Analysts see mixed picture for stock markets in 2023, with things looking up in second half

A big factor that could determine how 2023 shapes up for global equity markets is the global economy. PHOTO: AFP

SINGAPORE - Recession and its impact on corporate earnings will likely occupy the minds of investors through much of 2023, just as inflation, interest rates and the war in Ukraine took centre stage for markets in 2022.

While the MSCI All-Country World Index is on track for its worst performance since the 2008 global financial crisis, with a drop of more than 20 per cent, Singapore’s Straits Times Index (STI) ended 2022 up 4.09 per cent, making it among the biggest gainers.

The Singapore market benefitted this year from not being laden by tech shares, which have borne the brunt of the global selldown amid rising interest rates.

The STI’s technology exposure is limited to Venture Corporation, whereas the MSCI Singapore Index, which includes Sea Limited and Grab Holdings, slumped 9 per cent.

The 2023 outlook reports published by over a dozen global research and investment houses generally seem to conclude that 2023 could be a tale of two halves. 

Markets will continue to face challenges from inflation and interest rates in the first half and grapple with the growing risk of a recession. Geopolitical tensions could remain elevated. But during the second half, these risks could get better priced into the markets as inflationary pressures ease and the Fed turns less hawkish.

There is also abundant idle liquidity on the sidelines, waiting for opportunities. In the United States for example, there is US$4.6 trillion (S$6.1 trillion) sitting idle in money market funds seeking temporary abode.

During the global financial crisis, we saw a similar sharp build-up of US money market funds to US$3.9 trillion. As the world emerged from the crisis, these funds found their way to riskier assets, and helped global equities to stage a rebound of more than 50 per cent over three years.

A big factor that could determine how 2023 shapes up for global equity markets is the global economy.

While the US central bank expects to engineer a soft landing for the US economy, most economists reckon it could be in for a rough one.

Meanwhile, fund managers in a Bank of America survey named a deep global recession and persistently high inflation as the market’s biggest risk, with a net 68 per cent of those polled forecasting a downturn as likely in the next year. But firms like BlackRock, the world’s largest asset manager, Barclays and Oxford Economics see a mild recession.

How will this slowdown impact corporate earnings, and ultimately the equity markets?

Consensus estimates by analysts project the earnings of S&P 500 companies to rise about 5 per cent in 2023, according to Refinitiv IBES.

The S&P 500 has fallen some 20 per cent in 2022. The blue-chip Dow Jones Industrial index is down 8 per cent and the tech-heavy Nasdaq has slumped 35 per cent.

Strategists polled by Reuters in November expect the S&P 500 to end 2023 at 4,200 points, some 10 per cent above current levels.

This could happen if a recession hits early in 2023 and ends quickly. 

Going by past precedent, bear markets on average have bottomed four months before the end of a recession. So if we expect the recession to bottom out during the fourth quarter of 2023, markets could start stirring by June or even earlier, especially if the Fed starts pivoting to a more accommodative stance amid signs of softening in the labour market and consumer spending.

But the pace of recovery can vary across geographies.

Private-sector economists have cut Singapore’s 2023 growth forecast to 1.8 per cent, from 2.8 per cent. This is still a positive number compared with the contraction that is expected across most OECD markets.

There is general agreement among analysts that Asia is in a better position to ride out the storm in 2023.

The OECD in November predicted that Asia will be the main engine of growth over the next two years. Indeed, economies like Singapore, Thailand, Indonesia and Malaysia have built up significantly higher reserves and improved current account balances over the last 20 years.

The International Monetary Fund, meanwhile, expects Asean countries to recover strongly through 2023, with consumption and exports being the main drivers of growth. The region could also benefit as deglobalisation and re-shoring gather pace in 2023.

Mr Vasu Menon, executive director of investment strategy at OCBC Bank, cites China’s reopening as a key source of strength which could underpin regional economies and markets.

“2023 could be a year when the Chinese economy and stock markets outperform their global peers, especially those in the developed markets which face the prospect of a recession even as China experiences a pick-up in growth,” he said.

“A stronger Chinese economy and a better macro outlook for China should also augur well for Asia ex-Japan markets which have strong economic linkages to China.

“Additionally, the corollary of a weaker US dollar next year on prospects of a Fed pause and possible rate cuts in 2024, is stronger Asian currencies which will enhance the appeal of the region’s equity markets and help ease imported inflation into the region.”

So how should one position for such a recovery?

Maybank’s head of Singapore research Thilan Wickramasinghe recommends looking at three broad themes: technology developments that could drive revenue and margins; positive impacts to South-east Asia from supply chain shifts from China; and, companies riding on new beneficial government policies.

And in a recent report, he cites several names worth watching.

“We believe AEM Holdings, Bumitama, ComfortDelGro, CapitaLand Investments, DBS, Frasers Centrepoint Trust, First Resources, Raffles Medical Group, Sembcorp Industries, Singtel, ST Engineering, UMS and Venture Corp are well placed to benefit, going into 2023,” he noted. 

But the path will be volatile, he warned, though noting that Singapore will benefit from rising trade as well as inbound tourism.

Rising rates made 2022 an “annus horribilis” for the tech sector. Many of these companies tend to have higher gearings on average. AEM Holdings, UMS Holdings, Francken Group, Nanofilm, iFast, Aztech, ISDN and Silverlake Axis ranked among the 100 most traded stocks, but collectively declined 20 per cent year to date.

If interest rates flatten out during the second half of 2023, we could see many of these names recovering sharply, especially if the Nasdaq also takes off.

But don’t take your eyes off the value plays.

The trio of Singapore banks make up 20 per cent of the market capitalisation in Singapore and accounted for 26 per cent of market turnover in 2022.

They reported eight consecutive quarters of quarter-on-quarter net interest income growth. During the third quarter alone, they collectively raked in $7.4 billion in interest income, up from $1.3 billion during the April-June 2022 quarter. DBS chief executive officer Piyush Gupta sees the loan pipeline remaining healthy through 2023.

The search for value will continue into 2023.

Keppel Corp, City Developments and Sembcorp Marine were among the stocks which booked the highest net fund inflows in 2022. 

Keppel continues to power ahead with its business transformation, achieving $4.4 billion in monetisation to date and over $500,000 in share buybacks. Its sale of Keppel O&M to Sembcorp Marine will further strengthen its balance sheet while enabling the merged entity to emerge as one of the world’s largest offshore energy plays, with an order book of some $20 billion.

Meanwhile, the reopening of borders and recovery in travel and trade will benefit the likes of Singapore Airlines, SIA Engineering, ST Engineering and Sats.

But it is not just the big caps which will be in play. Many Singapore mid-caps and secondliners have strong balance sheets, pricing power and are poised to benefit from a recovery in 2023. Meanwhile, S-Reits offer some of the best yields worldwide.

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