RHB recommends Reits, defensive stocks with selective cyclical exposure

RHB Research on Monday recommended investors stick with real estate investment trusts (Reits) and defensive stocks while selectively adding exposure to cyclical recovery names in consumer, property and transport sectors.

This comes as optimism over economic recovery is rising in the Singapore market, amid the country's declining Covid-19 infection count and improved macroeconomic data.

Analyst Shekhar Jaiswal noted that earlier this month, the government raised its non-oil domestic exports (NODX) forecast to a 3-5 per cent growth, instead of a 1-4 per cent contraction as previously forecast. 

With close-to-zero interest rates likely to persist beyond 2021, Mr Jaiswal said investors will turn to high-yielding markets. He is bullish on Singapore's benchmark Straits Times Index's (STI) prospects, as the index remains the cheapest Asean market with the highest yield in the region.

At 13.9 times, the STI's one-year forward price to earnings (P/E) ratio has exceeded its historical average. Much of this increase has come from "sharp downgrades" in companies' 2020 earnings, Mr Jaiswal noted. And the index's P/E ratio has the potential to rise higher, given the expectations of a rebound in gross domestic product (GDP) growth and investors "finally" building up the confidence in sustained earnings growth for 2021, he added.

"Singapore's stock index returns are closely correlated with the country's nominal and real GDP growth. With the worst contraction in Singapore's GDP growth now behind it, we believe the STI could generate positive returns for next 12 months as economic growth continues to improve."

To be sure, Mr Jaiswal is banking on a "broad-based" profit growth with all sectors represented in the benchmark index expected to see improvements. The consumer, capital goods and real estate sectors are likely to deliver the highest net profit growth next year.

Although stocks in the transport sector such as Singapore Airlines are expected to remain loss making, these losses are likely to narrow, according to the analyst.

Considering the expected gradual recovery, he recommends investors to "gradually" build positions in CapitaLand, City Developments, ComfortDelGro, Suntec Real Estate Investment Trust and Thai Beverage Public Co, which are RHB's cyclical recovery picks.

Although things are looking up for both companies and investors, Mr Jaiswal warned that downside risks still persist.

For instance, government support measures introduced during the "circuit-breaker" period, such as the Jobs Support Scheme, are expected to taper off. This, coupled with the unemployment rate of 2.9 per cent that is above the historical average, could keep business and consumer confidence low, and dampen the expected recovery in economic activity, he wrote.

In addition, there are external risks from the continued deterioration of the US-China relationship.

To cover for such risks, RHB recommends investors stay invested in Reits and defensive stocks offering better earnings and dividend visibility.

Its key defensive picks for the rest of this year are Ascendas Real Estate Investment Trust, Manulife US Real Estate Investment Trust, Sheng Siong, Singtel and ST Engineering.