Gingerly Seeking Value And Diversification As Near-Term Headwinds Mount
There are near-term headwinds as regional markets grapple with higher interest rates and bond yields. Growth in ASEAN is supported by a shift of supply chain to ASEAN. BUY reopening plays CLAS (Target: S$1.39), MAHB (Target: RM7.52) and RFMD (Target: S$1.90). BUY defensive consumer staples BAT (Target: RM14.40), CPALL (Target: Bt78.00), KLBF (Target: Rp2,400) and OR (Target: Bt29.00). BUY yield plays BMRI (Target: Rp5,750), OCBC (Target: S$17.50) and SCB (Target: Bt138).
OUR VIEWS
• Singapore: Continued contraction in manufacturing and exports. 1Q23 GDP growth has slowed to 0.4% yoy. Services grew 2.0% yoy, supported by aviation and tourism but manufacturing contracted 5.6% yoy. Construction increased 7.2% yoy. MTI forecasts Singapore GDP to grow 0.5-2.5% yoy for 2023 and is concerned over the tightening of global financial conditions and a prolonged electronics downturn. UOB forecasts GDP growth of 0.7% yoy (lower end of MTI’s forecast range) due to its more cautious external outlook. Business and leisure air travel and inbound tourism should continue to recover but non-oil domestic exports have already contracted yoy for eight consecutive months.
• MAS expected to maintain status quo in October. Core inflation (excluding accommodation and private transport) eased to 4.7% yoy in May 23, driven by services and food. MAS expects core inflation to stay elevated in 1H23 before slowing more discernibly in 2H23. It has maintained its forecast of core inflation at 3.5-4.5% in 2023. UOB expects MAS’ tightening cycle to have already ended in Apr 23 and the pause to be maintained during the next meeting in Oct 23. The Singapore dollar is a safe haven currency and weakness against the US dollar is expected to be less pronounced.
• Malaysia: Growth moderation starting 2Q23. GDP growth moderated to 5.6% yoy and 0.9% qoq in 1Q23 anchored by the expansion in domestic demand and investments. Growth was led by the services, manufacturing and construction sectors. UOB forecasts full-year GDP growth at 4.4% (BNM estimates: 4-5%). The economy is expected to slow starting 2Q23 due to the high base effects and external uncertainties. UOB sees a slowdown in the domestic economy, possible subsidy rationalisation in 2H23 and uncertainties from the upcoming six state election. BNM expects core inflation to moderate to 2.8-3.8% in 2023.
• Headwinds from potential fiscal austerity. BNM resumed the rate hike by 25bp to 3.00% on 3 May 23 due to resilient domestic growth, bringing OPR is back to its prepandemic levels. The odds of another rate hike have diminished and UOB expects OPR to remain at 3.00% for the rest of the year. The ringgit’s weakness has extended into 2Q23, underperforming most regional peers, as China yuan depreciated due to concerns over China’s recovery losing steam. Current account surplus is expected to narrow due to lower energy prices. UOB expects the ringgit to regain strength and recover to 4.60 in 4Q23.
• Thailand: Benefitting from recovery in tourism. GDP growth picked up to 2.7% yoy in 1Q23 due to a strong recovery in services export, supported by private consumption and public investments. Private consumption expenditure expanded 5.4% yoy due to tourism rebound and spending on durable goods. Services expenditure grew 11.1% yoy with strong spending on restaurants and hotels. Public investments increased 4.7% yoy. BOT forecasts GDP growth of 3.6% in 2023 underpinned by government economic policies. Inflation should fall within the 1-3% target range due to easing electricity and oil prices.
• A tinge of dovishness. UOB expects interest rates to have peaked and stay at the current 2.00% for the rest of the year. The baht has weakened after the national elections in Jun 23 due to uncertainties over forming of the coalition government. The anticipated resurgence of tourist arrivals, especially those from China, has not played out as strongly as earlier expected. The baht is expected to track movements in China yuan more closely until the political fog clears. UOB forecasts the baht to strengthen to 34.0 in 4Q23.
• Indonesia: Resilient growth accompanied by easing of inflation. 1Q23 GDP expanded 5.0% yoy but contracted 0.9% qoq. Household consumption held up and net exports increased. Growth was led by the transportation and logistics sectors over the past five quarters due to the reopening and removal of mobility restrictions. Public consumption increased due to social protection and subsidy programmes. Government spending on infrastructure projects continues to accelerate. UOB forecasts full-year GDP growth at 5.0% (official estimate: 4.5-5.3%). Headline inflation eased to 4.0% yoy due to a decrease in food prices in May 23 and is expected to return to BI’s target range of 2-4% in 2H23.
• Fostering exchange rate stability. BI kept its policy rate at 5.75% during the May’s MPC meeting. It sees inflation as well anchored. UOB expects rate cuts starting 1Q24. The rupiah was affected by abrupt China yuan weakness starting May 23, losing ground in tandem with most regional currencies. Foreign investors turned to become net sellers of Indonesia government bonds in May 23. BI has pledged to continue Operation Twist by selling shorter tenure debts to boost yield and attract foreign inflows. UOB expects the rupiah to trade within a tight range and reach 14,800 by 4Q23.
ACTION
• Near-term headwinds from higher interest rates and bond yields. Central banks have turned more hawkish recently, as core inflation remains persistent and above target. On a brighter note, stresses from the mini banking crisis in the US have subsided.
• Resiliency from diversification. Indonesia looks attractive due to strong GDP growth of 5.0% for 2023 and core inflation has recently eased to 2.6% in Jun 23, which gives rise to positive prospects of BI cutting policy rates. Parliament and Senate will convene a joint sitting on 13 Jul 23 to elect the next Thai Prime Minister. A smooth transition to a freely elected Prime Minister and Cabinet would be positive for the Thai stock market.
• BUY reopening plays: CapitaLand Ascott (CLAS SP/Target: S$1.39), CP All (CPALL TB/Target: Bt78.00), Malaysia Airports Holdings (MAHB MK/ Target: RM7.52) and Raffles Medical (RFMD SP/Target: S$1.90).
• BUY defensive consumer staples: British American Tobacco (BAT MK/Target: RM14.40), CP All (CPALL TB/Target: Bt78.00), Kalbe Farma (KLBF IJ/Target: Rp2,400) and PTT Oil & Retail Business (OR TB/Target: Bt29.00).
• BUY yield plays: Bank Mandiri (BMRI IJ/Target: Rp5,750), British American Tobacco (BAT MK/Target: RM14.40), CapitaLand Ascott (CLAS SP/Target: S$1.39), Oversea Chinese Banking Corporation (OCBC SP/Target: S$17.50) and SCB X (SCB TB/Target: Bt138.00) provide attractive yields averaging 5.9%.