Typically regarded as the dependable bedrock of a long-term portfolio, Singapore blue-chip stocks are known for their stability, strong balance sheets, and reliable dividend payouts.
However, blue-chip stocks can also carry risks that can surprise even the most seasoned investors.
In this article, we delve into the real risks of Singapore blue-chip stocks and what investors need to consider when building a portfolio around them.
What Makes a Stock “Blue-Chip”?
A blue chip is typically a large company, characterised by solid financials with a track record for stable earnings, prudent money management and consistent dividends, often represented within the Straits Times Index (SGX: ^STI).
Blue-chips are usually industry leaders, such as DBS Group Holdings (SGX: D05), Singapore Telecommunications Limited (SGX: Z74), and Singapore Exchange Limited (SGX: S68).
They are seen as “safe” as they typically have businesses that serve multiple markets, delivering diversified revenue streams.
However, are blue-chip stocks really safe?
What are some of the risks that these companies have that are commonly neglected or downplayed?
Risk #1: Market Sensitivity
Many investors believe blue-chip stocks are shielded from major market fluctuations because of their size and stability.
However, history has proven repeatedly that even the most established companies are vulnerable during market cycle downturns.
Despite being a conglomerate, Keppel Ltd. (SGX: BN4), with a market capitalisation of approximately S$20 billion in 2013, saw its share price slump from S$11.00 to S$4.80 over a three-year period from 2014 to 2016.
Falling global oil prices had led to increased caution, and the group’s offshore and marine division was significantly impacted.
Keeping a diversified portfolio is the best way to minimise this risk.
Add quality companies with sound financials and diversified revenue streams from different sectors to create a diversified portfolio.
Risk #2: Regulatory and Policy Changes
A majority of blue-chips operate in industries that are highly regulated, such as banking and utilities, and as a result, carry considerable regulatory risks in the changing political environment.
Once regarded as the unshakeable leader in telecom, regulatory changes and an evolving competitive environment have impacted Singtel’s business.
India’s “adverse regulatory and court rulings” impacted the telco’s Airtel venture, which was one of the reasons Singtel cited for the 65% contraction in net profit in its FY2020 report.
The telecommunications company’s shares also plummeted from S$3.36 a share in early 2020 to S$2.04 after a fourth telco was permitted and launched in Singapore.
The most effective means of reducing this regulatory risk is through ongoing observation of policy changes and an evaluation of the management’s strategies in response to change.
Risk #3: Industry-Specific Challenges
Considered to have little to no competition and at the top of their field, blue-chip companies are, however, not free from industry-specific challenges.
The retail industry, for example, was dominated by physical retailers, but COVID-19 disrupted the industry and increased the prominence of digital retailers.
In its 2024 report, CapitaLand Integrated Commercial Trust (SGX: C38U) pointed out that sales for the Home & Living segment “dropped with the trend of homeowners shifting to online purchases or cross-border deliveries.”
Challenges and risks are present in any industry, and concentrating on one particular sector or asset class can expose an investor to risks and challenges that could persist for a long time.
Managing this risk requires diversifying your investments across industries and sectors.
Risk #4: Economic Sensitivity
Another misconception blue-chip investors have is the belief that blue-chip stocks are largely immune to the effects of economic slowdowns.
While some sectors are more defensive in the face of economic downturns, many blue-chip stocks tend to be cyclical and therefore, sensitive to current global or local economic conditions.
This is the case with Singapore Airlines Limited (SGX: C6L), or SIA.
With its profits highly susceptible to fluctuations in travel demand, the COVID-19 crisis highlighted this vulnerability painfully clear.
Within months, SIA stocks fell from a stable S$9.02 per share to S$3.45, and the Group reported a 76.1% year-over-year (YoY) loss in revenue in its FY2020/2021 report.
Despite the pandemic easing and travel picking up, the increases in fuel prices and uneven economic recovery in various regions continue to impact SIA’s performance.
SIA has shown that while blue-chip stocks can withstand some economic volatility, they are not immune to downturns.
Keeping a diversified portfolio within the blue-chip segment and tracking macroeconomic factors that may impact these companies is essential in minimising economic sensitivity risk.
Risk #5: Overvaluation in Bull Markets
Some investors assume that a blue-chip stock is always a safe pick regardless of its valuation.
However, these stocks can be overvalued, especially during bull markets, when investors flock to them for stability.
Buying blue chips at inflated valuations will lead to compressed future returns and a greater risk of price correction once sentiment normalises.
Banks in Singapore have traditionally been able to command higher price-to-book (P/B) ratios during bull market periods.
Right now, DBS’s P/B ratios are extremely high at 2.2, while its counterparts, Oversea-Chinese Banking Corporation Limited (SGX: O39) and United Overseas Bank Limited (SGX: U11), have ratios of 1.4 and 1.2, respectively.
While this doesn’t mean DBS is definitely overvalued, the prudent approach is to carefully analyse price-to-earnings (P/E) and P/B ratios, dividend yields, and business fundamentals to ensure your investment still has room to grow.
Long-term investors benefit most when they avoid overpaying, even for high-quality companies.
Get Smart: Blue-Chip is Stable But Not Without Risks
Singapore blue-chip entities provide a degree of security and dependable returns, but carry some level of risk.
Company reputation aside, factors such as market volatility, regulatory change, industry risk, economic sensitivity, and valuation risks are all things that can affect an investor’s returns.
Diversification across sectors and industries, prudent valuation, and close monitoring of changing market conditions are essential for managing risks effectively.
Blue chips can be excellent long-term holdings, but understanding their limitations is just as important as appreciating their strengths.
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Disclosure: Wenting does not own shares in any of the companies mentioned.
