DAILY MORNING NOTE | 16 October 2023
Trade of the Day
(Current Price: US$258.87) – TECHNICAL SELL
Sell stop: US$256.63 Stop loss: US$265.40 (-3.42%)
Take profit: US$239.00 (+6.87%)
Week 42 equity strategy: We share the consensus view that if the Israel conflict remains contained, there will be no spillover into crude oil prices, averting another surge in global inflation. The US has stated there is no direct evidence Iran was involved in the recent attack. Following an initial drop of 6%, the share prices in Israel have traded sideways over the past five days. The ongoing conflict will heighten the security preparedness in many countries. Companies that benefit from increased defence spending, including cyber threats, are ST Engineering and StarHub (via subsidiary Ensign).
We were early in our overweight in SREITs. It was a relative outperformance bet as economic growth slowed. However, the recent upswing in interest rates pushed the SREIT index down by almost 6% in 3Q23. We believe a rally for REITs is possible in 2H24. It hinges on the Fed hitting the pause button, likely around December. As economic data begins to show a more pronounced slowdown, we expect the market to start pricing in a monetary easing cycle in mid-2024. REITs can rally in anticipation of a rate cut. It can ride on a triple boost to the share price from a more attractive yield compared to bonds, lower interest expenses and increased valuations as cap rates compress.
Head Of Research
Local shares joined a global stock rout on Friday (Oct 13) to finish the week lower, as investors took stock of stronger-than-expected inflation figures in the US, which re-ignited fears about another interest rate hike this year. Singapore shares slipped 1 per cent or 32.9 points to end the trading week at 3,185.79. Across the broader market, decliners far outnumbered advancers 339 to 234 as 848.5 million securities worth S$777.9 million changed hands. It was a sea of red across the region, with markets closing lower on Friday amid cautious investor sentiments. The Kospi fell 1 per cent; the Hang Seng Index lost 2.3 per cent and the Nikkei 225 closed 0.6 per cent lower. The ASX 200 also fell 0.6 per cent, while the Bursa closed flat.
Wall Street stocks mostly declined on Friday (Oct 13), closing out a volatile week as traders assessed bank earnings, inflation concerns and worries over the conflict between Israel and militant group Hamas. The Dow Jones Industrial Average edged up 0.1 per cent to 33,670.29, while the broad-based S&P 500 Index slid 0.5 per cent to 4,327.78. The tech-heavy Nasdaq Composite Index plunged 1.2 per cent to 13,407.23. Early Friday, banks JPMorgan Chase, Citi and Wells Fargo posted strong results, with US markets trading higher as markets opened. But a consumer sentiment survey by the University of Michigan released later in the morning indicated that assessments of personal finances dipped, mainly on growing concerns over inflation.
Property developer Tuan Sing Holdings plans to turn its headquarters at The Oxley into a hotel or serviced residence, in a bold move into the hospitality sector in Singapore. It is also considering turning its key asset Link@896 and the freehold site next to it into a hotel or serviced residence. Evaluation for this proposal is ongoing, subject to approval by the relevant authorities, Tuan Sing said in a corporate update on Friday (Oct 13). The company said both properties present “potential value-creation opportunities”, with asset enhancement set to bring in incremental recurring income. Currently, Tuan Sing has two hospitality assets in its portfolio – the Grand Hyatt Melbourne and Hyatt Regency Perth. Both are five-star hotels. In Singapore, Tuan Sing is more well known as a property developer, with its most recent project Peak Residence fully sold and set to complete by 2024.
The first residential plot of land in post-independence Singapore which reached the end of its lease is being readied for a public housing development as part of rejuvenation efforts in Kallang. The area was home to terrace houses whose 60-year leases expired in December 2020. The houses have been vacated and the land returned to the state. On Friday (Oct 13), the Urban Redevelopment Authority (URA) said: “The proposed development will support demand for housing and allow future residents to tap the site’s proximity to amenities and transport nodes, such as Kallang MRT and Geylang Bahru MRT.” The Singapore Land Authority first announced in 2017 that the rejuvenation of Kallang will give residents a better living environment, more leisure options, new transport facilities and jobs closer to their homes. URA said it is proposing to assign plot ratios of 2.4 or 2.8 to the land parcels, which are located along Upper Boon Keng Road.
