With interest rate cuts set to happen this year, most analysts have turned positive on S-REITs, which are expected to see a resumption of DPU growth in FY2024. “We expect REITs to outperform the Straits Times Index (STI). This is evident from the past two periods of rate pauses, 2006–2007 and 2019. The same has held true thus far in the current pause,” say DBS Group Research analysts Yeo Kee Yan and Foo Fang Boon.
Similarly, CGS-CIMB Research’s Lock Mun Yee and Lim Siew Khee have kept their “overweight” rating for the sector. However, drawing reference to the past two periods of rate pauses as example, the analysts see that the path to normalised rates would be data-dependent as US inflation data remains elevated. As such, they expect unit prices in S-REITs to remain “choppy” in 1HFY2024.
“Using our FY2024 DPU estimates and peak/trough yield spreads over the past few cycles, our assessment indicates that share prices have recovered to their long-term average level,” the analysts write. “Assuming DPU projections remain unchanged, the next upcycle would likely come from the compression of the 10-year bond yield, which would widen yield spreads, rendering valuations more palatable. A pivot down in interest rates would be key to this development.”
Among the sectors, the analysts prefer the industrial, retail, hospitality and office sub-sectors, in this order of preference. Their top picks are CapitaLand Ascendas REIT A17U -1.68% (CLAR) and CapitaLand Ascott Trust HMN -1.53% (CLAS). For those still trading below the long-term average, counters such as CDL Hospitality Trusts J85 -2.75% (CDLHT), Keppel REIT (KREIT), Lendlease Global Commercial REIT JYEU -0.79% (LREIT), Mapletree Pan Asia Commercial Trust (MPACT) and Starhill Global REIT P40U 0.00% (SGREIT) stand out for them as well.
The CGS-CIMB team likes the tech sector too with the recent upgrade to “overweight” with a “favourable bias” towards semiconductor plays. “We see tailwinds from a shift from a previously more services sector-dependent growth into a more balanced recovery between the manufacturing and services sectors. The manufacturing sector is guided by the gradual recovery of the global electronics industry and favourable base effects, while growth in the services sector remains resilient and should normalise,” they write. “Semiconductor sector recovery and manufacturing diversion from China to Malaysia are potential tailwinds for the tech sector.” The analysts’ picks within the tech sector are Venture Corporation V03 0.66% , Frencken and UMS Holdings 558 0.00% .
On the other hand, CGS-CIMB has downgraded capital goods to “neutral” after the strong share price performance in 9MFY2023 and will “look to timing for re-entry”.
Overall, CGS-CIMB’s top conviction picks include ComfortDelGro C52 0.00% (CDG), CLAR, CLAS, Genting Singapore G13 -0.99% (GENS), Sats, Seatrium, United Overseas Bank U11 -0.56% (UOB), Venture Corporation and Yangzijiang Shipbuilding (YZJ). Within the brokerage’s small-cap universe, the team likes Centurion, CSE Global 544 0.00% , Frencken, Riverstone and UMS Holdings.
Value over safety
For the DBS team, “value” is preferred over “safety” in the current cycle. As such, the team has selected the following REITs to focus on in 2024. Frasers Centrepoint Trust J69U -0.87% (FCT), LREIT for resilience; diversified REITs MPACT and KREIT for their “deep value wider-than-average yields”; and CLAS, Frasers Logistics & Commercial Trust BUOU -2.59% (FLCT), Mapletree Logistics Trust M44U -2.37% (MLT) and Digital Core REIT (DCREIT) for their relative earnings resilience.
Other picks are Seatrium, Sats and DFI Retail for their earnings turnaround, and UMS, Venture and CDG for their “meaningful recovery” against an improving sectoral outlook or backdrop.
Finally, companies with stable or resilient outlooks will “continue to hold a place in an equity portfolio considering the global soft-landing scenario,” say the analysts, who have named Singapore Technologies Engineering S63 -1.29% (ST Engineering), Singapore Telecommunications Z74 0.00% (Singtel) and Netlink NBN Trust as their picks.
Maybank Securities analyst Thilan Wickramasinghe is recommending investors be more selective in buying stocks in 2024, advising them to take a closer look at potential winners either with a thematic story or are laggards.
“Four major themes — corporate restructurings, sustainability inflows, regional mergers and acquisitions (M&A) and productivity boost from new technologies — are converging. These should catalyse Singapore’s medium-term earnings higher,” he writes.
However, the pace also looks set to slow during the year as companies which benefited from the interest rate hikes and early re-opening start to retreat. “Risks are on the upside, though, particularly from a new semiconductor inventory cycle, falling rates, and fresh orders for offshore and marine (O&M) and alternative energy. Corporate balance sheets are strong giving significant runway for Singapore to consolidate its regional hub status,” he says.
Maybank’s top Singapore picks are CDG, CapitaLand Integrated Commercial Trust C38U -2.96% (CICT), CLAR, DBS Group Holdings, Dyna-Mac, Frencken, GENS, LREIT, ST Engineering and Venture Corp.
OCBC Investment Research (OIR) strategist Carmen Lee sees a reprieve for REITs and real estate stocks in 2024 as interest rates come off. The lower rates could also benefit other sectors and drive consumption, she says.
