Will sceptics renew their affection for beaten up Singapore stocks?
First, the positive news. Favourable vaccine news has lifted optimism in the market and together with a low interest rate environment, equities are likely to remain in focus.
However, with the strong turnaround in share price performances, from losses to gains for the year in most markets, valuations are no longer cheap.
Will the underperformers enjoy a comeback the way growth stocks did so quickly in 2020?
Optimism over vaccine deployment is likely to drive cyclical stocks higher in the months ahead. Singapore’s benchmark Straits Times Index (STI) is cyclical-heavy and could see a re-rating to narrow the gap against the more growth-heavy indices in the region.
The Singapore government recently announced that it will enter into phase 3 of its re-opening on 28 December 2020.
This will see the relaxation of current restrictions such as allowing for social gathering in groups of up to eight people. This is an increase from the previous limit of five. Together with this news, Prime Minister Lee also announced that the government has set aside more than S$1 billion for Covid-19 vaccines which will be made free for all Singaporeans and long-term residents.
While the number of Covid-19 cases remain high in Europe and the US, and most of Singapore’s existing restrictions remain, this announcement is positive and point to a gradual return to normalcy for the Singapore economy.
This augurs well for several segments of the Singapore economy, in particular, sectors which were severely hit by a lack of tourists.
REITs remain an overweight
The Singapore REIT sector is like a tale of two cities.
This year’s performance is particularly stark as REITs with a growth angle largely outperformed the REITs focused on tourism and retail. Our REIT analyst has aptly coined the terms Recovery Basket and Resilient Basket.
The former is a basket of REITs which are likely to benefit from the pick-up in economic activities and recovery, after languishing since the start of the pandemic. The latter is a basket of REITs which have performed well so far, but these REITs have come under some recent selling pressure as rotation into cyclical and value stocks saw profit taking on stocks which have outperformed.
We have an overweight rating on the S-REITs sector. Our view is that the Recovery S-REITs basket will outperform in the near-term.
As the Singapore market has a higher concentration of value and cyclical stocks, its performance has trailed the growth markets in this region. Growth sectors, especially technology and bio-tech, have enjoyed a strong performance in 2020.
We are expecting the environment to become more challenging with tighter scrutiny and regulations especially for big technology companies. Singapore stocks are good additions to provide for a more diversified and broader equity portfolio.
While we have selected several real estate and REITs, largely due to relatively higher potential upsides and more attractive valuations, banking stocks were not included as share prices have recovered from March 2020 lows. That said, investors could look at buying on dips for this sector.
Risks to our investment views will come mainly from Covid-related developments, such as longer than expected lockdowns and delays in vaccine deployment.
We believe that Singapore’s cyclical-heavy stocks are well positioned to benefit from the recovery theme and also to narrow the gap between growth and value stocks in the months ahead as economic activities resume gradually.
Three macro themes to watch out for in 2021
1. Uneven recovery ahead
While our quarter by quarter market strategy reports in 2020 were able to effectively match market actions, it was also with an acute awareness that the recovery is going to be largely uneven across different regions and markets.
With the resurgence of cases in Europe, US and Japan, there is the heightened risk that the recovery may be delayed despite optimism over the impending deployment of vaccines. This means that sectors which were not positioned for the digital economy will have to suffer longer and will need a longer period to heal, recover and grow and along the way. Some companies will no longer be viable due to a lack of funding or cash flow issues.
Companies which were able to play into the digitalisation of economies will continue to benefit and look set to continue to grow in the coming years.
2. Near term volatility, but long-term market outlook is constructive
The recent surge in the spread of the coronavirus, especially in Europe, US and even in Japan, could derail economy recovery, despite recent optimism on vaccines.
We expect this to result in near term market volatility as some economies re-impose restrictions to control the spread of the virus. This cautiousness was also seen in weak US and Europe Consumer Confidence indices.
Beyond the current situation, investors are likely to look at the gradual economic growth recovery as vaccines deployment takes place in 2021, starting with the developed economies. With rates widely expected to stay low for a longer period of time, this will support risk assets and equities.
China, which is the first major economy to emerge from the pandemic, has continued to deliver encouraging economic data. This could help to support and lift the rest of the region.
Earlier, China unveiled its ambition to become a technological powerhouse and to develop its self-reliance in technology. Its “dual circulation” strategy aims to achieve sustainable growth and develop a robust domestic economy. This is especially critical in view of the ongoing US-China tensions.
3. US-China tensions to remain in focus
Recently, President Trump issued an executive order banning US persons from investing in selected Chinese companies deemed to have ties with the Chinese military, as well as the release of draft anti-trust guidelines against monopolistic practices in the Chinese internet industry. Together with closer scrutiny and regulations on big-tech companies in both US and China, the operating environment for these high growth firms will become increasingly tougher.