If 2024 was a memorable year for the stock market, 2025 seems to be more “daunting” due to the unpredictable policies that may be imposed by the new US government.
In 2024, the Singapore market grew by 16.9%, marking a 17-year high and coming in just 1.6% shy of the all-time high achieved in October 2007.
“If you prefer, the market did nothing after 17 years,” notes Paul Chew, head of research at PhillipCapital, adding that average returns stood at around 4.5% per annum, including dividends.
The gains in 2024 were mainly attributed to the “stellar” finance sector, which saw overall gains of 34%, led by DBS Group Holdings’ 44% increase. Transport-related stocks, such as Yangzijiang Shipbuilding and Sats, also saw gains amid rate cuts that stood higher than initially expected.
Meanwhile, REITs were the underperformers of the year with a 11.8% decline. Chew, speaking at PhillipCapital’s quarterly outlook session on Jan 4, noted that REITs with exposure to Chinese properties will get sold down.
2025 themes
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This year, Chew sees three main themes. These are a higher number of rate cuts than expected, corporate restructuring and the re-rating of China risk premiums.
The analyst is guiding for a total of four rate cuts this year instead of just two guided by the US Federal Reserve.
“The Fed’s medium-term interest rate or dot plot projections are as reliable as that scorpion on the frog’s back,” says Chew in his Jan 3 report, adding that the Fed has been constantly changing its guidance.
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“Inflation will be under pressure from lower gasoline prices, tapering shelter inflation and base effects from 1Q2024. Trump’s inflationary policies will only occur with a long lag,” he notes. Naturally, REITs will stand to benefit from the higher-than-expected cuts.
“Even if rates are unchanged, most REITs have repriced their lower interest rate hedges, removing the pressure for DPU growth,” Chew continues.
Corporate restructuring is another theme identified, with companies like Keppel looking to continue its asset monetisation plan, including the disposal of its rig assets and Thai Beverage (ThaiBev) selling its stake in BeerCo via a trade sale or initial public offering (IPO).
Singapore Telecommunications (SingTel) is also another counter to watch, with the telco expected to crystalise the market value of its stakes in Bharti or Intouch. Singapore Post (SingPost), too, is expected to aim to complete the disposal of its Australian and property assets.
In China, Chew believes that there could be a re-rating of valuations as he sees that the tariffs proposed by Donald Trump seem to be targeted at the US’s neighbours, Canada and Mexico, instead of China.
OCBC and UOB preferred
This year, the PhillipCapital team is “overweight” on Singapore banks, REITs, construction and the telecommunications sectors.
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Meanwhile, they are remaining “neutral” on healthcare, property, technology and air transportation.
Analyst Glenn Thum believes the banks will benefit from the lower rate cut expectations and improving loan growth. The banks are also expected to see stable net interest margins (NIMs), with non-interest income being the growth driver, offsetting any stagnation seen in NIMs and net interest incomes (NIIs).
This year, Thum also expects the banks to try and build their assets under management (AUM) and further their current spread. All three banks, DBS, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB), have mentioned that they were trying to expand their pool of relationship managers to reach more people, said Thum at the event.
The analyst has “accumulate” calls for all three banks, but prefers OCBC and UOB.
“We like OCBC due to attractive valuations and a dividend yield of 5.4%, buffered by a well-capitalised 15.6% common equity tier-1 (CET-1), and non-interest income growth from recent acquisitions. We like UOB due to stable NII and NIM by cutting deposit costs and continuing to increase loan margins, and other tailwinds such as loan growth recovery from rate cuts and double-digit fee income growth, which will boost earnings,” he writes.
Thum’s target prices are $44.70, $18.80 and $39.70 for DBS, OCBC and UOB, respectively.
‘Overweight’ retail; ‘neutral’ for office, industrial and hospitality among S-REITs
Analysts Darren Chan and Liu Miaomiao are “overweight” on REITs, with more interest rate cuts on the horizon.
As most REITs have already repriced their debt to reflect the current interest rate levels, the analysts now expect to see interest rate costs begin trending down this year. With this in mind, DPUs are also expected to grow in 2025 from lower financing costs.
“Transaction volumes picked up in 2H2024 following the interest rate cuts, and we expect this momentum to continue, spurring inorganic growth opportunities,” they write.
“We expect the dividend yield spread to widen as the 10-year Singapore government securities (SGS) yield decreases and DPU increases. The P/NAV of 0.86 times, 1.8 times standard deviations (s.d.) below the 10-year mean appears attractive,” they add.
