Wednesday on a loop for markets?
MOST investors must be wishing that the 2022 bear had gone into a long slumber early in the year, so that they can forget about the past 12 months – the year when most assets fell dramatically, and trading was challenging.
As Netflix’s year-end top-ranked hugely popular series Wednesday showed, sometimes surprises lurk in every corner and there is no knowing when the roller-coaster ride will end.
Markets have seen several key upheavals this year and in large part, these were initially single-handedly sparked off by the Ukraine-Russia war. This was quickly followed by elevated inflation and higher interest rates. All these are now water under the bridge, and it is imperative to look through new lenses for the year ahead.
The widely held view of a recession in 2023 for several major economies, including the US and Europe, has reined in investors’ optimism. With the US Federal Reserve not providing any clear indication of a stop to the rate hike cycle in the December 2022 meeting, this has also caused investors to take on a more cautious stance in December after the strong rally in November 2022.
One of the most pertinent questions for equity investors is – what is the outlook for corporate earnings in 2023? Sharply lower or negative economic growth projections for 2023 have already caused earnings expectations for the year to be adjusted down to reflect the more subdued outlook. Since April 2022, FY2023 earnings have been adjusted down about 5 per cent, based on the MSCI World Index earnings per share (EPS) for 2023. However, risks remain that there could be further downwards earnings revisions if the global economy slips into a widespread or protracted recession.
The combination of factors includes lower consumer demand, which could in turn impact revenues for companies. Operating costs are likely to stay elevated in 2023, due to higher interest expenses, energy and transportation costs, raw materials, and logistics costs. Operating margins are likely to continue to come under pressure in 2023. This could put pressure on profitability in 2023. Job cuts in Q4 2022 could also continue into 2023, especially for high-growth industries which had experienced an excessive expansion in headcount in the past few years. While the unemployment rate currently remains healthy, if market conditions deteriorate further and more jobs are cut, this could impact demand for discretionary products and higher-priced items.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Based on current earnings projection, price-to-earnings (PE) ratio is sharply lower due to the broad-based decline in share prices. The MSCI World Index is currently trading at 15.0x earnings. This is down from 19.4x at the beginning of 2022 and the 10-year average of around 16.1x. As a comparison, this ratio was at 12.5x during the Covid low in March 2020.
In Singapore, sentiment in the Singapore market is well supported by strong performances from some sectors including financials, industrial, telecommunications, utilities and energy. The Straits Times Index (STI) is currently trading at a PE of 10.7x versus 10-year average of 13.2x. In terms of price-to-book ratio, it is at 1.1x versus 10-year average of 1.2x.
Going into 2023, does this mean that investors should avoid equities with the bleak outlook? This overly simplistic view ignores several mitigating factors. China, the largest economy in this region, looks set to open up in 2023. From the experiences of economies that opened up in 2022, there is the release of pent-up demand for consumer products and services as well as a strong pickup in tourism-related activities. A good example is Japan. Pre-Covid, Japan received a monthly average of about 2.7 million foreign tourists in 2019. The number was 17,766 in Jan 2022. Japan’s recent reopening in October saw the number soar to almost 500,000 in October. The reopening of China is likely to be a positive driver for the rest of Asia, which has seen a complete dearth of Chinese tourists and consumer demand.
For the near term or at least into Q1 of 2023, trading is likely to remain highly volatile. A look at trading activities in October 2022 and November 2022 showed that market sentiment can fluctuate widely within a brief period. As a recap, and based on the MSCI Asia ex-Japan Index, the index fell sharply by 6.1 per cent in October 2022 before staging a spectacular rally of 18.7 per cent in November.
The near-term uncertainty has also led to a flight to safety and investors have sought refuge in safer assets. There has been strong awareness of and interest in higher-yielding assets such as short-term Treasury bills, one of the most popular instruments in recent months. In the last four auctions, Singapore T-bill auctions have on average attracted funds of S$11.6 billion. There appears to be ample liquidity in the market.
When sentiment improves in the second half of 2023, largely buoyed by China’s reopening, this could see a quick reversal in consumer confidence and sentiment, and short-term funds could then be deployed into other assets including equities.
Overall, we remain constructive on the Singapore market despite the STI’s outperformance in 2022 versus other regional markets. The STI is currently trading at 12.0x this year’s earnings and 10.7x 2023 earnings. The estimated average dividend yield is 4.4 per cent for 2022.
For our sensitivity analysis and based on a further 10 per cent deterioration in the earnings estimate from current levels for 2023, we have derived both a good and bad outcome for our STI estimates. The STI is currently trading at 10.7x 2023 earnings and this is at -2 standard deviation below the 15 years’ historical average. In the bad case and using the same 10.7x, the STI is estimated to hit 2,953 or about 8.9 per cent down from the current level. However, if sentiment improves by H2 2023, and the STI reverts to the historical average of 13.2x, the STI is estimated at 3,613 or an upside of 11.5 per cent from current level.
Some of our buy ideas include CapitaLand Ascendas Reit (fair value (FV) estimate of S$3.04), CapitaLand Ascott Trust (FV: S$1.20), DBS Group Holdings Ltd (FV: S$37.60), Frasers Centrepoint Trust (FV:S$2.36), Frasers Logistics & Commercial (FV: S$1.37), Mapletree Industrial Trust (FV: S$2.64), Raffles Medical Group (FV: S$1.50), Singapore Telecommunications (FV: S$3.25), Singapore Technologies Engineering (FV: S$4.50), Thai Beverage (FV: S$0.81), UOL Group (FV: S$8.52), Venture Corp (FV: S$20.27) and Wilmar International (FV: S$4.68).
The writer is head of OCBC Investment Research.
Share with us your feedback on BT's products and services
