Investment Thesis For Singapore In 2021 - RHB Invest 2020-12-14: Rising Optimism Comes With Some Risks

Singapore Market Strategy - RHB Investment Research | SGinvestors.io COMFORTDELGRO CORPORATION LTD (SGX:C52)

Investment Thesis For Singapore In 2021 - Rising Optimism Comes With Some Risks

  • We expect the Straits Times Index (STI) to reverse its underperformance relative to Asian peers in 2021 on increasing optimism around improvement in economic activity, sustained improvement in private consumption, strong improvement in business confidence as vaccines become available in late 2H21, and greater investor participation amidst a return of funds flow to Asia.

Singapore’s underperformance should reverse in 2021

  • Singapore has been the worst performing equity market in Asia, with year-to-date returns of negative c.12% in local currency and USD terms (as at 13 Dec 2020). In 2021, we expect this under performance relative to rest of Asia to reverse. Basis for our expectations is
    1. increasing optimism around improvement in economic activity amidst strong control on spread of COVID-19 infections,
    2. strong improvement in business confidence as vaccines become available around 2H21, and
    3. greater institutional investor participation amidst a return of funds flow to Asia.
  • At current levels, STI’s 13.8x 2021F P/E is almost in line with its historical average since Jan 2008. STI remains the cheapest market in ASEAN and is trading at discount to rest of Asia. STI’s 2021F yield of 4.1% is the highest in Asia. Given that the current almost-zero interest rate environment is expected to persist beyond 2021, elevated global liquidity and reversal of funds flow to Asia should bring investors to high-yield markets like Singapore.

There is optimism around improvement in economic activity

  • Our economist believe that on a y-o-y basis, Singapore should deliver 5.5% GDP growth in 2021. This economic recovery will be underpinned by continuing easy monetary policy, overflowing benefits from fiscal stimulus announced in 2020 in response to the COVID-19 pandemic and is likely to improve employment outlook by 2H21.
  • In terms of trajectory, we anticipate GDP growth to pick up in 2H21 to 5.7% from 5.4% in 1H21 as the global economy strengthens amid improved business and consumer sentiments. Our in-house assumption of a mass vaccine deployment in late 2H21 should also bolster growth further.

Strong control on COVID-19 paves way for gradual reopening of the economy

  • The COVID-19 infection rate in Singapore has declined amidst aggressive testing and contract tracing. The current run rate of infections averages less than 10 reported cases a day, with most of them detected amongst people arriving in Singapore.
  • The Government has placed all of the infected cases under quarantine and separated from the rest of the population, ensuring that the domestic spread of infection remains as close to zero as possible. This has allowed the Singaporean Government to relax more restrictions and support more businesses to return to normalcy. It has already announced plans to gradually ease into Phase 3, which will become the country’s new normal until the pandemic is brought under control globally, or until a vaccine is available and widely deployed across the world.
  • The Multi-Ministry Taskforce is piloting the use of pre-event COVID-19 testing to enable the opening up of larger-scale and higher-risk activities. There are plans to increase the limit on gathering sizes from five to eight people, and an increase in capacity limits for public venues and events.

Consumer confidence to continue improving

  • Mobility data, a proxy for private consumption, has so far indicated rising foot traffic in the retail sector following the relaxation of the Circuit Breaker (CB) measures since 1 Jun 2020. This tallies with the gradual improvement in retail sales index, an indication of consumer demand.
  • Singapore is set to be in Phase 3 of the opening of the economy whereby the majority of economic activities are to resume. This would set a precedence for the mobility and retail sales indices to continue on an upward trend for 1H21 and accelerating in 2H21, as Singapore further eases its restrictions.

