THE Goldilocks effect – neither too hot, nor too cold – seems to aptly describe the Singapore market.
While 2023 saw several key market-moving events such as the collapse of Silicon Valley Bank and the growing tensions in the Middle East, the Singapore market withstood the wide volatility and traded within a narrower band than other markets.
As an indication, the Straits Times Index (STI) traded within the range from 3,053 to 3,394 – or a high-to-low percentage change of minus 10 per cent. In comparison, the Hang Seng Index was at minus 29 per cent, the Shenzhen Shanghai CSI 300 Index, minus 22 per cent, and Taiwan’s TWSE Index, minus 20 per cent.
The STI’s reduced volatility versus other indices in the world makes it ideal to add Singapore blue chips to a diversified portfolio, to reduce overall portfolio price movements and volatility. Market uncertainty reinforces the need for increased investments in less volatile markets.
Volatility is the new norm
With inflation remaining sticky, and the projected macroeconomic slowdown in 2024 – especially for the two key economies of the US and China – market volatility in the year ahead is to be expected. In 2024, there will be several major elections; these, together with rising geopolitical tensions, will likely have market movements fluctuating widely
In China, the outlook for the property market is likely to stay weak, and this will continue to hurt consumer sentiment.
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Most economists expect to see a slowdown in economic growth in 2024. The Bloomberg consensus forecast has global economic growth easing off from 2.9 per cent in 2023 to 2.6 per cent in 2024. The US will see growth drop from an estimated 2.4 per cent in 2023 to 1.2 per cent next year, while China will ease off from an estimated 5.2 per cent in 2023 to 4.5 per cent in 2024.
Singapore is projected to see growth improve from an estimated 1.0 per cent in 2023 to 2.3 per cent next year. While the city-state is expected to buck the slowdown, the domestic economy is acutely vulnerable to external factors, and will similarly be impacted if external demand weakens faster than anticipated.
Singapore companies that are heavily reliant on external demand are likely to face a challenging environment of slower sales in 2024. However, domestically focused and cash-rich businesses can differentiate themselves and even register growth. The local property sector, which was hurt by high interest rates, could enjoy a reprieve; rates are expected to come off in 2024, given the US Federal Reserve’s signal that three cuts are on the horizon.
Property stocks could see renewed interest
Lower interest rates could provide the much-needed price driver for the real estate and real estate investment trust (Reit) sectors in 2024.
Property and property-related companies fared poorly in 2023, and underperformed the broader market. The interest-rate sensitive FTSE ST All-Share Real Estate Investment and Services Index (FSTREH) fell 29 per cent from its 52-week high to a 52-week low, while the FTSE ST All-Share Real Estate Investment Trusts Index (FSTREI) lost 23 per cent. Some of these companies are index heavyweights and heavily dependent on economic conditions and interest rates.
With rates expected to have already peaked in 2023, the outlook in 2024 is likely to improve for both the real estate and Reit sectors. Lower rates could also benefit other sectors and stimulate consumption, which will in turn aid the recovery for the property sector.
In terms of valuations, both real estate and Reit sectors are trading at close to 10-year-low price-to-book (P/B) ratios. Based on current levels, the estimated yield from the Reit sector is at around 6 per cent in 2023 and 6.2 per cent in 2024 – this will start to look attractive once T-bills and other similar products start to adjust down in line with the lower interest rate outlook in 2024.
Record earnings for Singapore banks
With DBS and UOB notching solid nine-month results, both banks are set to post record profits in FY2023. The strong performances were supported by several factors, chiefly the strong improvement in net interest income (NII) due to higher net interest margins (NIMs).
With higher-for-longer rates, this sets the stage for a sharp jump in NIM to more than 2 per cent – the last time NIM crossed 2 per cent was in FY2009. For DBS, nine-month NIM was 2.16 per cent; UOB’s was 2.12 per cent. In addition, non-performing loan (NPL) ratios have stayed low. As at September 2023, DBS’s NPL ratio was 1.2 per cent and UOB’s,1.6 per cent.
With the recent share-price corrections, valuations have similarly come off. Based on the FTSE ST All-Share Financials Index (FSTFN), the current P/B ratio is 1.2 times. This is not excessive, since profits have surged in the past 10 years. In FY2014, the combined net profits of the listed Singapore banks amounted to S$11.1 billion. By 9M FY2023, this swelled to S$17.5 billion.
On an annualised basis, profits have more than doubled in the last 10 years. This speaks of the transformation and the diverse earnings streams of the local banks. In addition, when compared against other peers, their valuations are not expensive and are at the lower end of the valuation spectrum.
Key risks for the banking sector will largely come from the projected macroeconomic slowdown in 2024, which could dent the outlook for loans growth in the region. The widely expected easing of interest rates in 2024 could also potentially impact NIMs.
With bumper dividends in recent quarters, Singapore banks provide some of the highest dividend yields in the region as well as among the Singapore stocks, apart from selected Reits.
The STI is currently trading at a price-to-earnings (P/E) ratio of 10.6 times – below the 10-year historical average of 12.9 times. The average dividend yield is estimated at 5.2 per cent in 2023 and 5.7 per cent in 2024. At these levels, the current dividend yield is amongst the highest in the region and is also higher than the 10-year average of 3.8 per cent.
Given expected lower rates in 2024, a current estimated dividend yield of 5.7 per cent in 2024 is still attractive for medium- to longer-term investors looking for a steady stream of dividend income.
The writer is head of OCBC Investment Research
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