Receive $80 Grab vouchers valid for use on all Grab services except GrabHitch and GrabShuttle when you subscribe to BT All-Digital at only $0.99*/month.
Find out more at btsub.sg/promo
AS THE third-quarter earnings season begins in earnest, expectations are running high among some fund managers and analysts.
With strong Q3 gross domestic product (GDP) numbers confirming an earnings recovery story in 2017, Singapore companies like banks and manufacturers have the potential to beat already-raised expectations, they say.
However, the outlook for domestic-oriented sectors like retail, telcos and transport is still muted.
Another discordant note is how September non-oil domestic exports shrank from a year ago. Analysts say that some moderation is expected, but it is too soon to say that the economic cycle has peaked.
Kenneth Tang, senior portfolio manager at Nikko Asset Management, told The Business Times that earnings might surprise on the upside for contract manufacturers like Venture Corporation, one of his top holdings.
He is bullish about the firm's expansion in medical and health instruments, especially in genomics testing. Venture is believed to be working with US biotech firm Illumina, which said in August that orders for its new NovaSeq sequencing machine have exceeded expectations by 30 per cent.
Mr Tang said gene sequencing machines might one day be available to a general practitioner, with Venture a key supplier not just to manufacture, but also to help collect data.
"We've taken the view that Venture is no longer a tech manufacturer, it is going into services," he said.
Jalil Rasheed, an Asean equities fund manager at Invesco and the head of its Singapore office, told BT that Singapore's Q3 GDP data correlates with what he is seeing among companies he is invested in.
Sentiment remains strong, though he has taken profit off some property companies that have rallied significantly.
"The sense on the ground is pretty good," he said. "We spoke to a lot of property developers . . . there's a sense of optimism that things are coming back."
Banks, too, have recovered from concerns of asset quality deterioration, as commodity markets recovered, he said.
Singapore's GDP expanded a better-than-expected 4.6 per cent year-on-year in the third quarter, driven by the manufacturing sector.
The electronics, biomedical manufacturing and precision engineering clusters boosted the numbers.
The services industry, which makes up two-thirds of the economy and employs the bulk of workers here, also expanded 2.6 per cent year-on-year. It was driven by the finance and insurance, wholesale and retail trade, and transportation and storage sectors.
Jarick Seet, head of Singapore small and mid caps at RHB Research Institute, said the strong manufacturing GDP numbers bolster his expectations for manufacturing firms to report robust Q3 results.
He expects earnings growth of anywhere from 30 per cent to 200 per cent for companies like Avi-Tech, Jadason, Venture, Valuetronics, and AEM.
However, a strong Q3 might lead to a slight slowdown in Q4, he said.
On Thursday, rigbuilding, property and infrastructure firm Keppel Corporation will report its results.
This will be followed by a host of real estate investment trusts (Reits), which traditionally kick off Singapore's reporting season.
Large-cap Reits like CapitaLand Mall Trust and CapitaLand Commercial Trust will report on Friday. Blue chips reporting next week include OCBC and Singapore Exchange.
Counters like SPH Reit and Keppel DC Reit have delivered within expectations, said Carmen Lee, head of OCBC Investment Research. She expects the rest of the Reits to also report earnings in line with market expectations. Banks could surprise on the upside as market activities and transactions remain healthy, she said.
Ms Lee cautioned that despite the active en bloc market in the last three months, local property companies are not expected to report immediate earnings improvements.
Looking ahead, Nikko AM's Mr Tang said stocks in the capital goods and industrials sector like Keppel, Sembcorp Industries and Wilmar International might benefit from a spillover effect, following "early cyclicals" like tech stocks and banks.
But the domestic transportation sector is facing earnings headwinds, he said, citing taxi, bus and rail giant ComfortDelGro. He also avoids telcos, which he says are facing competitive pressures.
Both Mr Tang and Invesco's Mr Rasheed highlight how the retail sector is struggling due to the impact of e-commerce.
On the whole, South-east Asian stocks have room to rally given its high-growth economies, provided the interest rate environment stays benign, said a note on Wednesday by fund manager Fidelity.
"Asean equity markets have a long history of underperforming regional indices during a US rate hiking cycle, before stabilising and outperforming close to the end of the cycle and thereafter," it said.
Invesco's Mr Rasheed said the commodity price recovery has benefited countries like Indonesia. However, consumer companies in Indonesia, Thailand and the Philippines have reported weaker-than-expected results.
"There are concerns about the rising cost of living and the ability of people to spend a lot of money on consumption goods . . . But these things tend to take a bit longer before it becomes a big concern," he said.
Singapore ultimately remains dependent on external factors, more than its neighbours, Mr Rasheed said.
"The market is pretty small, companies listed in Singapore are pretty much international in nature."