Outperforming in a slow-growth environment
- End-2024 STI target of 3485
- Eight REITs to benefit from the Fed pivot
- Position for earnings recovery, turnaround, and stability
A stable macro backdrop. The Singapore economy is set to grow +2.2% y-o-y in 2024 while the US skirts a recession, China aims for a 4.5% y-o-y GDP growth, and ASEAN-5 growth picks up. A more balanced recovery between the manufacturing and service sectors will be seen with the electronics export cycle bottoming and travel and tourism continuing recovery. Average headline and core inflation should ease to 3.5% (4.7% in 2023) and 3.1% (4% in 2023), respectively, but remain above pre-pandemic levels.
Mixed outcome from Fed pivot. The Fed’s pivot spells relief for REITs, property, and technology, but NIM compression for index heavyweight banks. STI’s FY24F earnings growth will be affected by flat growth forecast for banks, offsetting recovery for technology, consumer staples, and several industrial names. Our end-2024 target for the STI is 3485, conservatively pegged between a 10.8X (-2SD) and 11.5X (-1.5SD) FY25F PE. We see limited downside; an attractive 5.4% FY24F benchmark yield and multi-year low PE and P/BV valuations offset low-single-digit EPS growth.
REITs are key Fed pivot beneficiaries. We expect REITs to outperform the STI. This is evident from the past 2 periods of rate pauses – 2006-2007 and 2019. The same has held true thus far in the current pause. Our REITs team prefers “value” over “safety” in the current cycle and selects these 8 REITs for 2024: (1) Retail REITs FCT and LREIT for resilience, (2) diversified REITs MPACT and KREIT for deep value wider-than-average yields, (3) CLAS among the hospitality REITs, and (4) Industrial REITs FLT, MLT, and DCREIT for their relative earnings resilience.
Earnings recovery, turnaround, and stability. FY24F earnings growth will be a key focus among investors as the STI heads into a year of slow earnings growth. Our picks are Seatrium, SATS, and DFI Retail for earnings turnaround and UMS, Venture Corp and ComfortDelGro for their meaningful recovery against an improving sectoral outlook or backdrop. Companies that have a stable or resilient outlook will continue to hold a place in an equity portfolio considering the global soft-landing scenario. Our picks in the changing interest rate environment are ST Engineering, SingTel and Netlink NBN Trust.