Time flies, and the next earnings season is just around the corner.
Investors may be curious to know which sectors to look out for that can provide attractive investment opportunities.
Some sectors may be enjoying tailwinds while others could be seeing short-term challenges.
Here are three interesting sectors that you can focus your attention on.
Banks
Singapore banks have done well in 2023 and the first quarter of this year (1Q 2024).
All three banks, DBS Group (SGX: D05), United Overseas Bank (SGX: U11) [UOB] and OCBC Ltd (SGX: O39), saw their share prices hit all-time highs earlier this month.
DBS reported a sparkling set of earnings for 1Q 2024 as its net profit a quarterly record of S$2.96 billion.
The lender also upped its interim dividend by 42% year on year to S$0.54.
The banks are doing well because of surging interest rates that led to increases in their net interest margins (NIMs).
These higher NIMs have, in turn, resulted in higher net interest income which has flowed down to each bank’s net profit.
With the recent inflation and labour market numbers coming in, there is a chance that interest rates may be reduced soon.
US inflation came in at 3% in June, down 0.1% from May, and is at its lowest level in three years.
While this level is still higher than the central bank’s target of 2%, it is a good sign that prices are heading in the right direction.
The US unemployment rate also hit 4.1%, the highest in 2.5 years, and signals that high rates could be hurting the economy and putting a strain on borrowers.
Investors may be curious to know how banks think about the interest rate trajectory and the sensitivity of their income and earnings to changes in interest rates.
The upcoming earnings season could shed more light on this aspect.
REITs
On the flip side, the REIT sector looks overdue for a breath of fresh air.
REITs are heavily reliant on loans to fund their operating costs and capital expenditure.
Hence, higher interest rates will lead to lower distributable income as REITs have to pay their lenders higher amounts of interest.
With interest rates possibly easing, this could spell some hope for REITs that are struggling with higher finance costs.
For instance, Mapletree Pan Asia Commercial Trust (SGX: N2IU) saw its weighted average cost of debt rise from 2.68% in fiscal 2023 to 3.35% in fiscal 2024.
During its recent earnings release, the manager for Mapletree Logistics Trust (SGX: M44U) warned that replacement loans will be renewed at significantly higher rates.
Retail mall owner Frasers Centrepoint Trust (SGX: J69U) saw finance costs jump 16.6% year on year to S$41.6 million for the first half of fiscal 2024 (1H FY2024) ending 31 March 2024.
Its all-in cost of debt also rose from 3.6% a year ago to 4.2% as of the latest quarter.
These examples showcase the tough job that REIT managers have in keeping a lid on finance costs.
The upcoming earnings season should shed more light on how managers intend to cope with elevated interest rates and whether they can enjoy some respite should rates start to decline.
Semiconductors
Semiconductors are the backbone of the technology sector as they are used to power everything from computers to mobile phones.
With the proliferation of artificial intelligence (AI) and a surge in demand for digitalisation and data storage, semiconductors should continue to enjoy strong sales.
The strong 166% surge in Nvidia’s (NASDAQ: NVDA) share price year-to-date is a testament to investor optimism over the next generation of graphics processing units (GPUs) that can power more AI applications.
The industry, however, has been in a slump since the pandemic-driven surge in demand back in 2021 and 2022.
For 2023, the Semiconductor Industry Association (SIA) reported that global semiconductor industry sales fell by 8.2% year on year to US$526.8 billion.
There is good news on the horizon, though.
The World Semiconductor Trade Statistics (WSTS) has revised its forecast upwards for 2024.
It now projects a 16% year-on-year growth in semiconductor sales to US$611 billion, driven by integrated circuits, logic, and memory.
2025 should also see robust growth of 12.5% year on year to reach US$687 billion.
Stocks to look at within this sector include blue-chip contract manufacturer Venture Corporation (SGX: V02), parts and consumables producer Micro-Mechanics (Holdings) (SGX: 5DD), and equipment manufacturing and engineering services firm UMS Holdings (SGX: 558).
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Disclosure: Royston Yang owns shares of DBS Group and Micro-Mechanics (Holdings).
