Budget 2019: Winners and losers

SINGAPORE (Feb 25): Singapore’s Budget 2019 speech, delivered by Finance Minister Heng Swee Keat on Feb 18, hogged headlines for the better part of the week. Analysts were quick to parse which stocks would be affected by the projected government spending of $80.25 billion.

Some $22.7 billion, or just over a quarter of the total spending, will go to the defence and home security sector, which Heng reasons is necessary because of an increasingly uncertain geopolitical environment. “This spending is significant, but indispensable. We will invest more, if the need arises, to protect the sovereignty of Singapore and the well-being of Singaporeans,” he says.

According to brokerages such as DBS Group Research and RHB Securities, Singapore Technologies Engineering, which generates about half of its revenue from defence-related contracts, is a potential gainer from the increase in defence spending.

“We view the government’s increased focus on defence spending as positive for ST Engineering, which remains a key innovator and supplier of defence equipment to the country,” states RHB. On Feb 21, ST Engineering reported that its FY2018 earnings had dropped 2% y-o-y to $494.2 million. As a result, shares in ST Engineering closed six cents lower on Feb 21, at $3.71.

In his speech, Heng announced new subsidies for healthcare and an additional $3.1 billion set aside for premium subsidies and other forms of support for Singaporeans, bringing the total budget to $5.1 billion. “The government will put this $5.1 billion into a new Long-Term Care Support Fund. This will help fund the CareShield Life subsidies and other long-term care support measures, such as ElderFund,” says Heng.

In an effort to enhance access to neighbourhood clinics that provide primary care to Singaporeans, Heng says, the budget will make it more affordable to consult neighbourhood doctors via the Community Health Assist Scheme. In addition, the Merdeka Generation will also enjoy additional healthcare subsidies.

Some listed companies that could benefit from the positive sentiment in this sector are healthcare providers Raffles Medical Group, Thomson Medical Group and OUE Lippo Healthcare.

DBS is “marginally positive” on the local healthcare sector. “On a strategic perspective, aside from reducing the burden on public polyclinics and medical centres, we believe this could indicate the government’s intention to progressively pass on more treatment (especially day treatment and long-term care treatment) to the GP clinics’ network to reduce its healthcare burden and expenditure in the long term,” says DBS analyst Rachel Tan.

Overall, Maybank Kim Eng is keeping a cautious outlook on the local market, as it believes that there is little in the Budget that can change its view against the backdrop of a slowing economy, decelerating corporate profit growth and wild cards related to the US-China trade war outcome. The Budget is also seen to be supportive of local real estate investment trusts, as it extended the tax incentives for S-REITs and REIT exchange-traded funds in a bid to strengthen Singapore’s position as a REIT hub.

UOB Kay Hian has an “overweight” rating on the S-REIT sector, as the tax incentive extension may attract the listing of REITs and enhance trading liquidity. The research house also notes that office and industrial REITs are not affected by the reduction in the dependency ratio ceiling, which will have little impact on retail and hospitality REITs.

RHB is also remaining “overweight” on REITs, with its top picks being Ascendas REIT, CDL Hospitality Trusts, Starhill Global REIT and Manulife US REIT. Heng announced additional curbs on foreign manpower employment for the service sector, which will weigh down local F&B operations. Listed entities include Koufu Group, Jumbo Group, Kimly and BreadTalk Group.

CGS-CIMB and RHB view this move as negative too, albeit slightly and just for the near term, for F&B players and local grocers. DBS believes bigger F&B companies such as Koufu, BreadTalk, Sheng Siong Group and Dairy Farm International Holdings will see only marginal effects, as these companies have large employee counts, while productivity over the longer term could improve with government support.

DBS says, however, that investors pay more attention to wider factors beyond the Budget speech. “Market focus continues to be on a possible US-China trade deal and the 4Q results season.” On Feb 21, the Straits Times Index dropped 0.47 points to close at 3,277.91.

Fed’s signals

Minutes of the US Federal Open Market Committee meeting in January signalled the intention to reduce the Federal Reserve’s balance sheet by year-end. “Almost all participants thought it would be desirable to announce before too long a plan to stop reducing the Fed’s asset holdings later this year. Such an announcement would provide more certainty about the process for completing the normalisation of the size of the Fed’s balance sheet,” the document said.

For now, interest rates will be kept steady at 2.25% to 2.5%. “The Fed will hope that a series of upcoming appearances by policymakers, together with intervening data (including the monthly jobs report for February), will help reduce the risk of another communication failure involving the central bank and markets,” says Mohamed El-Erian, chief economic adviser at Allianz, in a Bloomberg commentary. “If not, it wouldn’t come as a huge surprise if the Fed decided to let the markets’ interpretation run for a while, lest attempts at moderating it end up causing renewed and potentially disruptive financial instability.”

Meanwhile, the US-China trade war truce is about to end on March 1. The US previously said that it would impose higher tariffs of Chinese goods if a deal was not agreed upon by then.

Although a deal has yet to be reached, US President Donald Trump said he could extend the deadline to reach a trade deal if they were making good progress. “If we’re close to a deal where we think we can make a real deal and it’s going to get done, I could see myself letting that slide for a little while,” said Trump.

This may spell trouble for Europe and Japan, though. On Feb 20, Trump said the US would impose tariffs on European car imports if it could not reach a trade deal with the European Union. Trump will be in Hanoi, Vietnam on Feb 27 and 28 to meet with North Korean leader Kim Jong-un in the second summit, following the first Trump-Kim Summit, which took place in Singapore last June.

Earnings season

This week sees the continuation of the 4Q earnings season. Asian Pay Television Trust, Ho Bee Land, United Engineers and Raffles Medical Group will be announcing their financial results on Feb 25. AP Oil, Best World International, KrisEnergy, UOL, Sinarmas Land, BHG Retail REIT, CNMC Goldmine Holdings and Delong Holdings will report on Feb 26. Cromwell REIT, Emerging Towns & Cities Singapore, Golden Agri-Resources, Hong Leong Finance, OKP Holdings and Haw Par Corp will report on Feb 27.

China Aviation Oil, Dairy Farm, Hongkong Land Holdings, Jardine Matheson, Jardine Strategic, Mandarin Oriental International, Mewah International, Olam International, Thakral Corp, China Sunsine, Straco Corp, Fragrance Group, Halcyon Agri Corp and Hotel Royal will report on Feb 28, followed by LHT Holdings and Singapore Reinsurance Corp on March 1.

This story appears in The Edge Singapore (Issue 870, week of Feb 25) which is on sale now. Subscribe here