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Interest rates, commodity prices will affect market

Maybank Kim Eng sees banks gaining from higher rates; transport stocks benefiting from low commodity prices


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HIGHER interest rates and lower commodity prices will feature strongly in the Singapore market this year, said Ng Wee Siang, Maybank Kim Eng's head of research.

In his view, the banking sector will benefit from higher interest rates, and the real estate industry will be the key loser. Weakened commodity prices will be positive for transport stocks while hurting the offshore & marine sector.

Mr Ng was speaking at The Business Times-Maybank Kim Eng Invest Asia 2015 seminar on Saturday, on the topic of mining the market. This is the second Asian investment outlook seminar jointly organised by the two parties. The event was attended by over 200 participants.

Mr Ng projects the three-month Singapore Interbank Offered Rate (Sibor) to rise to one per cent this year, and 2 per cent by end-2016. On Thursday, the three-month SIBOR was 0.64 per cent.

Historically, the three-month Sibor has a 94 per cent correlation to the Fed funds rate. With the end of the quantitative easing tapering last year, Mr Ng expects the US Fed to start raising interest rates by the middle of this year.

With a liquid balance sheet and a strong deposit franchise, DBS should stand to gain most from the interest rate hikes, Mr Ng said, issuing a "buy" call on the stock, at a target price of S$23.50, versus DBS's closing price of S$20.13 on Friday.

DBS has a current and savings account (CASA) ratio of 55 per cent and a loan-deposit ratio of 78 per cent, suggesting S$30.8 billion in net deposit surplus. This will allow DBS to enjoy lower funding costs, explained Mr Ng.

Typically, when real interest rates increase, asset quality will be affected. In this case, Mr Ng expects asset quality to remain resilient, as interest rates rise in a modest fashion, giving the economy time to digest the changes.

OCBC is also expected to benefit from the interest rate hike, but Mr Ng has placed a "hold" on the counter, due to the overhang of its acquisition of Wing Hang bank in Q3 FY2014, which weighs heavily on its share price. There have been worries whether OCBC was making the right move given the bad experiences that other Singapore banks have had in Hong Kong.

As interest rates rise, property investments will lose their appeal. The problem will be compounded by a "higher than usual" supply of completed private residential homes in 2015 and 2016, said Mr Ng.

This year, 21,000 private residential homes are expected to be completed, a 3,000 jump from 2014. This figure is predicted to surge to 23,000 in 2016. "Vacancy is set to rise further," Mr Ng said, forecasting home prices to decline by up to 10 per cent this year, and placing a "neutral" weighting on property developers.

Another key theme to expect this year is lower commodity prices, Mr Ng said. The US dollar, with a strong inverse relationship to commodity prices, is expected to appreciate further this year, driven by a stronger US economy and risks in the eurozone, said Mr Ng.

This is set to further dampen commodity prices, such as crude oil, which have already fallen to a fresh 5.5 year low last week, on the back of a supply glut.

The Organisation of the Petroleum Exporting Countries (Opec), which produces about 40 per cent of the world's crude oil, also seems to prefer protecting market share by maintaining production, than to reduce output and boost oil prices.

Despite a sharp oil price correction, Opec's output for December 2014 stood at 30.239 million barrels, just 0.4 per cent less than November 2014's output, but still surpassing the pre-agreed 30 million barrels quota.

Lower oil prices will be a boon for transport companies, such as Singapore Airlines, with oil comprising around 40 per cent of its costs, Mr Ng said. Cheaper oil could also have a positive spillover for general demand and consumption, he added.

But a sustained fall in oil prices could force oil companies to scale back on spending, which is negative for offshore & marine stocks, Mr Ng said, issuing an "underweight" for the sector.

Offshore drillers are facing a perfect storm, he said. Low oil prices could lead oil companies to cut their capital expenditures in 2015. And already, 43 per cent of new floaters and 87 per cent of jack-up rigs are currently uncontracted. This phenomenon places further risks to their charter rates and utilisation.

While the market has factored in S$9-11 billion of new orders for Singapore rig builders this year, the assumption is based on sustained high oil prices.

That goal is now unattainable, said Mr Ng, cutting the order intake for Keppel Offshore & Marine, a unit of Keppel Corporation, and Sembcorp Marine to 11-27 per cent below market expectations.

"It may be too early to buy into the oil services counters now, but any significant price correction will be a good buying opportunity," he said.