A Peek into Singapore Market May 23, 2023

Singapore market in 2023 review

Singapore shares have experienced a roller coaster ride this year. In the first quarter of 2023, there was a surge of 3.5% in January, but the market subsequently relinquished all its gains to finish the quarter relatively unchanged. This can be attributed to higher-than-expected inflation in the US, along with anxieties about the banking sector.

In April, the ex-dividend dates for banks and other index component stocks bolstered Singapore’s stocks. However, uncertainties over inflation, a global economic slowdown, and an end to the net interest margin expansion for banks kept the rebound in check. Beyond April, the seasonal trend of “sell in May” has been evident post the ex-dividend dates.

Outlook for the Singapore market

Fed fund rate likely to remain steady

The Federal Reserve (Fed) announce a 25 basis points hike in the interest rate this month, while signalling a pause in any further rate hikes for the remainder of the year. In addition to this, real-time inflation data continues to decline, as shown by commodity prices (Fig. 1), rentals (Fig. 2), and logistics.

(Fig. 1) Source: Phillip Securities Research

(Fig. 2) Source: Phillip Securities Research

The benchmark interest rates, currently set within the 5.00 – 5.25% range, are anticipated to remain stable for the remainder of the year.

Given this, we might observe a renewed interest in rate-sensitive sectors such as Real Estate Investment Trusts (REITs) and technology, now that the recent series of Fed rate hikes are on hold. During the last pause in the Fed rate hike cycle from December 2018 to June 2019, the technology and REITs sectors outperformed the benchmark STI (Fig. 3).

Source: Bloomberg

1. The narrative of China’s reopening and economic recovery is still in its early stages, but it is anticipated to bolster market performance. Apart from industrial production and profits, most data releases from February have indicated strength.
2. With China reopening, and continued growth expected in regional travel and tourism, the decelerating growth and financial instability in the US and Europe should be offset. The recent 25bps required reserve ratio (RRR) cut indicates the new administration’s strong commitment to sustaining growth [1].

Furthermore, the visit to China by Singapore’s Prime Minister Lee Hsien Loong in late March is set to deepen cooperation between the two nations. This could potentially reignite investor interest in Singapore companies with ties to China.

Limited upside for Singapore banks ahead

In the coming months, Singapore banks are expected to trend sideways and maintain their trajectory. Given their robust asset-liability management, well-diversified funding and deposit sources. Only 15% of their assets are in investment securities, a stark contrast to the 57% held by Silicon Valley Bank [2]. Near-term uncertainties in the banking sector have also reduced.

However, the upside potential is somewhat constrained by concerns over a potential peak in sequential NIM improvement in H1 2023, as further rate hikes in 2023 are not anticipated, and the recovery in wealth management income remains uncertain.

Stock counters to watch

With the outlook that interest rates have reached a peak amidst a decelerating global growth, we are awaiting the effects of disinflation to take its course. In the interim, our tactical call would favour equities that exhibit bond-like characteristics, such as Real Estate Investment Trusts (REITs).

Within the REITs realm, our top picks include CapitaLand Ascott Trust (SGX: HMN) and CapitaLand China Trust (SGX: AU8U).

1. CapitaLand Ascott Trust

CapitaLand Ascott Trust (CLAS), formerly known as Ascott Residence Trust (ART), is the largest lodging trust in Asia-Pacific with an asset value of S$8.0 billion as at 31 December 2022. CLAS’ objective is to invest primarily in income-producing real estate and real estate-related assets which are predominantly used as serviced residences, rental housing properties, student accommodation and other hospitality assets. [3]

Chinese travellers to boost demand

With China’s reopening, we anticipate a steady recovery of corporate demand for long-stay and short-stay. Enquiries from Chinese guests have increased since China fully re-opened its international border and started to issue visas to foreigners in March 2023, following a three-year hiatus. On a group wide basis, Chinese guests accounted for 9% of its pre-pandemic guest count. [4]

Properties in Japan, Singapore, and Australia, which accounted for 17.5%, 17.1% and 12.7% of total assets respectively, should benefit from the resurgence of Chinese travellers. Prior to the pandemic, Chinese nationals accounted for 25-30% of visitor arrivals for Japan, 19% in Singapore and 15% in Australia. [4]

Additionally, we anticipate a rise in flight capacity to 25% by April 2023, considering that as of January 2023, global airlines are operating merely at 11% of pre-pandemic capacity levels for flights to and from China.

Yield-Accretive Acquisitions for Student Accommodation and Rental Housing

In 2022, HMN invested S$420 million in 15 yield-accretive acquisitions, which included 12 longer-stay properties and three serviced residences. Longer-stay properties currently constitute 19% of total assets [4].

The Standard at Columbia, a 678-bed property located in South Carolina, is on track to be completed by 2Q23 and prepared to welcome students for the 2023-24 academic year, commencing on 23 August.

Resilient Balance Sheet

As of March 2023, HMN maintains a healthy aggregate leverage of 38.7%. The average cost of debt has risen to 2.3% (1Q23: 1.6%), which is among the lowest within its sub-segment. With a robust interest coverage ratio of 4.4x and 75% of total debt on fixed rates, its weighted average debt maturity remains at around four years [4].

2. CapitaLand China Trust

CapitaLand China Trust (CLCT), Singapore’s largest China-focused REIT, has total assets of approximately S$5.2 billion as at 31 December 2022. CLCT has a portfolio that encompasses 11 shopping malls, five business parks and four logistics parks, spread across 12 Chinese cities. [5]

In 2022, CLCT experienced a decline in its distributable amount from S$135.5 million in 2021 to S$125.6 million due to the necessity to grant higher rental reliefs to tenants impacted by China’s COVID-zero lockdowns [6]. This resulted in a year-on-year drop in its distribution per unit (DPU) by 14.1% to S$0.075 [6].

With the re-opening of China’s economy, CLCT’s retail malls are projected to see a surge in footfall, reducing the need for further rental reliefs. Management expects its retail portfolio to register positive rental reversion in FY23, aided by its asset enhancement initiatives. Meanwhile, the logistics park and business parks are anticipated to remain resilient. Increased activity levels within the REIT’s business and logistics parks should likewise benefit its tenants.

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