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DBS ‘optimistic’ about ‘buoyant growth’ in 1H2023, but sees ‘potential slowdown’ in ‘uncertain’ 2H2023

DBS's picks for Singapore are Sheng Siong Group, DFI Retail, Delfi and ThaiBev.

DBS Group Research analysts are seeing a tale of “two halves” in its outlook for 2023.

In its report dated Jan 11, analysts Andy Sim, Leena Phaerakkakit, Cheria Christi Widjaja, as well as the Singapore and regional research teams say they are “optimistic” about the “buoyant growth” in the first half of 2023. This is driven by the first festive celebrations, which are the Chinese New Year in January, as well as Song Kran and Lebaran in April.

Lebaran is the popular name for the two official Islamic holidays in Indonesia, Eid al-Fitr and Eid al-Adha.

While Indonesia has already seen an easing of restrictions for Lebaran in 2022 after a painful bout of high infection rates from late 2Q-3Q 2021 due to the Delta variant, there were still concerns of the Omicron variant in early 2022,” the analysts note.

“With eased restrictions and normalcy almost back, we expect sentiment to remain buoyant for the 2023 festive season,” they add.

Meanwhile, the second half of 2023 looks to be more “uncertain” with a “potential slowdown” on the horizon.

“Gazing into the crystal ball of 2H of 2023, we adopt a more guarded stance with a confluence of factors at play,” the analysts write.

“As the festive mood wears off, consumers would become more cost conscious on the back of the high inflationary environment seen, which may put a dent in consumer sentiment and demand,” they add. “On a more optimistic note, margin pressure for companies should start to ease as costs moderate/decline post a 2022 high, given the delayed impact.”

The year 2022 saw record inflation fuelled by geopolitical conflict and a rebound in consumer demand. Yet at the same time, economies in Asean benefitted from the lifting of Covid-19 restrictions.

"Apart from Thailand, all economies’ absolute real GDP expanded past 2019 levels,” the analysts note. “Heading into 2023, our economists believe that this expansion is set to soften on dissipating pent-up tailwinds and moderating trade momentum.”

“Highly trade-dependent economies, especially Singapore, Vietnam, and Thailand, are likely to be more impacted by a trade slowdown A remnant reopening boost will still help, as visitor arrivals remain significantly below 2019 levels,” they add.

Heading into 2023, the analysts see “significant concerns” of a global recession and a slowdown in the global economy as inflation and interest rates remain elevated.

“According to a KPMG survey of global CEOs, 86% believe there will be a recession in the next 12 months,” they note.

While there are “significant slowdown risks” in the West, China’s reopening dynamic would be a “wildcard”, the analysts add.

To them, China’s “sudden u-turn” in its zero-Covid-19 policy earlier in December 2022 saw concerns of surging infection rates, a strain on the country’s healthcare facilities and a high number of deaths. Various countries have required pre-departure tests and negative Covid-19 results from inbound Chinese travellers.

That said, these near-term concerns should ease and that the measures will “attenuate” based on past trends seen in other countries.

“Assuming there will be no mutation of variants causing renewed outbreaks and restrictions, a complete unwinding of Covid-related restrictions in 2H2023 is highly probable – and it will serve as a tailwind for Asean economies,” the analysts write.

Inflation in Asean

According to the economists at DBS, headline inflation appears to have peaked in most countries after the multi-year high inflation in 2022.

By extension, the economists are expecting headline inflation to average lower in most of Asean in 2023 except for Singapore and Vietnam.

“Singapore’s inflation is projected to remain high in 2023 at 6.3%, which is above the historical average, on the back of a rise in GST from 7% to 8% with effect from Jan 1,” they write.

Key themes in 2023

With Covid behind us and economic uncertainties ahead, we believe the following key themes will be relevant for Asean consumer plays in 2023: Reopening and festivals, balance sheet strength, and earnings resilience.

Based on these themes, Singapore Exchange (SGX)-listed counters such as Thai Beverage (ThaiBev) and DFI Retail look set to benefit.

For ThaiBev, upside factors include China’s latest pivot to easing restrictions, the expectation of Song Kran in April, as well as the upcoming elections in May, which could boost the country’s tourism and increase domestic spending.

“On Hong Kong and China reopening, we are optimistic about DFI Retail riding on this coat tail, especially for its North Asia business, which includes its restaurant (via associate Maxim’s group), health & beauty, and convenience store operations,” the analysts write.

Singapore picks

In Singapore, Sim and the Singapore research team expects Singapore’s GDP to slow down to 2.2% in FY2023 and inflation to remain elevated due to the GST hike. He also expects interest rates to increase at a slower pace and remain high for the rest of the year, as Singapore’s interest rates follow that of the US’s closely.

“With the Fed expected to pause the rate hike cycle at a terminal rate of 5% (current: 4.5%) in 1Q2023, the Singapore Overnight Rate Average (SORA) should also start to plateau. Our economist expects SORA to stabilise at around 3.6%,” says Sim.

Festive discretionary spending is also expected to be “transitory”.

“The first Chinese New Year in three years without Covid restrictions will serve as a transitory tailwind for discretionary spending like dining out, shopping, and beer consumption,” says the analyst.

“As the festive atmosphere cools in 2Q2023, consumers will turn more cognisant of their spending in the face of high inflation and interest rates. We see the likelihood of consumption patterns trending towards downtrading,” he adds.

He continues: “With slow economic growth in Singapore, we prefer counters with exposure outside Singapore, where our economists see higher growth (Thailand: 3.8%, Indonesia: 5%, Vietnam: 6% vs. Singapore: 2.2%) and lower recession risk.”

Sim’s picks here are the Sheng Siong Group (SSG), DFI Retail, Delfi and ThaiBev.

“We believe [Sheng Siong Group] will do well in the face of high inflation and be resilient during a recession. Sheng Siong, a brand synonymous with value, will be a key beneficiary of the shifting preference towards in-house consumption and value for money,” says Sim.

DFI, with its substantial grocery business, will benefit from consumers’ shifting their preference to in-house consumption, albeit to lesser degree than Sheng Siong.

Delfi was selected for its key customer geography being in Indonesia where Sim sees “sustained economic growth being supportive of discretionary consumption, like chocolates”.

“In addition, the company is attractively valued with a substantial net cash position,” he says.

ThaiBev’s beer and spirits businesses in Thailand and Vietnam is expected to benefit from celebratory and reopening tailwinds.

“In addition, higher economic growth and the return of Chinese tourists in these countries will support higher alcobev consumption. The biggest overhang of a high debt load is also being resolved through continued deleveraging and earnings recovery,” he says.

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