JPMorgan raises STI target, upgrades real estate sector
They also reiterated that Singapore's equities market is their No 1 'overweight' market in South-east Asia.
This comes on the back of interest rate declines, positive tariff news flows, and progress of the city-state's S$5 billion equity market development programme (EQDP), which has driven the STI up by 6 per cent in the month to date, surpassing the analysts' initial expectations.
The STI was 0.5 per cent or 21.03 points down at 4,252.02 as at 12.14 pm on Friday (Jul 25). Across the broader market, gainers outnumbered losers 254 to 226, with 1.2 billion securities valued at S$851 million changing hands.
The EQDP, in particular, is noted to benefit small and mid-cap stocks on the local bourse, in light of the Monetary Authority of Singapore's (MAS) placement of the first S$1.1 billion for three fund managers, and its commitment of S$50 million till end-2028 to strengthen equity research and listing support.
'We reiterate our view, however, that significant outperformance of small and mid caps as compared to large caps is unlikely, due to higher multiples, uncertain profitability, and lower liquidity and growth potential of the group,' they wrote in their Wednesday (Jul 23) report.
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'Still, small and mid-cap stocks with a good track record of growth and quality balance sheets would likely be the centre of attention in Q3 and Q4 due to the influx of capital, and as funds begin allocations and research coverage picks up.'
In the report, they also stressed that the Singapore dollar is a safe-haven currency as the US dollar weakens.
'Despite sharp outperformance year to date (YTD), Singapore equities still offer one of the best combinations of yield, currency strength, and potential inflows among Asean markets, in our view,' they said.
In addition, Singapore rates have continued to trend downwards with the Singapore Overnight Rate Average (Sora) dropping by another 44 basis points to below 1.3 per cent, since the analysts' previous report in June.
'At our base-case target level, STI's forward dividend yield is around three percentage points higher than the risk-free rate (for six-month Treasury bills) and still one of the highest yields among developed markets,' they said.
The latest six-month Treasury bill cut-off yield fell to 1.79 per cent, based on auction results released by MAS on Jul 17. This is the ninth consecutive issuance since Mar 26 for which yields have declined.
Strong on real estate sector
The analysts specifically upgraded Singapore's real estate to an 'overweight' rating from 'neutral' previously, as they shift their asset allocation to focus on rate beneficiaries in the real estate sector. They were also 'overweight' on the consumer staples sector in Singapore, and strong on counters such as Thai Beverage .
The cost of debt guidance was reduced in the Q1 FY2025 results season on the back of a drop in Sora and the Singapore yield curve.
'With the recent drop in Sora, we expect guidance to be lowered further with Singapore-focused real estate investment trusts (Reits) holding a greater proportion of Singapore dollar debt,' wrote the analysts.
Several of their top picks for Singapore were Reits such as CapitaLand Ascendas Reit , CapitaLand Integrated Commercial Trust , Frasers Centrepoint Trust and Keppel DC Reit . They were also 'overweight' on property conglomerate City Developments Limited .
On the flipside, the analysts are becoming more selective in industrial sectors following strong YTD performance of certain counters, preferring defence and airline plays. It was 'overweight' on ST Engineering and Singapore Airlines .
However, they had an 'underweight' rating on shipbuilding and marine engineering player Yangzijiang Shipbuilding , considering rulings on port fees for China-built vessels that will kick in on Oct 14, which will likely negatively affect the company.
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