Dear Smart Investor,
What goes up must come down. Or so they say.
In November, the Straits Times Index hit a high of 3,263 points, up 14.2% for the year.
Since then, the emergence of the Omicron variant has rattled the local stock market, causing the Singapore index to give back some of its gains.
The new variant has muddied the waters of Singapore’s economic recovery.
On one hand, the first vaccinated travel lanes (VTL) flights from Kuala Lumpur, India, and Indonesia landed last Monday, setting an important milestone in the reopening of Singapore’s borders.
Yet, even as the VTL programme gains traction, the Singapore government has selectively pumped the brakes by postponing VTL flights to UAE, Qatar and Saudi Arabia until further notice.
As the dust settles, the question remains: what does all this mean for Singapore stocks?
Banking on Singapore’s banks
No analysis of the STI is complete without taking Singapore’s banking trio of DBS Group Holdings Ltd (SGX: D05), United Overseas Bank Ltd (SGX: U11) or UOB, and Oversea-Chinese Banking Corporation Limited (SGX: O39) or OCBC into consideration.
The trio collectively accounted for almost 44% of the STI’s weightage, as of 29 October 2021.
The good news is that the earnings for DBS, UOB and OCBC have been largely positive for the first nine months of the year.
Profits for Singapore’s banking trio soared amid sharply lower provisions taken compared to a year ago.
The positive news does not end there.
Earlier in July, the Monetary Authority of Singapore (MAS) lifted its restrictions on dividend payouts for banks.
In response, DBS and OCBC promptly restored their dividends to pre-COVID levels while UOB elected to raise its interim dividend by 9% compared to its pre-COVID levels.
Looking ahead, there is a potential for interest rates to rise above their current levels.
If that occurs, it would be another win for Singapore banks as higher interest rates would allow them to earn a higher net interest margin, and subsequently, more revenue and profits.
A growing army of REITs
Real estate investment trusts (REITs) have come a long way since CapitaMall Trust became the first REIT to be listed in 2002.
Today, the STI is home to an army of seven REITs, including:
- CapitaLand Integrated Commercial Trust (SGX: C38U) or CICT
- Ascendas Real Estate Investment Trust (SGX: A17U)
- Frasers Logistics and Commercial Trust (SGX: BUOU)
- Keppel DC REIT (SGX: AJBU)
- Mapletree Industrial Trust (SGX: ME8U) or MIT
- Mapletree Logistics Trust (SGX: M44U) or MLT
- Mapletree Commercial Trust (SGX: N2IU) or MCT
- Together, the septet of REITs account for almost 15% of the overall weightage of the Singapore index, at the end of September 2021.
More importantly, all but two of the REITs reported higher DPU during their respective fiscal years in 2020, a sure sign of resilience.
This factor is important as a REIT’s future returns come, in large part, from the consistent DPU it pays.
This cohort of Singapore REITs passes the test with flying colours.
Bye bye, legacy baggage
The pandemic has also triggered Singapore’s major conglomerates to take a hard look at their current business and shed some of their legacy divisions.
For instance, real estate giant CapitaLand has acted swiftly to shed its property development business in favour of an asset-light real estate management firm in CapitaLand Investment (SGX: 9CI).
Keppel Corporation (SGX: BN4) is looking to follow suit by letting go of its legacy rig manufacturing business while maintaining an asset-light operating business in the offshore and marine sector focused on design, engineering, and procurement services.
Meanwhile, Singapore Telecommunications Limited (SGX: Z74) or Singtel and Singapore Technologies Engineering (SGX: S63) or ST Engineering are firming up strategic plans to move towards higher value added businesses.
Collectively, these four big boys contribute about 14% of the STI, as of 30 September 2021.
If the quartet are successful, we could see the value of the new asset-light businesses increase over the long haul.
Get Smart: The upside amid uncertainty
As we outline the positives for the Singapore stock market …
… as Smart Investors, we remain vigilant of the potential risks.
For instance, if the Omicron virus turns out to be more severe than anticipated, then we could see a return of tighter movement control measures that could stifle economic activity and put renewed stress on bank loans.
That said, do not give in to fear, dear Smart Investor.
The good news is that we are no longer operating without a playbook.
Living through 2020 has shown us both the full impact of a circuit breaker and the resilience of Singapore companies.
This year, on the other hand, has demonstrated how beaten-down companies are able to restructure and recover from Singapore’s worst recession in history.
The secret of successful investing, which every investor hopes to unearth, is staring us right in the face.
It is, quite simply, identifying wonderful companies that have the ability to continually make good and rational decisions for their shareholders …
… all we have to do, then, is to not only own them, but to own more of them when we have the money and the opportunity to do so.
We will be investing S$20,000 of our own money into The Smart Dividend Portfolio in 2022.
The goal is simple, to continue to invest in strong companies that will continue to generate returns for us, year after year, decade after decade…. With the ultimate aim to build wealth for us and our future generations in the years to come.
This weekend, we’ll be running a special 12.12 sale to invite you to join us at The Smart Dividend Portfolio. So do keep a lookout for the invitation in your email inbox!
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Disclosure: Chin Hui Leong owns shares of DBS Group, UOB, OCBC, Ascendas REIT, CapitaLand Integrated Commercial Trust, Frasers Logistics and Commercial Trust, Keppel DC REIT, Mapletree Logistics Trust, Mapletree Industrial Trust, and Mapletree Commercial Trust.