Phillip 4Q23 Singapore Strategy - Next comes the fiscal hangover

2 Oct 2023

Review: Singapore’s equity market was up a meagre 0.4% in 3Q23. Expectations that interest rates will remain elevated for longer triggered a repricing of bond yields and risk assets (Figure 6). Banks recouped most of their losses in the prior quarter after raising interim dividends by 40% (Figure 1). The best performers were commodity-related names (Figure 2). The largest drags were weakness in electronics and poor sentiment on China’s recovery (Figure 3).

Outlook:  We expect a far slower US economy in 2024. To short-circuit the upcoming drag will require another round of stimulus. But we don’t think there will be more because the politics of austerity has returned after two sovereign downgrades and threats of government shutdowns.

The US economy has been propped up by an additional US$1tr of fiscal deficit spending (Figure 7), bank bailouts and surging credit card debt (Figure 8). We see multiple upcoming headwinds for the US and global economies. Firstly, excess savings from the pandemic stimulus peaked at US$2.1tr in Aug21 (Figure 9). These savings have been drawn at approximately US$80bn per month as US consumers undersaved on their disposable income. Excess savings will end by this year. Secondly, the cost of living adjustments has allowed social security spending to jump 8.7% (or US$147bn) in 2023. But will decline next year (Figure 10). Thirdly, students have to start repaying their US$1tr credit card debt from Oct23 (Figure 11). This is an almost US180bn drag on consumer spending. Fourthly, real interest rates are at their highest levels in 15 years (Figure 12). In the current cycle, we think the Federal Reserve will be slower to ease, to ensure inflation is completely squashed. Finally, China accounts for around a third of net growth in global economies. Disappointing growth in China especially with a collapse in housing sales will exacerbate the current cyclical weakness in exports. New home sales in China peaked at around 15mn per year in mid-2021. They are now trending at 9mn. A more sustainable figure is 7mn based on 8.5mn marriages and 3mn new household formations (Figure 13). German exports to China are in their eighth month of decline. How deep the the US economic slowdown is depends on whether a bad debt cycle emerges (Figure 14).

The Singapore economy is also facing a slowdown. Exports, retail sales, and employment are all trending down. Pockets enjoying strength are tourism, hospitality and marine. With the global economy expected to dip further in 2024, any recovery will be at end-2024. Structurally Singapore is on a strong footing with record foreign direct investments (Figure 15) and rising foreign reserves (Figure 16). It remains the only triple-A-rated country in Asia.

Recommendation:   We remain cautious on Singapore equities.  A lack of growth keeps us anchored in dividend yields and non-cyclicals. We favour banks for their resilient dividend yields, especially in an environment of elevated interest rates. Our base case is a rate cut by the Fed, only in 4Q24.  Slower growth and a tapering of stubborn rental inflation will provide the Fed with comfort that inflation heading towards it targeted 2%. This is possible by mid-2024. We do not expect any dividend growth for REITs. Their business model is challenged in a negative carry environment. REITs become a relative rather than an absolute return bet as growth slows and interest rates peak. There is a window to trade Singapore tech stocks on a short inventory re-stocking cycle. But we doubt there will be any meaningful rebound as end consumption for electronics is still weak. We removed SGX from our model portfolio, Phillip Absolute 10. Despite healthy earnings from interest income, sluggish trading volumes have reined in its share price. We also removed CDL as high-end property sales will be difficult to turn around. We added our newly initiated ST Engineering for resilience in defence spending, a record order book and pick-up in aircraft maintenance. We have also added Singtel.  Mobile prices are gradually recovering for most of its regional associates, led by India. Also, Singtel is looking to monetize some S$6bn of its assets, including real estate, data centres and associate stakes.

 

 

 

 

Phillip Absolute 10

During the quarter our model portfolio was down -1.4% YoY. Our property and hospitality exposure were the weakest performers. PropNex was down 13% on soft results and worries over future transaction volume. CapitaLand Ascott plummeted after a S$300mn equity fundraising plan for acquisitions. CapitaLand Investment fell on lower transaction activities and worries over the slowing Chinese economy. ComfortDelgro was the best performer with expectations of a strong rebound in 2H23 earnings.

 

4Q22 – Add: SGX; Remove: Asian PayTV

1Q23 – Add: Prime US REIT; Remove: Singtel

2Q23 – Add: FCT, PropNex, CLI; Remove: Prime US REIT, Del Monte Pacific, HRnetGroup

3Q23 – Add: Thai Beverage; Remove: DBS

4Q23 – Add: ST Engineering, Singtel; Remove: CDL, SGX

 

Strategy commentary: Our cautious view on the market is reflected in the portfolio through a larger exposure to non-cyclicals such as defence, dividend yield and telcos.

Changes to model:  We removed CDL and SGX. Sluggish high-end residential sales will cap earnings upside for CDL. Sluggish equity and derivatives volumes will remain a share price overhang despite surging interest income. We added ST Engineering and Singtel to the model as growth and re-rating plays, respectively.

About the author

Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

Latest Reports

Contact us to Open an Account

Need Assistance? Share your Details and we’ll get back to you

IMPORTANT INFORMATION

This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

This advertisement has not been reviewed by the Monetary Authority of Singapore.  

 

Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com