“Based on [their] current levels, the estimated yield from the REIT sector is at around 6% in 2023 and 6.2% in 2024 — this will start to look attractive once treasury bills (T-bills) and other similar products start to adjust down in line with lower interest rates,” says Lee, whose picks include CLAS, CapitaLand Investment (CLI), City Developments (CDL), DBS, FLCT, Netlink, Sembcorp Industries U96 0.18% , Sheng Siong Group OV8 -1.27% , Singtel, UOB and UOL Group.
PhillipCapital’s head of research Paul Chew expects rate-sensitive assets to outperform in 2024 amid a backdrop of slow growth and falling interest rates. He favours REITs for their “triple boost” of dividend yields becoming more attractive than bonds, lower interest expenses and higher valuations; conglomerates for their elevated electricity margins; and telecommunications for the consolidation within the industry and higher prices from mobile operators on the back of cost pressures.
In his recommendations for the Phillip Absolute 10 portfolio, Chew recommends investors look out for stocks which offer attractive dividend income, dividend and earnings growth and stocks with re-rating catalysts.
FCT and Oversea-Chinese Banking Corporation (OCBC) were named as Chew’s preferred picks under stocks with good dividend yields; China Aviation Oil (CAO), Valuetronics BN2 0.84% , ST Engineering and Thai Beverage Y92 -1.83% (ThaiBev) were named for their dividends and earnings growth; CLI, CDG, Singtel and Keppel were named as stocks to benefit from several upside factors going ahead.
RHB Bank Singapore analyst Shekhar Jaiswal sees the current level for S-REITs to be a “good entry level” for most of them as the peak of the interest rate cycle nears with the sector’s valuations becoming more attractive.
“We believe negatives are largely priced in and sector news flow is expected to turn incrementally more positive in 2024. With the exception of the retail sub-sector, we are now ‘overweight’ on all other REIT sub-sectors. Across all sub-sectors, CLAR, KREIT, AIMS APAC REIT (AA REIT), and CDLHT are our preferred picks,” he writes in his Jan 5 report.
Big on tech and manufacturing
Jaiswal is also big on the manufacturing and technology sectors ahead of the anticipated recovery in tech in 2024. “We are starting to see semiconductor inventories easing, and players in the supply chain are stocking up inventory and reducing their backlogs of programmes that were previously constrained by manpower and technological limitations. Growth will also be supplemented by an initial production ramp-up and new product introductions (NPIs),” he says. “We, therefore, believe 2024 will be the start of the technology recovery cycle, where stocks within the sector could undergo a re-rating as a result of stronger orders.”
In addition, he likes quality companies offering defensive earnings — particularly those with solid dividend or profit histories — to buffer from the uncertain macroeconomic environment.
“While we are nearing peak interest rates and the market believes that the US Fed will be able to engineer a soft landing as it pivots from raising interest rates to gradually cutting interest rates in 2H2024, history tells us that there remains a risk of sharp economic weakness every time the US central banking system pivots its interest rate policy,” he warns.
From the small-cap or sub-US$1 billion ($1.33 billion) space, Jaiswal likes Centurion, Food Empire and Marco Polo Marine 5LY 0.00% . “All three stocks have strong earnings tailwinds and have delivered strong year-to-date (ytd) returns.”
UOB Kay Hian analyst Adrian Loh and the Singapore research team remain “constructive” on 10 large-caps and five small- and mid-caps on the Singapore Exchange S68 -0.71% (SGX), chosen for their prevalence of quality, value and dividend stocks relative to its regional peers.
The counters are CLI, CDG, First Resources EB5 -2.7% , GENS, Mapletree Industrial Trust ME8U -1.2% (MINT), OCBC, Sats, Seatrium, Sembcorp and Venture Corp for the large-caps and CDLHT, Far East Hospitality Trust Q5T -0.77% (FEHT), Food Empire, Frencken and Valuetronics for small- and mid-caps.
The team of analysts at Citi Research prefer a “barbell strategy” with near-term defensive counters such as telcos, industrials (utilities) and longer-term cyclicals such as tech, industrials (shipbuilders) and discretionary consumer stocks. “We see 2024 as potentially split between two halves with expected macro softness into 1H2024 and recovery into 2H2024,” they explain.
“We remain neutral on banks which is a large part of the index owing to earnings growth challenges especially as the world transitions from a rate hike into a rate cut environment in 2024. Property developers are worth watching into 2H2024 as macro starts to improve and rates potentially,” they add.
Their barbell strategy includes stocks like Sembcorp and Singtel, which they expect to outperform in 1H2024 and cyclicals like Venture Corp, GENS, Keppel and YZJ in 2H2024 with “macro improvements”. While the banks are not expected to outperform, OCBC was named as the team’s preferred pick.
The team at Morgan Stanley Research prefer sectors that are high yield and low risk. “We recommend raising allocations to sectors and stocks that feature: high dividend yields with reasonable certainty of stable or growing dividends; as well as low-risk exposures to major tail risks of higher-for-longer interest rates. Banks, telco and consumer services stocks score well on these criteria,” they write in their Nov 13, 2023, report. “On the flipside, we now believe it may be too early to position for lower interest rates and a China growth recovery, and with the Singapore housing market on the cusp of a downturn, we grow more cautious on the real estate sector.”
Their focus list, which comprises DBS, OCBC, ST Engineering, Sembcorp and GENS, was revised to align with their high-yield-low-risk theme. The new list includes one more bank while the only real estate stock, which was on their list previously, was removed.