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Singapore market could see re-rating at end-2023 following 4Q2023 recovery: RHB

Analyst Shekar Jaiswal recommends investors to “stay invested while waiting for catalysts”.

The Singapore market is still defensive with its high yield and low valuation, says RHB Bank Singapore analyst Shekhar Jaiswal who recommends staying invested while waiting for catalysts in his Singapore equity strategy report dated Sept 8.

Should his forecast of an economic recovery in 4Q2023 materialise, he believes Singapore could see a re-rating in its equity market closer to the end of the year, supported by the services sector’s resilience, a likely pause in interest rate hikes and manufacturing and exports sector revival.

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“We continue to recommend investors hold a core defensive portfolio of higher quality companies or REITs that offer secular earnings growth and/or defensive dividends, with selective exposure to topical names and small-mid cap stocks that have strong earnings tailwinds,” says the analyst.

Jaiswal is overweight on the consumer, healthcare, industrials and transport sectors, as well as office, overseas and industrial Singapore REITs (S-REITs). He is keeping neutral on financials, food products, manufacturing and technology, real estate and telecommunication, as well as hospitality and retail S-REITs.

His top picks include DFI Retail Group D01, Food Empire Holdings F03, Sheng Siong OV8 and Thai Beverage Y92 in the consumer sector, Raffles Medical BSL in healthcare, Singapore Technologies Engineering (ST Engineering) S63 and Marco Polo Marine 5LY in industrials and ComfortDelGro C52 in transport.

Jaiswal also prefers UOB U11 for stocks within the financial sector, Golden Agri-Resources E5H and Wilmar International F34 in food products, Centurion Corporation OU8 in real estate and Singapore Telecommunications (Singtel) Z74 in telecom and media.

His favoured REITs are CapitaLand Ascendas REIT A17U, ESR-LOGOS REIT J91U, Keppel REIT K71U and CDL Hospitality Trusts J85.

Following a recent ratings upgrade, RHB has added DFI Retail and CDL Hospitality Trusts to its list of top picks, with the decline in share price bringing the respective stocks’ valuations to more attractive levels. “This, along with our expectation of a recovery in FY2024 support our positive outlook for the share price of both stocks,” says Jaiswal.

However, the analyst adds that the Singapore market will be looking for direction as concerns over the global macroeconomic outlook remain. “We expect the Straits Times Index’s (STI) movement to remain volatile given the uncertainties around China’s economic slowdown and the US interest rate outlook,” he explains.

Nevertheless, Jaiswal notes that the STI’s forward price-to-earnings ratio (P/E) remains cheap when compared to its historical valuation, with the STI trading close to 2 standard deviations (s.d.) below its historical average since January 2008. Using a top down approach and a target P/E multiple of 11.5x applied to the STI’s 2024 earnings per share (EPS), he predicts the STI will hit 3,340 points by the end of this year.

Meanwhile, the RHB economics and market strategy team expects that the US Federal Reserve’s (US Fed) Federal Funds Rate (FFR) will rise to 5.50% to 5.75% with the balance of risks skewed towards a print of 5.75% to 6.00% in 2023. The team expects no FFR cuts well into 1H2024.

Retail sales momentum in Singapore is still expected to improve in 2H2023, supported by seasonal factors such as the upcoming Formula 1 Grand Prix, Black Friday sales, Single’s Day sales and Christmas shopping, coupled with front-loading of consumer demand in response to higher GST rates in 2024. Jaiswal maintains his view that discretionary demand should outperform essential spending.

As such, the analyst is maintaining his investment themes. Jaiswal recommends sticking with industrial REITs as rotations into the sector will be time sensitive given the dependency on the interest rate outlook, buying into companies that will benefit from the return of Chinese tourists to the Asean and Hong Kong regions, retaining exposure to quality companies offering defensive earnings or dividends and buying into small and mid-cap companies with a strong growth outlook.

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