Singapore equities stand a chance to shine in H2 2023

SINGAPORE’S concert scene is buzzing as megastars come to town, with the tourism industry looking to potential spillovers from the influx of regional tourists – especially for multi-day gigs like Jacky Cheung’s staggering eleven shows.

While Beyonce’s concert in Sweden in May led to an inflation blip, we do not expect a similar effect in the months that mega acts perform here: Cheung in July 2023, Coldplay in January 2024, and Taylor Swift in March 2024. Rather, the effect is likely to be spread over the coming months as bookings begin for concert tickets, hotels, airlines, and F&B outlets. More importantly, further mega acts could descend on the island.

Singapore’s appeal to artistes is obvious: a strong Singapore dollar, being a gateway to regional markets, well-developed infrastructure, and a post-pandemic population looking to travel and spend. Some of these factors are equally favourable for the Singapore equity market.

Bucking the downtrend

Besides a boost from tourism-linked companies, Singapore’s market outlook is supported by several well-established companies that remain able to pleasantly surprise in this uncertain investment climate of elevated inflation, high interest rates, slower economic growth, and a tighter credit market.

These factors, together with the underlying tone of weak consumer and business sentiment, have led to concerns of further earnings cuts in the coming quarters. Expectations of corporate earnings for this year have generally been pared back.

However, the Singapore market has bucked this downtrend as several companies delivered good earnings growth rates.

The Straits Times Index’s (STI) 2023 earnings per share has grown from 301.01 at the start of the year to 306.57 as at end-June, up 1.8 per cent. This meant that several STI companies enjoyed good share price appreciation because of better earnings and a better business outlook.

Globally, equities have rebounded strongly from the lows in October 2022, with some key indices gaining more than 20 per cent. However, gains were uneven and came largely from technology-related companies. This was led by interest in artificial intelligence, with companies in this space enjoying stellar gains.

Based on the S&P 500 Index, gainers were largely in the growth sectors, including industries such as communication services, consumer discretionary, information technology, semiconductors and semiconductor equipment, media and entertainment, and software and services.

With rates expected to stay high for longer, it is going to be more challenging to drive growth. Softer economic prospects could result in reduced demand and production, and deter investments or expansion plans.

However, Asia is likely to fare better and could lead growth in the second half of 2023. The Bloomberg consensus growth estimate for China in 2023 is 5.5 per cent, a sharp improvement from 3.0 per cent in 2022.

Recently, People’s Bank of China Governor Yi Gang conveyed an optimistic outlook for economic recovery as China resumed production activities. The government appears ready to undertake measures to support the economy.

Making a case for Singapore stocks

With a generally weak outlook for global economies in 2023 and with interest rates expected to stay higher for longer, the operating environment for companies will remain challenging. While commodities and oil prices have come off from recent highs, other input costs remain elevated, including interest expenses and wages.

This softer outlook could dent consumer demand, hurting the revenues and profitability of listed companies. Companies which are highly geared or sensitive to higher rates are likely to face higher interest expenses and an inability to borrow.

Against this backdrop of elevated inflation, high interest rates and geopolitical uncertainties, safe haven markets and stocks could help investors ride out the mounting economic uncertainties.

At OCBC, we are making a case for Singapore stocks for several reasons. These include:

• Continuous government plans and support to grow key industries. Based on consensus, gross domestic product growth will improve from 1.5 per cent in 2023 to 2.7 per cent in 2024;
• Current low market valuations based on the STI, with recent price corrections having factored in some of the global weakness;
• Established companies with good long-term track records;
• A growing government and corporate focus on sustainable investments, including Singapore Green Plan 2030;
• Strong investments into the country. Singapore’s inward direct investment flows hit S$195 billion in 2022, up 10 per cent year on year. The five main source economies are the US, Japan, UK, Hong Kong, and mainland China.
• A pick-up in tourism arrivals and receipts with the aforementioned mega concerts; and
• STI stocks offer an average dividend yield of 5.1 per cent, based on FY2023 estimates. While dividend distribution is unpredictable and largely dependent on the economic outlook and company performance, big-cap companies tend to offer a steady stream of annual dividends, or have clearly articulated annual dividend payout policies.

More importantly, larger-cap Singapore companies are generally well-established and not highly geared. The estimated gearing of STI stocks is at an average of 79 per cent – low compared to that of regional peers, where it ranges from 75 per cent to 168 per cent.

At current levels, valuations for the STI are not expensive, especially with the current -1.42 per cent year-to-date performance. The STI is trading at 10.6 times FY23 earnings and 10.2 times FY24 earnings – at -2 standard deviations below the 10-year historical average.

The price-to-book ratio is at 1.1 times – at -1 standard deviation below the 10-year average and below regional peers. The sweetener is the dividend yield of 5.1 per cent based on FY23 estimates and 5.4 per cent based on FY24 estimates.

The writer is head of OCBC Investment Research