UOBKH cuts STI target, downgrades banks on prolonged Middle East conflict

[SINGAPORE] Fresh escalation in the Middle East conflict over the weekend has prompted UOB Kay Hian (UOBKH) to cut its Straits Times Index (STI) target by 9.3 per cent amid risks of a prolonged war, higher oil prices and weaker business sentiment.

The brokerage lowered its 12-month STI target to 6,061 points from 6,682, citing potential disruptions to sea traffic through the Strait of Hormuz and the Bab el-Mandeb Strait.

It also downgraded Singapore’s banks and removed OCBC from its “conviction buy” list, while recommending that investors adopt a more defensive stance amid heightened geopolitical and energy-market risks.

Among its picks were Singapore real estate investment trusts (S-Reits) with yields “significantly above government bonds” as well as value-oriented technology picks such as Venture Corp .

The increased fighting in the Middle East over the weekend is likely to lead to heightened geopolitical tension and a potential energy crisis, UOBKH said in a Monday (Sep 14) note. The resulting near-term headwinds could also lead to elevated inflation.

In view of these developments, the new STI target represents a fair 2026 price-to-earnings ratio of 18.3 times and “muted upside” of 6 per cent, the brokerage added. Heightened uncertainty over oil supply could also trigger bouts of volatility, with UOBKH estimating the STI’s current equity risk premium at 3.4 per cent for 2027.

Banks downgraded

The brokerage also downgraded DBS to “sell” with a target price of S$74.70, and OCBC to “hold” with a target price of S$32.50.

UOBKH noted that it had already downgraded the banking sector on Aug 24. Since then, DBS and OCBC shares have gained 1.3 per cent and 2 per cent, respectively.

“The economy and loan growth could slow down due to weak business sentiment aggravated by a prolonged Middle East conflict,” UOBKH said.

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Shares of DBS fell 1.2 per cent to close S$0.91 lower at S$76.50 on Tuesday, while OCBC shares fell 2.7 per cent to close S$0.85 lower at S$31.

At the same time, UOBKH removed SIA Engineering from its “conviction buy” list, citing the aviation sector’s exposure to a potential rise in jet-fuel prices.

The brokerage noted that companies in the logistics and air-cargo supply chains could also be affected by higher petrol and diesel prices, as well as increases in freight rates.

Defensive positioning

Against this backdrop, UOBKH recommended several investment themes for investors looking to position defensively.

Keppel , Singtel and City Developments Ltd were highlighted under the theme of “value creation through asset recycling and monetisation”.

The S-Reits that the brokerage recommended were NTT DC Reit and UI Boustead Reit .

Besides Venture Corp, it also recommended Valuetronics as a technology pick, alongside small and mid-cap companies it described as “gems” – namely Riverstone and Pan-United .

Despite concerns over the Middle East conflict’s impact on the aviation sector, the brokerage recommended Sats for investors seeking exposure to Singapore’s growth as an aviation hub.

Energy risks

UOBKH said that the latest developments in the Middle East had heightened the risk of disruptions along key maritime routes.

Houthi rebels are now able to more effectively threaten maritime traffic through the Bab el-Mandeb Strait – a choke point for maritime traffic traversing through the Suez Canal and the Red Sea, it noted.

“These gains could expose tankers to greater risk of attack, raise freight and insurance costs and disrupt deliveries to Asian customers, particularly as restrictions at Hormuz have increased Saudi dependence on its Red Sea export route.”

A drone attack on Saudi Arabia’s East-West pipeline, an alternative to the blockaded Strait of Hormuz, also prompted a shutdown on Friday. The pipeline has capacity to carry seven million barrels of crude oil per day from the main oilfields in eastern Saudi Arabia to the Port of Yanbu on the Red Sea.

“Its closure threatens to deprive Saudi Arabia of its only remaining option,” said UOBKH. “The country’s ability to resume export depends on the extent of damage and the duration of repair time, but there is risk of repeated attacks on the East-West pipeline.”