Business activity to gradually revert to near-normal by end 2021

  • Business confidence for the manufacturing and services sector has gradually improved with the gradual relaxation of CB measures, and the Government slowly allowing more businesses to return to normalcy. With global trade flow not declining to its worse levels as expected during earlier part of the year, export oriented manufacturing sectors are not expecting an improvement in business outlook for the next six months (i.e. from Oct 2020 to Mar 2021).
  • As per 3Q20 data for the manufacturing sector, a weighted 18% of manufacturers anticipate the operating environment to improve, while a weighted 21% foresee a weaker business outlook. Overall, a net weighted balance of 3% of manufacturers predict a less favourable business situation for the period Oct 2020-March 2021, compared to the third quarter of 2020. However, this is a significant q-o-q improvement from a net weighted balance unfavourable expectation of 56% and 7% in 1Q20 and 2Q20.
  • Similarly, business expectations of firms in the services sector have improved but remain unfavourable. 25% of firms foresee slower business conditions while 20% of firms are optimistic, resulting in a net weighted balance of 5% of firms expecting a less favourable business outlook for the period of Oct 2020-Mar 2021. Though the business outlook remains negative, this is an improvement from the net weighted balance of -31% recorded in the previous quarter’s survey for the period of Jul-Dec 2020.

Growth in manufacturing and exports should be sustained in 2021

  • On the external front, Singapore’s manufacturing sector and non-oil domestic exports (NODX) have seen strong improvement throughout 2020, aided by strong demand for electronics and pharmaceutical products. Manufacturing Purchasing Managers’ Indices (PMIs) continue to indicate a sequential expansion in output.
  • The Government expects Singapore's overall trade and NODX to grow in 2021, in line with predictions that the global economy will expand over the next year from a low base. Total merchandise trade is expected to rise by 1-3% for 2021, while NODX is projected to expand by 0-2%. This will be supported by an improvement in global trade as the World Trade Organisation expects global trade to rebound to 7.2% in 2021. Higher expected oil prices in 2021 may provide some support to Singapore's oil trade for the year as a result.
  • As per the official forecast, Singapore expects trade-related services sectors (eg wholesale trade and water transport) to benefit from the pickup in external demand. At the same time, the manufacturing sector is projected to continue to expand, with the electronics and precision engineering clusters boosted by robust semiconductor demand from the 5G market.

Expect vaccine to start becoming available during late 2H21

  • Regarding the COVID-19 vaccine, our base line assumptions are that wide spread dissemination of the vaccine in Asia will occur during late 2021. Based on our recent discussions with some participants in the pharmaceutical industry, capacity enlargement, logistics to distribute the vaccine to a broad population, and domestic government policy to implement the vaccinations are still a work in progress. Hence, we take a relatively more cautious stance on widespread dissemination compared to market expectations of perhaps 2H21 broad distribution. Nevertheless, news relating to the availability of vaccine will boost investor confidence and could further boost consumer and business confidence.
  • Availability of vaccines would provide the much needed boost to aviation-and tourism-related sectors (e.g. air transport and accommodation), which are projected to see a gradual recovery in air passenger volume and visitor arrivals. Similarly, consumer-facing sectors (e.g. retail trade and food services) would benefit from the recovery in visitor arrivals, as well as an improvement in consumer sentiment amidst better labour market conditions. However, economic activity in these sectors is not likely to return to pre- COVID-19 levels, even by end-2021.
  • While local authorities may be in talks with various pharmaceutical companies to access vaccines in advanced stages of clinical trials, we believe there is limited rush to make sure that the vaccine is immediately available as the number of new locally transmitted cases in Singapore have fallen close to zero. The Government will continue to emphasise the need for aggressive and rapid COVID-19 testing along with wearing masks, keeping social gatherings small and maintaining safe distances until a final decision on vaccine is made.
  • In Singapore, American biopharmaceutical firm Arcturus Therapeutics, is working with scientists from Singapore’s Duke-NUS Medical School to develop a local vaccine for COVID-19. As per news report, the vaccine (ARCT-021) has shown positive interim clinical study results from its ongoing Phase 1/2 study. The ability of the Arcturus vaccine to be delivered in a low dose differentiates it from many other vaccines in development. The vaccine is on track to be shipped in early 2021.

Improving GDP outlook is positive for Singapore equities

  • With Singapore’s worst GDP contraction now behind it, expectations of an improvement in GDP over the next 12 months should be positive for the equity market. This is because, historically, the STI Index’s forward EPS growth and returns have been closely correlated with Singapore’s GDP growth. Amidst expectations of an economic recovery, Street is also holding on to its expectations of strong EPS growth for the STI Index in 2021.

Street has pencilled in strong growth; waiting for investors to agree

  • A y-o-y recovery in Singapore’s GDP growth in 2021 despite a low 2020 base, along with hope of vaccine availability in late 2H21, should continue to support consumer confidence during early 2021 and improve business confidence from 2H21. This should support a rebound in corporate earnings.

