Cautiously upbeat. Stay defensive
Of the 19 corporates presenting at our IA Singapore Week conference, a majority expects to deliver growth despite underlying macro headwinds. Some see opportunities for expansion through M&A, leveraging on robust balance sheets. Of course, rising interest rates, inflation, geopolitics as well as labour shortages are critical concerns. Strategies are focusing on limiting their impact. We maintain our defensive stock picks balancing strong earnings visibility and competitive moats ( DBS, OCBC, SGX, CDREIT, CD) with those offering thematic growth (CLI, SingTel, ST Eng, Raffles Med, Venture).
Still a lot of hope on growth…
79% of the presenting companies expect sequential growth opportunities driven by a combination of regional border re-openings, expanding order books, structural trends (such as digitalization, sustainability) and improving margins. The rest expect to maintain current activity levels, while none are forecasting retreating growth. Amongst those expecting the most material margin upside are the Banks (from rising NIMs from interest rates), Telcos (from cost savings and rising re-opening ARPUs) and Commodity traders from rising ASPs. Volume upsides are seen by Land Transport, Tech Manufacturing, Recruitment and Healthcare sectors. Separately, around 40% are looking for M&A opportunities and/or value unlocking and restructuring. Industrial and Logistics REITs, Commodity traders, Telcos, Land Transport and Non-bank Financials are the most on the lookout.
…but rising caution on operating conditions
Unsurprisingly, higher inflation, rising interest rates and geopolitical uncertainties are top-of-mind concerns for managements and strategies are being focused on limiting their impact. Interestingly, most corporates expect significant cost pass through, either from cost-plus pricing models (Defense, Tech Manufacturing), indexation (Land Transport) or contractual stipulations (REITs). Gearing levels are low, while debt is being rotated towards fixed-rate facilities from floating rates – especially REITs. Bottlenecks arising from lack of labour availability is another critical issue that is threatening low utilization rates in Tech Manufacturing. For Banks, higher labour costs are so far not exceeding guidance set during 1Q22.
Stick with a Moats+Growth stock selection strategy
Until better macro clarity emerges, we adopt a defensive stock picking approach with stocks that offer near-term earnings visibility and strong competitive positioning for superior pricing (Moats), plus stocks offering growth acceleration due to medium-term themes such as EM consumption, policy support, ESG (Growth). Our top picks include: DBS, OCBC, SGX, CDREIT, CD (Moats), CLI, SingTel, ST Eng, Raffles Med, Venture (Growth).