Singapore banks, tech, Reits favoured by analysts amid growth, inflation concerns

INFLATIONARY pressures and weaker growth are likely to have the biggest impact on equity portfolios in the second half of 2022, analysts and strategists told The Business Times.

To mitigate these risks, some have suggested looking to banks and real estate investment trusts (Reits) as potential beneficiaries of higher interest rates. Technology-linked stocks, meanwhile, are potential long-term plays.

In a report dated May 12, Morgan Stanley equity analysts said inflation and interest rates have risen more quickly this year than they had expected.

Singapore, however, is seen as a safe haven, where interest rates are "likely to rise further, but on a relatively moderate path compared to the US".

The Monetary Authority of Singapore is expected to allow a strengthening of the Singapore dollar to keep inflation in check, the analysts said, which would be supportive for local equity markets.

Indeed, this relative optimism is reflected in the performance of Singapore benchmarks.

For the year to May 23, the Straits Times Index (STI) had seen a total return of 2.9 per cent – outperforming the -15.6 per cent of the MSCI All Country World Index.

The MSCI Singapore Index also outperformed, albeit by a smaller margin. It has declined 12.7 per cent this year, weighed down by gaming and e-commerce group Sea. The latter had an index weight of 12.2 per cent as of Apr 29 this year, but is not a constituent of the STI. The company has seen a year-to-date total return of -65.5 per cent.

As interest rates continue to rise, Morgan Stanley's analysts said the banks are well-placed beneficiaries. They should also receive a boost from the lifting of restrictions to limit the spread of Covid-19.

“Positively levered to both rising interest rates and the reopening theme, banks look especially well positioned to weather cost inflation headwinds and provide sustained growth in earnings and dividends,” the analysts said.

Within the 5 counters that make up their “focus list”, they have replaced real estate investment manager CapitaLand Investment with DBS while keeping UOB . The banking sector’s valuation multiples do not look overstretched when compared with the real estate and travel-related sectors, they said. Their other picks include Sea, Keppel Corp and Sembcorp Industries .

Morningstar’s director of equity research Asia Lorraine Tan, too, has DBS among her top picks.

“We estimate an 8.5-basis-point increase to the bank’s net interest margin on every 25-basis-point increase in interbank rates. This is relatively higher compared with the OCBC and UOB sensitivity of 3.5 basis points and 4.7 basis points, respectively,” she said.

Reits to rise

Tan is also bullish on select Reits as the economy reopens after the Covid-19 pandemic.

One such Reit is CapitaLand Integrated Commercial Trust (CICT), which she said could benefit from tighter office supply in the central business district (CBD) and recovering demand as workers return to the office.

In a report released May 20, DBS analysts said the “stars are still aligned” for hospitality and office Reits.

These S-Reits could outperform when the yield curve flattens in the second half of this year and next year as recession fears set in, they said.

S-Reits have also begun to refinance debt that is expiring in the near term, as seen in their recent first quarter business updates. Their increased hedged ratio to 77 per cent from 75 per cent provides increased defence against rising interest costs, the analysts said.

“While utility costs are on the rise, we remain comforted that most S-Reits are locked in with contracts ending from the latter half of 2022 onwards. This will impact industrial the least, while retail may experience a lag before higher costs could be passed through,” they added.

CICT and Keppel Reit are their top office picks, while Ascott Residence Trust and CDL Hospitality Trusts are their hospitality picks.

CGS-CIMB, meanwhile, sees CICT and Lendlease Global Commercial Reit as reopening plays.

In a strategy report dated May 26, analysts Lock Mun Yee and Lim Siew Khee, also highlighted Ascendas Reit as "well placed to pursue inorganic growth".

Tech opportunities

Amid this general risk aversion, DBS equity market strategist Yeo Kee Yan said there is a chance inflation fears could peak in the second quarter of this year.

“If this view pans out, there should be opportunities among Reits and technology sectors that have underperformed year to date amid rising rates concerns,” Yeo said.

The team at CGS-CIMB also believes the tech sector has reverted to "mean valuations and priced in some of the slower growth expectations". That could present opportunities for investors seeking bargains for the longer term.

Maybank head of research Singapore and head of regional financials Thilan Wickramasinghe said the tech manufacturing sector, for one, offers exposure to longer-term themes such as sustainability, increasing digitalisation and emerging markets consumption.

DBS, Maybank and CGS-CIMB all listed Venture Corp among their preferred picks.

A Maybank report on the electronics manufacturing services company released on May 1 noted that despite inflationary pressures, its first quarter pre-tax profit margin remained healthy at 11.5 per cent, up 0.6 percentage points year on year. (see amendment note*)

While other tech companies globally may be concerned with demand slowdown, the report noted that growth domains such as healthcare and wellness stood out. Demand was largely led by the recovery of the retail and hospitality sectors globally amid reopenings.

DBS’s Yeo added that much depends on how aggressively the Federal Reserve raises interest rates and how much growth slows as a result. Should economies slow gradually and remain healthy, he believes commodity producers and energy-related sectors should continue to benefit.

On the other hand, there would be few gainers in a stagflation scenario. “Consumer staples (providers), like grocers, or telcos may be more resilient,” he said.

Even then, Maybank’s Wickramasinghe said such companies may see margin contraction if they cannot fully pass on rising input costs.

*Amendment note: An earlier version of this article incorrectly stated that Venture’s pre-tax profit margin was down year on year when it was actually up.