First signs of EPS upgrades

  • 3Q20 earnings/business updates offered some hope that Street has been too conservative on the earnings outlook for STI. After a significant cut to forward earnings estimate during 1Q-2Q20, when negative earnings surprises and cautious management guidance significantly exceeded the positive ones, Street has upgraded the 12-month forward EPS estimate for STI Index by 5% since end Sep 2020.
  • During 3Q20, the positive earnings surprises came from the financial, commodities, gaming and transport sectors. While the upgrade seems small, we believe it should act as a confidence boosting measure for investors looking at sustained earnings recovery into 2021 and 2022.

Improving investor participation in Singapore equities

Continuing retail participation would be positive for Singapore equities as well

  • Retail investors have accumulated nearly S$7.5bn in Singapore-listed stocks year-to-date in 2020. While household balance sheets still appear far from stretched, we believe this retail participation could continue into 2021 as well, which could lend support to trading liquidity and valuations.
  • Moreover, any reversal in the net outflows from institutional funds could further support market valuations.

Institutional investors could return to Singapore equities

  • Foreign portfolio funds have predictably exited the ASEAN equity markets in droves in 2020, as the pandemic hit, fleeing back to the relative safety of the developed markets. During 2020, relative to regional peers, Singapore probably should have offered the most comfort to foreign investors, in terms of political and economic policy continuity.
  • Although lacking data on foreign flows, investors are likely to have stayed away from Singaporean equities, as there are few technology names in STI.
  • Meanwhile, the cyclical banks, telecommunications, and industrial stocks that form a large portion of the index have not been favoured by investors during the early part of this year.
  • Outside of S-REITs, there were limited defensive sectors available to investors. However, a resolution of the uncertainty around US politics, coupled with positive vaccine news, could spur portfolio shifts back into ASEAN equities, with Singapore likely see some inflows. Singapore should be attractive, given the prominence of large cyclical sectors like banks and property, which we believe could see earnings recovery.
  • See 
  • See also recent SGX market update:

STI Target Of 3,144 Pts For End-2021

  • Our end-2021 STI Index target is 3,144 pts, offering 11% upside from 4 Dec 2020’s close of 2,840 pts. This is based on a 13.5x forward P/E that is in line with its average forward P/E since Jan 2008 and our expectation for EPS to grow 30% and 13% in 2021 and 2022, from 35% decline in 2020.
  • We believe our target P/E multiple at normal (historical average) levels seem justified, as we approach normalcy for earnings growth over the next two years, and life in general in the city-state.
  • See also

Base case of 3,144 pts (11% upside).

  • In our base case, we have assumed the forward P/E multiple stabilises at the historical average since Jan 2008, and the index earnings rebounding by 30% and 13% during 2021 and 2022.
  • In this scenario, consumer confidence gradually builds up during 1H21 and business confidence rebounds in 2H21 as the COVID-19 vaccine becomes widely available. Singapore’s economy gradually opens up to near normal state by end 2021.

Best case of 3,602 (27% upside).

  • In our best case, we assume that the P/E multiple strengthens to 14.5x, which is +1.5SD from the historical average since Jan 2008. Index earnings growth is estimated at 26% and 18% for 2021 and 2022.
  • In this scenario, we expect an early availability of the vaccine leading to an earlier-than-expected opening of Singapore’s economy leading to higher-than-estimated travel and tourism inflows. GDP growth for 2021 would likely come in above the higher end of the current estimate of 6% provided by the Singapore Government.
  • At 3,602 pts, the STI index would be trading close to its 5-year high.

Bear case of 2,315 (19% downside).

  • In our bear case scenario, we assume the P/E multiple to contract to 11.0x, which is -1.5SD from the historical average since Jan 2008, and the index earnings will grow at a much slower pace of 22% and 5.5% in 2021 and 2022.
  • In this scenario, we expect the 2021 GDP growth rate to come it closer to or lower than the current GDP growth forecast of 4% provided by the Singapore Government. 2022 GDP growth will also remain muted as it would take longer for Singapore and global economies to rein in the spread of COVID-19.
  • At 2,315 pts, the STI Index would still trade above its 5-year low of 2,233 pts.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-12-14
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