Review: The STI was down 11.8% in 2020. It was the worst performer in Asia, coinciding with Singapore’s worst GDP contraction on record of -6% to -6.5% in 2020. The pandemic triggered consensus earnings to be slashed around 27% this year. The worst-hit sectors were the pandemic epicentres of transportation (-30%) and hospitality REITs (-20%). Sectors that managed to clock gains were industrials (+9%), industrial REITs (+10%) and healthcare (+30%).
Outlook: We believe Singapore’s equity market is in a sweet spot. Our containment of the pandemic will lead to an earlier and more pronounced economic rebound than many countries, where the pandemic is still raging on. Globally, new COVID-19 cases average 561k per day. In Singapore, community cases averaged one per day over the past week. Phase 3 reopening should add to the economic momentum as bigger group activities resume. Other conditions conducive for an equity rally include low interest rates, undemanding valuations and attractive dividend yields. Vaccines and populist fiscal stimulus offer downside protection to global growth, in our view. Approval of Moderna’s and Pfizer’s vaccines can support 1.8bn doses for 900mn people in 2021. If all the 10 leading vaccines are approved, there is capacity for 9.3bn dosses in 2021, enough to cover two-thirds of the global population and most of the developed markets. Vaccines can bend the infection curve in 2021. Yes, risks remain. The most obvious are vaccine failures to tame mutations of the virus, their side effects or even inefficacy. Other factors that could unsettle markets are monetary-policy misjudgements by the Fed or foreign-policy faux pas by the new U.S. administration. But we think the likelihood of such pitfalls is low.
Recommendation: Sectors we favour in 2021 are hospitality, banks and REITs. We are taking a longer-term stance on hospitality. Pent-up demand for travel is likely to result in a prolonged upcycle for the hospitality industry. Airline stocks may be tantalising after their steep drops amid expectations of a return of travel but we have our concerns. Firstly, competition in the industry has not abated due to support from governments. Secondly, airlines are now even more leveraged than before the crisis. In the banking sector, we expect multiple headwinds to change direction. As our economy comes out of lockdown and loan moratorium ends, we expect the aggressive pre-emptive provisioning to reverse. The next positive could be the MAS’ removal of dividend caps. This has already come to pass in some jurisdictions. A corollary tailwind will be better loans growth as economic uncertainties recede. Where REITs are concerned, the pandemic has introduced unwonted volatility for risk-averse yield investors. Both asset values and dividend payments suffered in 2020. With global negative bonds at a record US$17.7tr, the search for yield remains integral to our equity strategy. Our preference is U.S. REITs for their attractive 9% yields. While work-from-home trends had already taken root in the U.S. before the pandemic, average leases of five years should anchor near-term yields, even if some tenants shift more aggressively and permanently to home-based work arrangements.
2020 REVIEW
The STI was down 11.8% in 2020. It was the worst performer in Asia, coinciding with Singapore’s worst GDP contraction on record of -6% to -6.5% in 2020. When we compare the STI to other major asset classes such as corporate bonds, gold and U.S. markets, 2020 was its second (or even third) consecutive year of underperformance, in USD terms (Figure 4).
The pandemic triggered a slash in consensus earnings by around 27% for 2020, primarily due to banks, telcos and aviation (Figure 5). The worst-hit sectors were the pandemic epicentres of transportation (-30%) and hospitality REITs (-20%). Other sectors similarly affected by the pandemic were even worst hit. They included telecommunications (-27%) and ship/marine yards (-37%). Sectors that managed to clock gains were industrials (+9%), industrial REITs (+10%) and healthcare (+30%).
OUTLOOK
We believe the Singapore equity market is in a sweet spot. Containment of the pandemic has led to an earlier and more pronounced economic rebound than many countries, where the pandemic is still raging on. Globally, new COVID-19 cases average 561k per day (Figure 6). A positive is the infection curve is bending albeit at very elevated levels. In Singapore, community cases averaged one per day over the past week due to a recent surge (Figure 7). Phase 3 reopening in Singapore should accelerate the economic momentum as restrictions on group activities are further relaxed (Figure 8). Other conditions conducive for an equity rally include low interest rates (Figure 9), undemanding valuations and attractive dividend yields. Vaccines and fiscal stimulus offer downside protection to global growth, in our view. Approval of Moderna’s and Pfizer’s vaccines can support 1.8bn doses for 900mn people in 2021. If all the 10 leading vaccines are approved, there is capacity for 9.3bn dosses, enough to cover two-thirds of the global population in 2021 (Figure 10). Vaccines can bend the infection curve in 2021.
With vaccines dominating all the headlines and an economic boom in 2021 forecast by just about every economist and government, the question is, has everything been priced in? We think No, looking at the large underperformance of our equity market. Yes, risks remain. The most obvious are vaccine failures to tame mutations of the virus, their side effects or even inefficacy. Other factors that could unsettle markets are monetary-policy misjudgements by the Fed or foreign-policy faux pas by the new U.S. administration. But we think the likelihood of such pitfalls is low.
