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Continuing global macro headwinds sees economic growth in Singapore slowing down

PhillipCapital's Paul Chew has suggests that “hibernating for winter” could be an appropriate strategy for Singapore investors.

Head of research at PhillipCapital Paul Chew has suggested that “hibernating for winter” could be an appropriate strategy for Singapore investors in 4Q2022 as global growth continues to ease.

In his report dated Oct 4, Chew noted that the STI was up only by a “modest” 0.9% in 3Q2022, with only a third of the component stocks managing to eke out gains. Banks and selected cyclicals were the outperformers, while REITs bore the brunt of the sell-down as they face multiple challenges.

“Higher interest rates and flat property cap rates translate to negative carry from acquisitions, stifling inorganic growth. We also expect refinancing costs to spike not just from higher rates but costlier hedging to keep interest rates fixed,” says Chew, adding that the ability to maintain distributions per unit (DPUs) will be a challenge.

According to him, there are no growth drivers on the horizon with most macro indicators at their lowest points since the pandemic began. “Europe is facing a recession under the weight of skyrocketing energy prices. Energy rationing during winter could further depress the region. The Fed is intent on slowing the US economy with higher interest rates, while China remains gripped in a lockdown. Rising interest rates globally will deflate both valuations and earnings. We believe the US economy faces a high probability of a recession next year,” lists Chew.

He points out that most leading indicators are “flashing red”, indicative of a coming recession. US corporates face the trifecta of an appreciating dollar, higher interest rates and rising material costs — made worse by “just too much” inventory. In the past three recessions, earnings declined by around 20%; the forecast for 2022 is still “mid-teens” growth, says the analyst.

However, he also notes that Singapore's corporates are in much better shape, “backstopped” by a resilient domestic economy and rising interest rates bolstering bank margins.

Chew says that he is bearish this quarter, adding that the typical equity hedge during a bearish phase is bond-like stocks such as REITs, although REITs are no longer a shelter with the steep ascent in interest rates. “In general, a 2% point rise in interest rate requires mid-teens growth in property income just to maintain dividends. It is an insurmountable hurdle with accretive acquisitions using debt no longer available,” he says.

Adds Chew: “To hedge out downside risk, we have added Singapore Exchange (SGX) to our model portfolio. We are buying volatility for the coming quarter. SGX benefits from rising rates due to its collateral float from member balances.”

Singapore economy not exempt

Still, CGS-CIMB economist Nazri Idrus believes that the Singapore economy is “downward trending”, with Singapore’s manufacturing sector growing at a slower pace in August, as production declined for the chemicals and electronics clusters.

Headline and core inflation rose 7.5% y-o-y and 5.1% in August respectively, due to rising prices of food, housing and transport. Idrus notes that weaker global demand ahead is likely to soften industrial production index (IPI) growth.

Positively, he adds that inflation should be coming down as well. “We expect 2023 consumer price inflation (CPI) at 2.6% y-o-y. Weaker demand to dampen manufacturing activity Singapore’s manufacturing sector grew at a modest 0.5% y-o-y in August, compared to 0.8%
in July, marking the continued downward growth trend in the component since mid-2021,” says Idrus.

In terms of overall performance, IPI was affected by contractions in electronics and chemicals manufacturing that were partly offset by strong growth in biomedical manufacturing, transport engineering, as well as general manufacturing. Excluding the volatile biomedical segment, the IPI contracted by 1.2% y-o-y in August compared to its growth of 3.1% in July, he notes.

Meanwhile, the electronics cluster fell by a further 7.8% y-o-y from its decline of 5.9% in July, affected by weakening demand in all subsegments including semiconductors, infocomms and consumer electronics, as well as other electronic components.

Similarly, output in the chemicals sector declined by 11.2% y-o-y in August compared to its growth of 5.7% in July, dragged by lower production of petrochemicals, specialties and other chemical products following plant maintenance shutdowns and general decline in demand.

“Going forward, IPI growth will likely remain modest in the months ahead, in our view. Global demand may continue to trend lower as consumer appetite falls amid the high inflationary environment. The impact is likely to be more prevalent for the production of consumer discretionary goods, such as electronics,” Idrus explains.

He adds that weaker global oil prices could also dampen investments in oil and gas, leading to lower production for the transport engineering cluster and, particularly, marine and offshore. “Overall, we maintain our 2022 GDP growth forecast at 3.8% y-o-y, with a softer growth of 2.0% in 2023. Inflation could peak on softer commodity prices,” says the economist.

Looking forward, he says the easing of global commodity prices is likely to “dampen” Singapore’s price pressures. This has been reflected in the softening in the producer price index which moderated to 14.8% y-o-y in August from 16.4% in July. In addition, the Federal Reserve continuing to hike interest rates is likely to feed into rising Singapore mortgage rates, dampening consumer purchasing power and weakening price growth further.

“That said, there are also risks of further upward price revisions for September,” adds Idrus, citing the geopolitical crisis in Europe and a consequent sharp increase in gas prices could lead to higher electricity tariffs for 4Q2022.

Chew also believes that volatility in the market will drive up trading volumes. To him, banks are still “overweight”, while variable-rate loans and the low-cost float of current accounts and savings accounts (CASA) deposits are rare beneficiaries of steepening interest rates.

“On REITs, we believe a more opportune time to Overweight the sector is early next year. Fed hikes at the current pace are not sustainable as we see a recession on the horizon. The FOMC’s December meeting could be a pivotal moment for that notorious Fed pivot to lowering rates or at least wait and watch,” says the PhillipCapital analyst.

Idrus’ forecast for Singapore’s headline inflation remains at 5.1% y-o-y for 2022 and 2.6% for 2023.

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