Nomura downgrades Singapore equities to Underweight on earnings outlook

Singapore port and Sentosa islandSingapore port and Sentosa island

Nomura downgraded Singapore’s equities market to Underweight from Overweight, saying earnings growth is set to be “pedestrian.”

“After a very strong 2018, we expect earnings growth for next year to be lacklustre with some downside risks as a number of key indicators roll over (likely credit growth, oil prices, potentially retail sales),” Nomura said in a note dated Monday.

“As we look towards 2019, we believe Singapore’s pedestrian earnings growth rate of 7.7 percent (consensus expectations) is unlikely to give much of a fillip to index levels,” it added, noting that was after expectations for 14.3 percent earnings growth this year.

Nomura said that the “key levers” for Singapore’s market are banks, property stocks and to a lesser extent, telcos and the offshore and marine sector.

“We find it hard to see what could really propel earnings for these sectors,” it said.

Banks and property

It noted that banks’ earnings have been strong so far this year on strong loan growth, but it could face a strong base effect next year, while property cooling measures would likely remain an overhang on the sector’s stocks.

In July, the government imposed a fresh round of property cooling measures, raising some stamp duties and targeting loan-to-value limits, after sharp price increases in the private residential property segment.

Nomura added that if domestic growth slows, it could affect property buyers’ sentiment, as could the negative wealth effect from the drop in domestic stock prices, with the STI off around 9 percent from its May peak.

Telcos’ earnings have also been disappointing, Nomura noted.

The three existing telcos in Singapore’s market have been lowering some of their pricing to prepare for the imminent entry of a fourth player, who may begin operations by the end of the year.

Economic headwinds

On the macro-economic view, Singapore could also face headwinds from its exposure to global trade, the note added.

“In our view, Singapore remains a leveraged play on global growth/trade, and with trade/growth set to slow next year, a more guarded stance is required,” Nomura said. “Disruptive trade wars were not our base when we went overweight on the market, … but increasingly it looks like trade and growth are likely to be hit and Singapore’s economy will unlikely to emerge unscathed.”

The Trump administration has launched a series of broadsides on trade, including against allies, which have resulted in higher prices in the U.S. and left some companies evaluating whether to move production facilities. Some analysts have predicted supply chain disruptions if the trade war continues to escalate.

Nomura noted the Singapore dollar was also “somewhat” exposed to China’s currency, due to strong trade flows between them. Historically, earnings of Singapore’s index plays have been “highly correlated” to the movements of the dollar/Singapore dollar, Nomura noted.

Nomura noted that its “guarded” view of Singapore stocks was also part of its outlook for seeking more domestic exposure, saying the city-state’s equities “really do not tick the box for us.”

Some positives

Despite the downgrade, Nomura pointed to some positives for Singapore’s market, such as the country’s large currrent account surplus and a consensus forecast for a 4.7 percent dividend yield for 2019, one of the highest dividend yields in the region.

“Valuations of the market relative to own history and compared with regional markets remain quite attractive. The political climate is stable, unlike other part of the region,” Nomura said.

It added that it continued to like high-quality banks, for attractive valuations and dividend support, as well as high dividend yield stocks.

Nomura removed Genting Singapore and Singapore Post from its Southeast Asia model portfolio, and added ComfortDelGro.

Other Singapore stocks in the portfolio are DBS, UOB, CapitaLand and Singtel, with the telco the only stock that didn’t see its weighting decreased.

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