• Build a defensive portfolio, with selective exposure to banks and economic reopening plays. Given the rising global macroeconomic risks, equity markets are likely to continue being volatile. Investors should maintain a defensive stance in 4Q22 as we believe companies with resilient earnings, as well as the ability to pass on costs and maintain strong cash flow should outperform in the current environment. We also recommend investors to buy banks, build exposure to selective economic reopening plays, and rotate into selective industrial and office REITs.

• Singapore’s economic growth to moderate. We do not expect the recent surge in COVID-19 cases to disrupt businesses, livelihoods, and tourist inflows into Singapore. Prospects for Singapore's manufacturing sector have dimmed, as growth in Singapore’s major trading partners is anticipated to decelerate to below-trend levels. We expect the services sector to pick up some slack in manufacturing, as strong household balance sheets and wage incomes lead to continued growth in the domestic-oriented and travel-related sectors. However, the pace of discretionary spending could moderate over the course of 2023. While there is still a risk of the major advanced economies entering into a recession in 2023, we expect Singapore to witness a below-trend but positive GDP growth of 3.0% YoY. While inflation could stay elevated in the near term, it is projected to ease more in 2023.

• Strong positive earnings growth, for now. The Street is estimating 2023 STI EPS growth at 13% YoY. This compares with our coverage universe's 2023F EPS growth of 16% YoY. However, note that our estimate excludes the manufacturing sector. Companies in this sector are expected to witness significantly slower or negative earnings growth in 2023. With expectations of a slowdown in 4Q22 GDP growth and the elevated risk of a further slowdown in economic growth in 2023F, there remain downside risks to earnings growth next year.

• Themes for 4Q22 include: i) Buying shares of firms with resilient and defensive earnings/dividends; ii) buying banking stocks as a proxy to rising interest rates; iii) continued selective exposure to economic reopening plays; and v) buying REIT counters that are defensive, and those that will benefit from the economic reopening (eg industrial and office REITs).

• STI’s valuation is inexpensive, but the uncertain outlook means upside will be limited. The STI now trades below 10.3x (-2SD) 12-month forward P/E as investors question the sustainability of ongoing positive earnings revisions and 2023F EPS growth. While we still expect the STI to outperform most regional markets, any upward move will be a slow grind. Our end-2022 STI target of 3,200pts (from 3,380pts) is based on 11.75x 2022F P/E (from 12.5x 2022F P/E). This lies between the -1SD and -2SD of its forward P/E since Jan 2008, and reflects the rising risks of a favourable operating environment ahead.

Source: RHB Research - 26 Oct 2022