Singapore stocks look inexpensive despite inflation concerns, outperformance: OCBC

WHILE the Straits Times Index (STI) has outperformed other markets year to date, valuations in the Singapore market still look inexpensive, OCBC said on Friday (Jul 22).

In its market outlook for the second half of 2022, OCBC said it is positive but recommends investors take a more defensive approach as it expects to see short-term market volatility amid high inflation concerns.

Amid the reopening in South-east Asia, OCBC chief economist Selena Ling expects the transport hubs in the region will benefit. Consistent positive growth in the electronics segment is providing some buffer to weaknesses in the pharmaceutical side, she added.

China is also a focus point for South-east Asia given its trade relations with the region.

“Our sense is that China is not out of the woods yet, although we do expect some stabilisation for headline growth in the second half,” Ling said. She expects that China’s trade surplus with South-east Asia can be an engine of growth at least in the near term.

Carmen Lee, head of OCBC Investment Research, noted that the STI is down 0.2 per cent year to date, outperforming other key indices, including the S&P 500, MSCI China and the Korea Composite Stock Price Index, which have seen declines of more than 15 per cent for the year.

Despite the outperformance, Lee said valuations are inexpensive: the price-to-earnings ratio of the STI is close to 2 standard deviations below its 10-year historical average, while the STI’s price to book ratio is also below its 10-year historical average.

Lee noted that in the current high interest rate and high input costs environment, a key thing to look at is earnings. She expects companies operating in a more stable business environment will likely fare better due to lower supply disruptions.

“In an environment like this where we're still uncertain, you still go for very good name companies,” Lee said, noting that investors still have a preference for stocks that have good dividend yields.

She is positive on the industrial Reits, and also noted that the average yield on some top Reits has improved to about 5 per cent.

OCBC’s stock picks include Ascendas Reit, CapitaLand Integrated Commercial Trust, Frasers Centrepoint Trust, Mapletree Industrial Trust, Mapletree Logistics Trust and NetLink NBN Trust.

Lee also noted that Singapore banks are still a good buy, as they are providing dividend yields of almost 5 per cent.

Additionally, Lee said certain property stocks such as UOL Group look attractive as they have not fully priced in their potential. On the broader sector, she noted that the FTSE ST All-Share Real Estate Index has fallen this year, despite the uptrend in the physical property market.

Other stock picks of OCBC include Raffles Medical Group, Sats, SIA Engineering, Singtel, ST Engineering, Thai Beverage and Venture Corp.

Speaking on the impact of a strengthening US Dollar, Lee said companies on the Singapore stock market will see less of an impact to their earnings given the limited exposure.

OCBC’s Ling also noted that the Singapore dollar has been strengthening.