Figurines displayed inside the Marina Bay Sands shopping mall in Singapore on 17 January 2023. AFP.
Figurines displayed inside the Marina Bay Sands shopping mall in Singapore on 17 January 2023. AFP.
Be hoptimistic.
Chinese zodiac and feng shui talks were popular among investors in the lead up to the Lunar New Year as they tried to get a glimpse into what the Year of the Rabbit had to offer. Based on the S&P 500 Index, which has a longer trading history, it is interesting to note that in the past Years of the Rabbit, which occurred in 1951, 1963, 1975, 1987, 1999 and 2011, the annual gain in those years was an average 14.7%. This is the 4th best annual average return among the 12 zodiac animals. So, what does the year of the Rabbit hold for Singapore equities?
Singapore is stable, not boring.
Singapore market’s lack of excitement versus other markets is a common view held by investors with global exposure. However, heading into a year of great uncertainty for the global market, especially in an environment of persistently elevated inflation and high interest rates, it is prudent to have some exposure to the stable Singapore market. Singapore is a good diversifier since it offers a stable group of core value stocks which will help to reduce the overall volatility of any equity portfolios. Last year, the Straits Times Index (STI) ended the year with a gain of 4.1%. With a dividend yield of 4.1%, this means that the total return for the year was 8.2%. This is remarkable especially in view of the massive losses for equities and bonds globally in 2022. Additionally, global equities saw huge fluctuations within the year. Based on the MSCI World Index, global equities shed almost 29.0% from 2022’s high to 2022’s low, before recovering with a gain of 12.4% from the 2022 low to close the year still in negative territory. In Singapore, the STI saw a narrower trading range; it shed 14% from 2022 high to 2022 low and then added 9.5% from 2022 low to close the year in positive territory.
Exhibit 1: Hopping into a joyous year?
Source: Bloomberg and internal estimates
Will earnings be cut?
With the weak outlook for the global economy in 2023, there is valid concern that earnings could be further cut in 1Q23 after the corporate result season in late January to February 2023. So far, 2023 earnings estimates have seen progressive cuts since the start of the Russian-Ukraine war, which sparked higher input costs and concerns over margins compression and lower revenues and earnings. Earnings growth for the STI is estimated at a healthy 7.9% in 2023 – better than the growth rate for Asia ex-Japan, but slightly below the MSCI World Index.
Based on the MSCI World Index, 2023 consensus earnings have seen several rounds of downwards revisions since 2Q22. In contrast, 2023 EPS estimates for the STI have been moving higher. This largely reflects the anticipated stronger performance from the financial sector due to the current higher interest rates environment. The financial sector accounts for an estimated 45% of the index. As an indication, and based on consensus earnings estimates, the banking sector is projected to see an average 19% increase in net profits in 2023 – a strong double-digit performance, largely supported by strong interest income.
Influx of Chinese tourists and expected improvement in tourism receipts
With the re-opening and the return of Chinese tourists, this will help to boost revenues for tourism-related industries, including hotels, F&B outlets, leisure, gaming, entertainment, retail and other consumer-related products and services. Airlines and transport companies are also likely to benefit from the higher inflow of visitors to the country. The re-opening theme has sparked renewed interest for consumer discretionary items and the FTSE ST All-Share Consumer Discretionary Index rose 1.9% so far this year.
Valuations are not demanding
With the cautious global outlook ahead, the P/E valuation for the STI is now at almost a 2-year low despite some tailwinds from China’s re-opening. Current valuations are at 11.1x P/E, 1.1x P/B and with an estimated dividend yield of 5.1% for the STI. These are undemanding and we believe it has also priced in some pessimism about the global outlook in 2023.
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