Navigating through murky waters
? We advocate a near-term defensive position in REITs and high dividend yield
stocks. We remain upbeat on capital goods and construction laggards.
? Tech, banks and construction have mean-reverted. Going into 2H, we look for
trough valuations and inflexion in pace of inflation and interest rate hikes.
? Keeping our end-2022 FSSTI target at 3,475. Top large-cap picks: ST, SCI,
YZJSGD, VMS, OCBC, CICT, AREIT, LREIT, THBEV, STE.
Advocate keeping yield for near-term defensive strategy
1QCY22 results/update season was a relatively muted event with the number of beats
outnumbering misses by a narrow margin. Inflationary cost pressures have dragged on
operating margins across most sectors and led us to cut our earnings by 1.1-32.7% for
FY22F and by 1.3-10.5% for FY23F. That said, we raised our projections for sectors that
benefit from reopening and higher commodity prices, such as air transport and
commodities on demand-led recovery, and banks on NIM upgrades. We expect the
market to remain volatile with increased external risks. We advocate a near-term
defensive position in REITs and high dividend yield stocks and remain constructive on
capital goods.
We like domestic reopening plays, room for upside surprise
Despite rising external risks, the domestic economy has continued to hum along, aided
by relaxation of safe management measures and reopening of borders that benefited the
retail, land and air transport sectors. We like construction plays as a reopening laggard,
as this sector has benefited from the easing of the labour crunch due to the reopening of
travel borders. We believe building materials players (BRC Asia, Pan United) have room
for earnings surprises this year in view of 1) steady recovery of construction activities in
Singapore, and 2) faster-than-expected rise in building material prices. We also see
potential upside surprises for recovery names (Thai Beverage, ComfortDelgro, SingPost)
in view of the significant relaxation of Covid-19 measures post the Omicron wave.
Keeping an eye out for value as we move into 2H
As we move into 2H22F and begin to focus on 2023F outlook and earnings, the market
could start to look for inflexion points in inflation and interest rate trends and seek sectors
with attractive valuations and robust earnings growth prospects. We note that the tech
and bank sectors have reverted to mean valuations and priced in some of the slower
growth expectations. While earnings may still have some downside risk and valuations
are not at trough levels yet, we would keep an eye out for inflexion point indicators, such
as 1) peaking of inflation outlook, which could provide improved visibility on costs, pricing
strategy and margins particularly for manufacturers, and 2) assess demand outlook under
a new normal of higher rates and inflation environment. For banks, a clearer interest rate
outlook and improved economic activity could translate to better NIM or growth outlook.
We add OCBC and VMS to our top pick list
Going into 2H22F, our preferred picks are YZJSGD for yield, backed by high net cash
positions, and ST for earnings recovery. We continue to like SCI for potential earnings
upside surprise on the back of higher energy prices. We like OCBC as it offers attractive
risk/reward profile at 1.04x P/BV. We also favour CICT and LREIT as reopening plays.
We like THBEV for potential better than expected earnings while PanU is a construction
sector laggard. Key downside risks remain slower consumption growth owing to
purchasing power erosion and supply chain blockages that may need more time to sort
out given China’s zero-Covid strategy.