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Singapore banks' earnings growth, dividends attractive; Reits looking overpriced: UBS

SINGAPORE bank stocks are starting to look more attractive at current levels while its Reits are beginning to look overpriced, said UBS Global Wealth Management in its July CIO Investing in Asia Pacific monthly report.

UBS had started the year being "overweight" on Singapore banks and Reits. The banking sector has underperformed while Reits have outperformed the benchmark index so far this year, said UBS.

Evidence of earnings growth and return on equity expansion could support a re-rating of the banking sector, which is currently trading in line with its long-term average, the wealth manager added.

It said the banks' dividend yields were above market average and comparable to some Reits, in line with the view in a previous OCBC Investment Research report, which had upgraded DBS to a "buy" and said its dividend yield was similar to a Reit.

"We expect banks to deliver earnings growth on the back of resilient loan growth, stable asset quality and net interest margin expansion," said UBS.

Meanwhile UBS said Reits’ valuations are "starting to look rich", with dividend yield one standard deviation below its long-term average and several Reits currently trading at multi-year highs.

In the Asia ex-Japan equities asset class, UBS also included Singapore banks among other Asian banks it saw as potential investments due to "decent earnings growth and attractive dividend yields of 4 to 6 per cent".

High dividends are popular in Asia, given the region’s attractive dividend yield of around 3 per cent and the recent performance of high dividend yield companies.

"The MSCI Asia ex-Japan High Dividend Yield Index has outperformed the broader MSCI Asia ex-Japan Index by 6 percentage points over the past year while achieving 35 per cent less drawdowns," UBS said.

Besides recommending banks in Singapore, China, Thailand, Indonesia and India for dividend payout, UBS also said select Taiwanese companies could benefit from the upcoming dividend season, where it "sees scope for higher payouts".

Taiwanese petrochemicals in particular provide decent yields of around 4 per cent and are relatively more defensive, the wealth manager said. 

For investment strategies, besides investing in high dividend yield companies, UBS also recommended looking at companies that can reinvest for faster growth or return cash through share buybacks.

It highlighted Chinese internet and Korean tech companies for their high cash flows and decent buyback prospects.

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