5 themes for 2021
✓ A boom in global growth
✓ Vaccines to bend the infection curve
✓ Interest rates remain conducive
✓ Prolonged growth in tourism
5 themes we had for 2020
✓ Trade ceasefire
× Recovery in the domestic economy
✓ Buoyant electronics sector
✓ Binary political events
× Less momentum from interest rates
RECOMMENDATIONS FOR PHILLIP ABSOLUTE 10
The STI’s relative performance has been poor. Therefore, it is challenging to simply buy beta to find returns. Our focus is on individual names to generate alpha. With our 10 stocks, we look for balanced returns to avoid excessive volatility in our model portfolio. For our 2021 absolute return portfolio, our top 10 picks – The Phillip Absolute 10 – by category are:
- Dividend yields: Ascott REIT, Asian Pay TV and Manulife US REIT provide the foundation of our portfolio to generate valuable yields. Admittedly, Ascott faces near-term volatility from COVID-19 but we are taking a longer-term stance. We expect the hospitality industry to enjoy a prolonged recovery after COVID. Asian Pay TV pays attractive yields of 8% with upside potential from 5G backhaul income. Manulife pays enviable US$ yields of almost 9% on Class A office assets with a 5-year WALE.
- Dividend/Earnings growth: Fraser Centrepoint Trust offers exposure to very resilient suburban retail malls at major transportation nodes. These malls are being sustained by necessity spending. Expansion in catchment areas and efficiencies gained from its recent acquisition are expected to power its growth. We believe property transactions will rise this year, driving growth for PropNex. After a challenging 2020, we look forward to a volume recovery in 2021 for Thai Beverage.
- Re-rating: CapitaLand was hit hard by their hospitality and retail-mall exposure last year. We expect a recovery plus re-rating from fee-management growth for assets under management. ComfortDelgro is our exposure to a resumption of group and economic activities in Singapore. Keppel Corp’s re-rating is expected to come from more aggressive divestments and asset monetisation. Yoma is a proxy for Myanmar’s fast-growing economy, consumption and digitalisation of financial services through its KFC franchise, property development and fintech arm, Wave Money.
STI target. Our target for the STI is 3,200. This is based on 14x PE, its 10-year PE ratio average and earnings rebounding 25%, still 10% below pre-COVID levels. The index is trading at 15x PE on depressed earnings.
2020 performance review: Phillip Absolute 10
Our Phillip Absolute 10 outperformed the STI in 2020. Changes we made during the year were:
1Q20 – Added: Fraser Centrepoint, StarHub; Deleted: SGX, DBS
2Q20 – Added: Thai Beverage; Deleted: Singtel
3Q20 – Added: Yoma Strategic, Asian PayTV, DBS; Deleted: StarHub, Sheng Siong, UOB
4Q20 – Added: ComfortDelGro, Manulife US REIT, SGX; Deleted: Ascott REIT, DBS, Venture Corp.
1Q21 – Add: Ascott REIT, Keppel Corp.; Deleted: NetLink Trust, SGX
Our portfolio suffered tremendously when COVID-19 struck in 1Q20. It took us the next three quarters to recover all the losses. We bore the brunt of the selling from our exposure to Ascott REIT, DBS, Singtel and FCT. Major winners for us were Sheng Siong, Venture Corp, PropNex and Thai Beverage. Sheng Siong was supercharged by a spike in grocery sales during the lockdown. Venture recovered from disruptions in its Malaysian operations with increased dividends and resilient earnings. PropNex gained market share as property sales performed better than expected. Thai Beverage endured an alcohol ban in Thailand and increased regulatory oversight of alcohol consumption in Vietnam to report resilient earnings. The company took aggressive steps to contain cost.
Sector Narratives
- Consumer: Macro conditions are weak for the Singapore consumer, with a drop in income and record job losses. Stock picks are critical. We prefer essential consumer products such as groceries and affordable F&B.
- Finance: We think banks can be re-rated upwards and outperform. This is premised on an economic recovery and a removal of the asset-quality overhang when loan moratoriums are lifted. It will trigger MAS to roll back dividend caps and pre-emptive bad-debt provisioning in 2020/21.
- Healthcare: Hospital and specialist admissions could remain sub-par without foreign patients as our international borders stay closed. However, elective treatments such as health screening, aesthethics and dental have rebounded strongly due to better health awareness and shift in spend from travel to healthcare. Glove makers face uncertainties over glove demand after the pandemic. The market is already pricing in a decline in glove profits, though profits should still be elevated as hygiene practices by healthcare workers have changed. Other industries are also adopting the use of gloves, for instance, air travel, F&B, etc.
- Property: Demand for property has been resilient through the recession. Some reasons are stable prices after the introduction of the total debt servicing ratio in 2013, rising income and a growing pool of HDB upgraders.
- REITs: Volatility in dividends has shaken confidence in the sector. But we believe the elusive search for yields will draw investors back to REITs, especially with strong Singapore or U.S. currencies backing these payouts.
- Technology: The electronics sector is undergoing a structural boom. Multiple drivers for hardware technology products include more cars using more electronics to meet new emission standards and increased usage of automated driving. 5G rollout is also expected to raise demand for infrastructure and smartphones. A work-from-home economy has led to more cloud spending on communication. Elsewhere, memory demand is supported by the insatiable consumption of streaming entertainment, data analytics and storage.
- Telecommunications: Loss of inbound and outbound roaming revenue has led to the overnight disappearance of 20% of high-margin mobile revenue. The silver lining is, the market has priced in this loss and sector valuations are turning more attractive.
- Transportation: Cancelled holidays and business trips sum up the airline industry this year. We believe air travel will only resume gradually as the pandemic is still raging in many countries and most are not willing to risk imported cases. Our preference is land transportation where the recovery is more evident and there is less reliance on international travellers.
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