RHB Investment Research Reports

Market Strategy - Looking For Outperformers Amidst Uncertainty

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Publish date: Mon, 16 Dec 2024, 05:36 PM
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  • Looking beyond the index for strong performance. The Straits Times Index (STI) has delivered strong returns in 2024. While market valuations are not stretched, the STI could generate modest returns in 2025 as earnings growth moderates. We see opportunities for outperformance in specific stocks and sectors and advise investors to buy: i) Stocks that offer sustainable earnings growth or are undervalued; ii) Stocks offering sustainable high yields (except for the REITs sector); iii) counters that will help mitigate the increased volatility risk during the next few quarters; iv) small-cap stocks with earnings tailwinds; and v) gradually build positions in the REITs sector as interest rates are expected to eventually decline.
  • Remain positive about growth and moderating interest rates. We see three key trends materialising in 2025 - resilient global economic growth, slower global (ex-US) inflation, and lower global interest rates. We estimate US and China YoY GDP growth forecasts at 2.0% and 4.8% for 2025. Most of our ASEAN GDP growth forecasts are above the consensus estimate. We think the US Federal Funds Rate (FFR) may see one 25bps cut in 2024, with the balance of risks magnified towards no rate cut. We anticipate three FFR cuts in 2025, bringing the rate to 3.50-3.75% by the end of 2025. For Singapore, the rebound in externally orientated sectors, particularly manufacturing and exports, will drive economic growth. Growth in the modern services sector (eg financial services) is expected to increase as major central banks' gradual interest rate cuts boost economic activity. The labour market is forecasted to experience improved conditions for 2024-2026.
  • Singapore market factors. The timing and size of the US FFR decrease, as well as the prospects for global economic growth, will have a stronger influence on Singapore's equities market. This is because of the significant index weightage and earnings contributions by the banks to the STI. Despite expectations of flattish growth, we see banks offering investors a solid defensive option as downside risks should be limited, with four US FFR cuts already baked in. Also, dividend yields for banks still look attractive.Despite near-term volatility, REITs should have a better year in 2025 as the moderation in interest rates is coupled with resilient GDP growth. Donald Trump's imminent second presidency may inject short-term market volatilities. But we expect the manufacturing and technology (tech) sectors to see a return in investor interest as earnings growth momentum improves.
  • Singapore market outlook. We expect the STI's earnings growth to moderate in 2025. For our coverage universe, excluding the S-REIT sector, we forecast a 4.8% market cap-weighted YoY EPS growth in 2025. We expect the S-REIT sector's DPU growth to turn positive (+2.7% YoY) in 2025. At 11.6x, the STI's forward P/E is still reasonable and is at -1SD from its forward P/E. Applying a target P/E of 11.3x to 2026 EPS, we estimate the STI to hit 3,940 pts by the end of 2025.

Source: RHB Securities Research - 16 Dec 2024

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