Won’t it be nice if we can gaze into a crystal ball to see what the rest of 2022 has in store?
Even if we can’t, we can do the next best thing, which is to piece together the information we have now to determine how the second half may turn out.
News headlines mention a host of risks to watch for, including high inflation and rising interest rates.
Prime Minister Lee Hsien Loong has also warned of an impending recession that may hit our shores either next year or in 2024.
How should you position yourself and what stocks should you include in your investment portfolio?
The pillars of the economy
First off, we look at the local banks, which form the pillars of Singapore’s economy.
Our mid-year review of the banking sector threw up some interesting findings for DBS Group (SGX: D05), United Overseas Bank Ltd (SGX: U11), or UOB, and OCBC Ltd (SGX: O39).
All three banks have thus far reported resilient numbers with single-digit year on year loan growth.
An increase in interest rates should bode well for the banks’ net interest income as they can reprice their loans to charge higher rates.
We had a glimpse of this happening when UOB released its fiscal 2022’s first half results.
The bank’s net interest margin jumped from 1.56% in the prior year to 1.63%.
Although net interest income has benefitted, the banks could see fees come under pressure as investors stay cautious about making new investments.
Loan growth could also be anaemic should the economy take a sudden dive.
Investors need to watch for these risks, but we are confident that the banks can sustain their dividend payments.
Tailwinds for semiconductors and electronics
Next, we look at the semiconductor and electronics space.
This industry supports the growth and development of myriad devices that we use every day.
While some chip manufacturers had warned that the global shortage was easing, the good news is that demand should remain resilient with a host of people and businesses heading onto the internet.
With more companies digitalising, this trend should also buoy demand for chips and electronic parts.
The sustained demand should benefit companies such as AEM Holdings Ltd (SGX: AWX) and Micro-Mechanics (Holdings) Ltd (SGX: 5DD).
Supply chains are still snarled due to the Russia-Ukraine war, but this should resolve itself in time to come.
Dampened demand for consumer goods
The consumer goods sector may also face near-term headwinds from a combination of high inflation and weaker economic growth.
Companies that rely on necessity-based spendings, such as Sheng Siong Group Ltd (SGX: OV8), are unlikely to be adversely affected.
However, discretionary spending looks set to be hit as consumers cut back on unnecessary spending.
Such a pullback will affect the revenue and profits of luxury watch retailer The Hour Glass (SGX: AGS) and luxury apparel seller Ralph Lauren (NYSE: RL).
As more people hold back on spending on vacations, companies within the travel and tourism sector may also see a slowdown.
Rising pressure for REITs
REITs are also taking it on the chin in light of rising interest rates.
Our mid-year REIT review threw up the issue of rising borrowing costs for all REITs as they are leveraged securities that rely on debt to fund both their operations and acquisitions.
However, the REITs with strong sponsors, such as Mapletree Logistics Trust (SGX: M44U), have hedged the bulk of their borrowings to fixed rates.
This move will help to mitigate the rise in finance costs should interest rates continue to spike up.
Tenants may also be under strain should the economy dive, which is why it’s important to park your money in REITs with large, reputable tenants.
A diversified tenant base also helps a lot, and Mapletree Industrial Trust (SGX: ME8U) has its largest tenant contributing just 6.1% to gross rental income.
REITs may also find it tougher to acquire assets as interest rates head up.
Investors should look for REITs that have a good pipeline of assets from their sponsors, such as Keppel DC REIT (SGX: AJBU).
This fact will make it easier for them to conduct acquisitions rather than hunting for third-party assets.
Get Smart: This, too, shall pass
It should be clear to investors by now that you should stick with companies that have proven track records of sailing through challenging times.
In addition, you should also buy companies enjoying tailwinds that will help them grow in the long term.
Remember that downturns do not last forever.
By sticking with strong companies and REITs, you can weather any storm successfully and go on to post an admirable investment performance.
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Disclaimer: Royston Yang owns shares of DBS Group, Keppel DC REIT, Micro-Mechanics (Holdings) Ltd and Mapletree Industrial Trust.