Total securities turnover value on the Singapore Exchange (SGX) fell 26.5 per cent in September to S$17.3 billion from S$23.6 billion the prior month, with September’s securities daily average value down 19 per cent on the month to S$867 million. In its monthly market statistics report released on Friday (Oct 13), SGX posted a 0.5 per cent month-on-month decline in the benchmark Straits Times Index (STI) to 3,217.41 in September, as major global stock markets fell during the month. The global trend was mainly attributed to downward selling pressures amid a risk-off mood from central bank meetings. Total securities market turnover volume fell 16.2 per cent to 24.4 billion shares in September, from 29.2 billion a month ago. Total derivatives volume for the month stood at 21.5 million, down 9.1 per cent from 23.7 million the previous month. It also represents a 3.5 per cent decline from the same period a year ago. SGX nonetheless noted a surge in derivative trading activity in foreign exchange and commodities, driven by widening rate differentials and surging oil prices. This came as global institutional investors leaned on SGX’s multi-asset offering to manage portfolio risk, said the bourse. Commodities derivatives traded volume for September was up 77 per cent year on year to 5.4 million contracts, which SGX said was a record high.
JPMorgan reported another highly profitable quarter on Friday (Oct 13), but warned inflation could persist and said recent Middle East turmoil means this “may be the most dangerous time the world has seen in decades.” The lender, the biggest US bank in terms of assets, reported third-quarter profits of US$13.2 billion, up 35 per cent from the year-ago period behind the lift from higher interest rates on earnings. Revenues rose 22 per cent to US$39.9 billion. Besides the boost from interest rates – reflecting the gap between the lending rate it charges clients compared with interest payments to customers – JPMorgan also cited good credit quality as a driver. Throughout the Covid-19 period and in the immediate aftermath, consumers have largely successfully managed credit card payments, although delinquencies have risen in recent quarters. Chief executive Jamie Dimon said the bank expects both exceptionally high net interest income and low loan defaults to “normalise” over time.
Shares of Boeing and its top supplier sank on growing concerns that production flaws for its 737 MAX aircraft will take longer than expected to correct, further delaying deliveries of the cash-cow jet. The US planemaker fell the most intraday in seven weeks on Friday (Oct 13), while Spirit AeroSystems dropped the most in almost a month. The Air Current reported late Thursday that Boeing is expanding inspections of the MAX’s aft pressure bulkhead for improperly drilled holes. The report rounds out comments made Thursday by Michael O’Leary, chief executive officer of Ryanair, a major 737 MAX customer. MAX delivery delays have worsened because fixes to the aft pressure bulkhead appear to be more challenging, he said.
US pharmaceutical giant Pfizer sharply scaled back its earnings outlook for the year, blaming lower-than-expected sales of two drugs used to treat Covid-19, the company said Friday (Oct 13). It now “anticipates full-year 2023 revenues to be in the range of US$58 billion to US$61 billion, versus its previous guidance range of US$67 billion to US$70 billion,” Pfizer announced in a statement. Earnings per share – the benchmark for the markets – should come in at between US$1.45 and US$1.65, compared with US$3.25 to US$3.45 previously anticipated. The cut to Pfizer’s guidance was “solely due to its Covid-19 products,” the company said. “Full-year 2023 revenues for Paxlovid and Comirnaty are expected to be approximately US$12.5 billion, a decline of US$9 billion versus original expectations,” it added. The sharp revision to expected sales of Paxlovid, an oral antiviral drug, and the Covid-19 vaccine Comirnaty sent Pfizer’s stock tumbling.
Source: SGX Masnet, Bloomberg, Channel NewsAsia, Reuters, CNBC, WSJ, The Business Times, PSR
Analyst: Darren Chan
– S-REITs Index fell 3.2% MoM, with the bulk of the losses coming in the last 2 weeks after the FOMC held interest rates unchanged and indicated that rates will likely remain higher for longer.
– S-REITs are now trading at a forward dividend yield of c.6.4%, 0.5 s.d. above the mean of 6.1% and a P/NAV of 0.86x, 2.0 s.d. below the mean of 1.03x. We think this could signal an attractive opportunity to reposition into S-REITs for the eventual interest rate pause and decline.
– We remain OVERWEIGHT on S-REITs but are more selective. We prefer REITs with a healthy balance sheet, strong sponsor and improving operating metrics such as the hospitality and retail sub-sector. Catalysts are expected from pick-up in the economy and asset recycling. Top picks are CapitaLand Ascott Trust (CLAS SP, ACCUMULATE, TP S$1.20) and Frasers Centrepoint Trust (FCT SP, ACCUMULATE, TP S$2.35).
Recommendation: Overweight (Maintained)
Analyst: Glenn Thum
– September’s 3M-SORA was up 1bps MoM to 3.70% and was 7bps higher than the 3Q23 average of 3.69%. 3M-HIBOR was down 3bps MoM to 4.95%.
– Singapore domestic loans dipped 6.71% YoY in August, below our estimates. The loan decline was slightly larger than in the previous month. The CASA balance dipped slightly to 18.8% (Jul23: 18.9%).
– Maintain OVERWEIGHT. We remain positive on banks. Bank dividend yields are attractive at 5.7% with upside surprise in dividends due to excess capital ratios and push towards higher ROEs. SGX is another major beneficiary of higher interest rates (SGX SP, BUY, TP S$11.71).
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