Singapore is among the better-performing equity markets so far this year in Asia, with the FSSTI hitting a 10-year high of 3,641 in May and gaining 4% year-to-date, says Credit Suisse.
Earnings across local banks improved in the first quarter, and property developers can expect strong pre-sales momentum in the second half.
What's more, an overdue recovery in the offshore and marine sector in the city-state could just be on the right track.
According to Credit Suisse research, average net profit at Singapore banks - DBS, UOB and OCBC - grew 25.3% year-on-year in the first quarter, and fee income, especially of wealth management, was strong.
Over the next 18 months, the Swiss private bank expects DBS to have the highest return on equity upside. In the case of UOB, it expects the prospect of a higher dividend pay-out supporting the stock’s outperformance.
‘OCBC’s overall asset quality outlook is good, helping keep credit cost low within 15–20 bp for 2018. With a CET1 ratio of 13.1%, within its optimal range of 12.5%–13.0%, it is less likely to raise dividends,’ Credit Suisse noted in its latest report.
Examining the Singapore real estate investment trust (S-REIT) sector, Credit Suisse estimates an average 2018 yield of 5.8%, which imply a yield spread of 3.2% over the 10-year Singapore government bond yield.
It said given a healthy average gearing of about 33.4% and a relatively high proportion of fixed rate debt at 74.4% of total debt, valuations are stacked against S-REIT's outperformance.
In March, S-REIT was the second best performing sector in the Singapore Exchange (SGX), generating a total return of 0.8%.
The five largest S-REITs are Ascendas REIT, CapitaLand Mall Trust, CapitaLand Commercial Trust, Suntec REIT and Mapletree Commercial Trust, with a combined market capitalization of SG$30 million ($22.9 million).
On the property front, earnings outlook is brighter in the second half of the year due to strong pre-sales momentum, according to the Swiss lender.
City Developments, for instance, it said, reported strong pre-sales in the first quarter of 459 residential units in Singapore with a value of SG$793 million ($591 million) because of new launches such as The Tapestry, Gramercy Park, and New Futura.
Meanwhile, the offshore and marine (O&M) sector’s first quarter results and management guidance, indicate diverging outlook in new order momentum for some.
Shipbuilder Keppel Corporation reported net profit of SG$337 million ($251 million) in the first quarter. What’s more, its O&M operation stabilized as the order book improved from SG$3.9 billion ($2.9 billion) in the fourth quarter of 2017 to SG$4.3 billion ($3.2 billion).
‘Net gearing strengthened from 0.45x in the previous quarter to 0.41x, and we expect it to further improve following the agreement to sell five jackup rigs to Borr Drilling,’ Credit Suisse said.
In contrast, peer Sembcorp Marine (SMM) recorded an underlying net loss as yard utilization declined. The firm, however, secured new orders of SG$476 million ($355 million), taking its order book to SG$4.6 billion ($3.4 billion).
Credit Suisse believes that unless there is an equity raising, SMM’s stretched balance sheet would limit its ability to competitively bid for new contracts.
The private bank is recommending investors to avoid the telecommunications sector in view of the challenging landscape ahead.
It said in the first quarter M1 reported a flat net profit, Starhub continued to disappoint with year-on-year decline in operating income and Singtel reported an underwhelming profit.
‘The increasingly popular SIM [subscriber identification module]-only plan in Singapore by MVNOs [mobile virtual network operators] has allowed them to gain market share without competing excessively on price.
‘In view of the incumbents’ market share loss to the MVNOs, we see a risk of more intense price competition going forward.’
Credit Suisse believes the technology sector in Singapore to remain a secular growth story due to increasing digitalization.
At the same time it also expects a wider performance divergence within the sector given elevated expectations and prefer companies with long-term growth drivers and self-help catalysts.
In March, the three technology stocks that traded the most volumes on SGX were Creative Technology, Memtech International and Valuetronics Holdings, averaging 26.9% in gains.