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Worries have mounted over a new wave of Covid-19 cases in the past fortnight. For months, the low number of community cases in the single digits gave the government the confidence to further loosen antiCovid-19 measures. The CBD got crowded as more workers returned to their offices.
Unfortunately, the persistent lofty number of new Covid-19 clusters forming at the airport and more worryingly, in schools, have sent the country into so-called Phase Two (Heightened Alert), where the key feature is to ban groups of more than two and on-premise dining till June 13.
Evidently, the market had already reacted negatively to the spike of new cases ahead of the May 14 “heightened measures” announcement. Yet, the following week, the Straits Times Index managed to rebound to close at 3,109.81 points on Thursday, May 20, as market experts weighed in.
“We believe that Singapore’s economic reopening is delayed, not derailed,” said UBS analyst Lee Wen Ching in her May 18 note. “Market valuations are inexpensive at 1.2 times price-to-book earnings, in line with the historical average. We continue to favour banks as reflation proxies, and adopt a barbell strategy with industrial REITs to hedge against an uneven economic recovery,” adds Lee, who is with the chief investment office of the bank’s wealth management unit.
UBS acknowledges that the measures are a “setback” to Singapore’s reopening. However, the measures, for now, are not expected to “severely harm” the economy. The bank, for now, is keeping its GDP growth forecasts of 7% for 2021 and 6% for 2022. “Renewed restrictions are likely to depress the level of activity in 2Q, but 3Q will likely see a stronger recovery,” says Lee.
For now, earnings impact is expected to be “minimal”, with the street expecting companies forming the MSCI Singapore Index to report earnings growth of 49.4% this year and another 15.1% in 2022. “Domestic reopening proxies such as the land transport and retail REITs sectors may see some downside risk to earnings, but the overall impact should be manageable,” says Lee.
However, she cautions that the heightened measures could spur sector rotations in the equity market. For one, defensive sectors such as industrial REITs and telecommunication infrastructure providers may once again come into the spotlight for their earnings and dividend resilience.
On the other hand, reopening proxies such as the aviation, hospitality, tourism and consumer discretionary sectors may face renewed pressure. UBS’ picks for now are Ascendas REIT, CapitaLand, ComfortDelgro, DBS Group Holdings, Keppel Corp, Mapletree Logistics Trust, NetLink NBN Trust, Oversea-Chinese Banking Corp (OCBC), Sea, SingTel and United Overseas Bank (UOB).
Meanwhile, US bank Morgan Stanley has kept its bullish forecast of 8% GDP growth for Singapore this year, with the optimism sparked by massive US spending driving the V-shaped recovery of economies oriented towards exporting to the US. Business optimism, particularly in the manufacturing sector, has rebounded to decade highs, according to Morgan Stanley in its May 17 note by analysts Wilson Ng and Derek Chang.
With the spread of infections “relatively well contained”, Singapore has added a layer of veneer during this period of the pandemic: the country’s safe haven reputation, coupled with policy incentives, has continued to attract family office and hedge fund AUM (assets under management), spurring more capital inflows, write Ng and Chang.
Besides recovery, they see two other themes panning out for the Singapore market. First is restructuring. Partly nudged by the pandemic, the various Temasek-linked large caps have been especially active on this front. Those in the process of restructuring include CapitaLand, SingTel and Keppel. Morgan Stanley is betting on more of such actions, as companies adapt to the evolving operating and capital environment, by “reconfiguring” their operations and assets across both the public and private markets. “This involves potential privatisations, acquisitions and divestments, which can unlock value for shareholders as assets that offer varying return profiles are more optimally matched to investor pools that value them the most,” write Ng and Chang.
The third theme is “rebalancing”. According to Morgan Stanley, more Singapore companies are increasingly rebalancing their business mix towards new economy sectors. The phased inclusion of e-commerce and gaming platform Sea from May 2021 to February 2022 will likely lift tech sector representation within Singapore MSCI to levels on a par with other major Asian and global markets. “We believe growing tech representation helps address the negative market perception of Singapore lacking new economy sector exposure, and raises the overall profile of the market, potentially resulting in more passive and active flows,” according to Ng and Chang.
Morgan Stanley’s “Focus List” of five stocks comprises leading ecommerce and e-gaming platform Sea, UOB, CapitaLand, Keppel and Sembcorp Industries (SCI). The list reflects the preference for stocks that are positively levered to the recovering economy, could benefit from a corporate restructuring, and have positive exposure to new economy sectors.
According to Morgan Stanley’s Mark Goodridge, Sea is levered to fast-growing e-commerce, mobile gaming and digital banking opportunities in the region. Over these nine months, Sea’s phased inclusion in the MSCI Singapore index from May 2021 to February 2022 could mean potential positive inflows to support the share price, which has come off by nearly 30% from its February 2021 record high.
For CapitaLand, which is covered by Wilson Ng, it is shedding its traditional developer model through a transformative restructuring exercise it hopes to complete by the end of the year. The new structure offers substantially better return on equity (ROE) growth potential, and could mean the stock attracts a much higher valuation multiple that is more line with peers such as Blackstone, Goodman Group and ESR.
Mayank Maheshwari, meanwhile, likes SCI, which demerged with Sembcorp Marine last year. SCI is seeing improvement in capital allocation towards higher-ROE utilities and urban business. Its growing renewable portfolio — which is now tied to management incentives — appears underappreciated by the market, and could support a doubling of ROE in 2021, and dividends by 2022.
With the inclusion of Sea, CapitaLand and SCI, three other companies were removed. They are City Developments (CDL), Ascendas REIT and Thai Beverage. CDL, with its bigger exposure to the Singapore residential market, might suffer from “escalated risks” of new property cooling measures before the year is up. Ascendas REIT will suffer from diminished appeal of yield plays amid potentially higher government bond yields later this year.
Last but not least, Thai Beverage’s P/E ratio appears to be “undemanding”. However, given the recent deterioration in the Covid-19 situation in its key markets of Thailand and Vietnam, and postponement of an earlier planned spin-off of its brewery unit, substantially positive nearterm re-rating catalysts appear limited for now.