As such, now would be a good time to buy into REITs due to their discounts in valuations, says Chan.
Within the REIT sub-sectors, the analysts are “overweight” on the retail sector as they expect tenant sales to improve in 2025 from the return of international visitor arrivals. They also expect to see positive rental reversion in the mid-teens for downtown malls and single high-digit reversions for suburban malls.
Meantime, the analysts are “neutral” on the office sub-sector. Office rents are expected to remain “muted” in 2025 with a large portion of the new supply still uncommitted in the pipeline.
They are also “neutral” on industrials as they see muted leasing demand as companies remain cautious with their business and expansion plans amid global uncertainties.
Finally, the analysts are “neutral” on the hospitality sub-sector due to the high base in 1Q2024, which benefitted from major concerts by Coldplay, Taylor Swift and Ed Sheeran, which drew massive foreign crowds. That said, revenues per available room (RevPAR) are expected to grow this year at levels similar to last year’s amid a normalisation in visitor arrivals supported by events such as the completion of Minion World at Universal Studios Singapore and the rebranded Singapore Oceanarium.
Among the REITs, Chan and Liu like CapitaLand Ascott Trust (CLAS) for its geographically diversified portfolio. They also like Frasers Centrepoint Trust (FCT) for its defensive portfolio of suburban malls, high occupancy and growth opportunities, and Stoneweg European REIT (formerly Cromwell European REIT) for its divestment and redevelopment strategies.
The analysts have “buy” calls for CLAS and Stoneweg REIT with target prices of $1.04 and EUR1.95 ($2.75), while FCT has an “accumulate” call with a target price of $2.44.
Busy construction sector
Analyst Yik Ban Chong has an “overweight” rating on the construction sector with strong project pipelines from the expansion of the two integrated resorts and Changi Airport Terminal 5 as well as a strong pipeline for public housing projects. These are expected to boost construction output and maintain high demand for worker accommodations for FY2025, Yik writes.
Within the sector, Yik likes Wee Hur, Centurion Corporation , BRC Asia and Pan-United Corp with “buy”, “accumulate”, “accumulate” and “buy” calls, respectively.
Wee Hur is expected to see revenue and profit growth from its new 10,500-bed worker dormitory, Pioneer Lodge, which will begin operations this year.
Centurion’s new 1,650-bed worker dormitory, Westlite Ubi, is expected to drive revenue and profit growth following its expected completion in December 2024. The company has also recently announced plans to spin off assets for a separate listing as a REIT.
BRC Asia is likely to see revenue and profits from its strong order book with the expansion of the two integrated resorts and the building of Chang Airport’s Terminal 5.
Finally, Pan-United’s low-carbon products could set it apart as customers adopt and transition towards low-carbon solutions in their construction designs.
Yik has target prices of 62 cents, $1.02, $2.80 and 68 cents for Wee Hur, Centurion, BRC Asia and Pan-United, respectively.
Telco consolidation?
Chew also has an “overweight” rating on the telco sector with the consolidation of operators being the key theme in 2025. While no one knows the exact timeline, Chew points out that June is a time to watch as there will be big payments made for the 700MHz spectrum.
Should that take place, the analyst believes Singtel will be the primary beneficiary of any price repairs from the consolidation. The telco is Chew’s preferred pick with several catalysts such as the commencement of new data centres, cost-out targets of $200 million per year from Singapore and Australia, as well as a monetisation target of $6 billion.
Chew has “accumulate” calls for Singtel and StarHub with target prices of $3.44 and $1.29, respectively.
He expects earnings growth for Singtel to be “muted” in FY2025 until its new Tuas data centres commence operations in 2026. Meanwhile, he remains less upbeat on StarHub as it continues to face an “intense” landscape due to heavier reliance on the local mobile market.
“Most of the mobile subscriber gains were from mobile virtual network operators (MVNOs) on the StarHub network. We believe margins will be impacted. Cost savings from DARE+ may not be immediately evident as decommissioning legacy IT systems will only occur in FY2025/2026,” he writes.
At the same time, the analyst has a “neutral” call on Netlink NBN Trust with a target price of 87 cents.
“We expect distribution to be stable despite lower residential prices as connections continue to grow, supported by household formations and demand for higher fibre bandwidth,” he says.
Table: PhillipCapital
