• Singapore’s defensive earnings growth, low valuations and benefits from the reopening of China’s borders should continue to attract investors. The Straits Times Index (STI) should deliver double-digit EPS growth, thanks to strong growth from the banks. While the STI’s low P/E could be reflecting investor concerns about the sustainability of EPS growth amidst a potential recession, it is not the base case. The positive effects of higher tourist flows from China’s reopening on the tourism, services, and retail sectors should offset some effects of the global slowdown on the Singapore economy. We maintain that Singapore equities will end higher this year, even as global recession risk and central banks’ policies keep markets volatile in the short term.

• Positive surprise from 4Q22 GDP data, we are bullish on growth in 2023. According to official advance estimates, Singapore’s 4Q22 GDP expanded 2.2% YoY which – although in line with our forecast – was higher than the consensus estimate of 2.1% YoY. Singapore’s full-year GDP grew by 3.8% YoY in 2022, slightly outpacing our +3.7% YoY estimate, given 3Q22’s GDP revision to 4.2% YoY (from 4.1% YoY). We have kept our 2023 GDP growth forecast at 3.0% YoY as we expect growth to decelerate into 1H23 before stabilising in 2H23. Our 2023 GDP growth forecast is more bullish than consensus (1.8% growth in 2023) and the Government’s forecasts of 0.5-2.5% growth.

• China’s rapid reopening could create near-term risks. China’s rapid exit from its zero-COVID policy could lead to weaker growth momentum in the near term. The surge in COVID-19 infections could cause temporary labour shortages and increased supply chain disruptions. At the same time, if Chinese consumers rapidly increase consumption of goods and services, it could lead to significantly high global inflation – which would push global commodity prices higher. Therefore, we believe investors should continue to maintain a defensive portfolio in the near term.

• Nevertheless, China’s reopening is a long-term positive for Singapore. The potential beneficiaries of the reopening of China would be players that are either beneficiaries of China’s domestic reopening, as well as companies that will gain from the return of business once China relaxes border restrictions. China accounted for 18% of Singapore’s non-oil domestic exports (NODX) and 19% of tourist arrivals before the pandemic. As such, its reopening should boost exports and tourism here.

• Investment themes for the early part of 2023 include: i) Buying banking stocks as a proxy to elevated interest rates and defensive earnings growth characteristics; ii) buying shares of firms with resilient and defensive earnings and dividends; iii) selective exposure to China's economic reopening; and v) buying industrial REITs.

Source: RHB Research - 5 Jan 2023