SINGAPORE equities offer sustainable dividends and earnings growth in a low-return environment clouded by an uncertain global macroeconomic outlook.
We see better return opportunities in select, high-yielding blue chips, and stocks levered to the ongoing recovery in China.
Secure dividends in an uncertain world
Singapore’s distinctively defensive equity market comprises largely high dividend-yielding stocks that could prove especially attractive as global markets grapple with slowing growth, deteriorating liquidity, and an uncertain path for interest rates.
A troubled global macroeconomic outlook suggests subdued return prospects for equity markets, in particular within developed markets. Our equity strategy team expects nearly zero potential upside to the S&P 500 index and the MSCI Europe index.
In this low-return environment, there is opportunity in stocks offering high and growing dividends. At nearly 5 per cent dividend yield, the MSCI Singapore Index’s dividend yield is among the highest within global developed markets. Singapore’s dividend yields are high, not just relative to other markets but also compared to its own history – indicating current valuation levels are inexpensive.
What’s equally important is the sustainability of these dividend levels and their potential to grow. Singapore’s dividends grew more than 10 per cent last year – positively surprising market expectations – and are set to grow another 10 per cent this year, and 5 per cent next year, based on average consensus forecasts for MSCI Singapore constituent stocks.
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Supported by sustained earnings growth
Underpinning high and growing dividends in Singapore is a robust corporate earnings growth profile. Earnings expectations for Singapore have steadily improved year to date, as seen by upward revisions in analyst consensus earnings per share (EPS) forecasts for the MSCI Singapore index, in contrast to downward revisions on aggregate across the region and for global developed markets.
MSCI Singapore’s EPS grew 25 per cent last year, and we think earnings growth could accelerate to 40 per cent this year, a level substantially higher than other markets globally. In comparison, consensus EPS forecasts for the S&P 500 Index, and the MSCI Europe and Asia indices suggest little to no growth.
Sustained positive earnings growth momentum across Singapore is likely to be broad-based, spanning banks’ averaging 20 per cent growth, and even higher growth from non-bank sectors, especially those levered to the reopening of travel borders.
Above-trend earnings growth will likely support higher valuation levels, even if earnings multiples remain depressed by low-risk sentiment. MSCI Singapore trades at 12 times one-year forward earnings (below its five-year average of 14 times) and it will likely remain at these levels over the next 12 months. Even so, we see close to 20 per cent total return potential for the index over this period, thanks to high earnings growth and dividend yields.
Prefer high-yield blue chips, beneficiaries of China reopening
Singapore stocks offering high and sustainable dividend yields are better positioned to combat a low-return environment for global equities.
Singapore banks, for example, offer dividend yields as high as 9 per cent (including special dividends) for 2023, and consensus expectations are for dividends to rise further over the next two years as earnings continue to grow. While there are market concerns that peaking interest rates could limit further net interest margin (NIM) expansion, well-capitalised balance sheets suggest room for more capital distribution to shareholders.
Within the industrial sector, dividend yields for large-cap stocks go as high as 6 per cent and could be a source of alpha generation – particularly those companies that benefit from tight electricity markets and actively monetise assets.
Real estate investment trusts (Reits) offer relatively high dividend yields as well, but we would caution on allocating too much too early, until there are firmer market expectations for interest rate declines.
Meanwhile, Reit dividends could see declines this year on rising borrowing costs. Real estate investment managers, on the other hand, seem like a more viable and early-cycle proxy to a turn in interest rate sentiment, as they likely benefit more from growing capital-raising activity that we are already beginning to see in the Reit market.
In addition, there are opportunities for select stocks within the consumer sector that stand to benefit should China’s growth reaccelerate in the second half of the year. The launch of a stimulus package to safeguard China’s recovery appears imminent. This could boost consumption and further ease credit conditions, supporting a more conducive business environment in China. This would benefit Singapore companies with significant exposure to the country.
Overall, in the Singapore market, there are select opportunities across sectors within large-cap stocks offering high-dividend yields, enabling investors to keep calm and get dividends.
The writer is Singapore strategist, Morgan Stanley
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