Investors should tread cautiously for 2023 but look to materials, energy and consumer sectors for a lift

(From left) ST's associate editor Lee Su Shyan, Singapore Exchange strategist's Geoff Howie, Head of Investments and Wealth Solutions Jeffrey Yapand ST's invest editor Tan Boon Ooi. PHOTO: ST FILE

SINGAPORE – Investors will likely be going into the new year with portfolios dripping with red ink, while facing an uncertain outlook for the Singapore and global economies.

These volatile times mean they need all the help they can get – a sentiment that underpinned the recent Market Outlook 2023 event organised by The Straits Times and presented by HSBC.

Panellists discussed trends in interest rates, the market outlook for next year as well as the opportunities available in the market.

The panel, which was moderated by ST associate editor Lee Su Shyan, advocated a cautious approach but remained optimistic about certain sectors that had potential.

HSBC managing director Jeffrey Yap, head of investments and wealth solutions for South-east Asia global private banking and wealth, favours the energy, materials and consumer sectors.

Companies in these segments can potentially benefit from the current levels of elevated inflation. If they are able to pass on the higher costs, they may even see an improvement in margins.

Singapore Exchange market strategist Geoff Howie favours some of the local companies that have benefited from Singapore’s position as an international trade hub. Other companies include the local banks that have done well in line with Singapore’s growth in the financial services sector.

ST Invest editor Tan Ooi Boon urged investors to be mindful of the rising interest rate environment and to set aside funds to pay off liabilities such as home loans, if possible.

He stressed the importance of having sufficient funds for a rainy day as well as the need for investors to keep up to date with the news. Being an informed investor can lead to better investment decisions, he noted.

Q: One of the key risks for investors is rising interest rates. What are your views on the US Federal Reserve’s next moves going into 2023?

Mr Yap: Why are prices rising? There are three components of cost – the cost of the raw material itself, the cost of the container to transport it and the cost of freight to bring it to the port. So raw material prices have gone up because of the demand-supply shock. There is also the Russia-Ukraine situation that results in raw material prices being generally higher across the board. That has resulted in higher container costs and the supply chain shock has resulted in food prices being a lot higher. So all these contribute to the overall rise.

The Fed is still concerned with the inflationary pressures because of these three factors. 

With this rise in inflation, for the Fed, the question is when they will stop hiking and at what level it will stop. The lesson the Fed took away from the 1980s is that if they pause too early, inflation may continue to rise and get out of hand. 

So the Federal Reserve has that memory and will not repeat it. That’s essentially the main KPI (key performance indicator). The main objective is to keep inflation intact. 

Mr Howie As of Nov 9, the peak rate for the Fed is seen to be between 5 per cent and 5.25 per cent up to September next year. The outlook is highly fluid. The Fed chairman has maintained a hawkish tone and treasuries, currencies and stocks remain highly CPI-relevant data.

Q: Given the high interest rates, what should investors be mindful of? 

Mr Tan: This depends on whether you are still a borrower or whether you have paid off your loans. There are many people who are servicing their housing loans yet keep quite substantial fixed deposits. My advice is that if you are somebody who still has a housing loan, take a look at it and see how to gradually pay it off.

Many investors think that the interest they earn is more than the interest they are paying on the loan, but this will not be the case. All debts have to be paid eventually. So those who still have loans can consider taking a part of their year-end bonus to pay down the loan. 

Q: What about the strength of the US dollar versus the other currencies that have weakened as interest rates have risen? 

Mr Yap: The world funding is in US dollars. In an uncertain market environment whether you are a company large or small, when you have US dollar debt and you want to pay off the debt, you need to get access to US dollars. So the demand for US dollars in this period has increased across the board. There is also the expectation that the US Fed will continue to hike interest rates again between two and four times next year.

We think the US dollar strength means there may be volatility, but we think it will still outperform the majority of the currencies out there. Investors should be overweight US dollar versus other major G-7 currencies.

The Monetary Authority of Singapore has been very proactive in adjusting the band (of the Singdollar) in order to keep inflation in check. As a result, the Singdollar outperformed its South-east Asian peers. Our view is that as long as inflation pressures persist, the US dollar will remain strong, until we see a significant slowdown in the US economy.

Q: What are some of the opportunities in the equity market? 

Mr Yap: Valuations are down 20 per cent to 30 per cent. But we are still not at the peak of the interest rate hike cycle as yet. But there are always certain sectors that can benefit from the high interest rate environment.

One area which we at HSBC really like is the energy space, the materials space and the consumer space, where companies can benefit from inflationary pressures and in some instances see margin expansion. Back in the 1980s, some of the traditional energy companies as well as consumer companies saw margin expansion because they were able to pass on the costs.

In terms of geographic sectors, we are somewhat bullish on the US market. We like the South-east Asian market because of it being a net commodity exporter.  

We are definitely bearish on Europe because of the reliance on energy, and the Russia-Ukraine crisis seems to be weighing heavily on the cost pressure on European nations.  

Overall, we say stick to the value sector, stick to the consumer sector, the material sectors and for geographical regions, we like the South-east Asian region.

Q: What are some of the opportunities in the Singapore equities market? 

Mr Howie: There are three aspects of Singapore that have really extended and transcended into the stock market. The first is the cornerstone financial services and their role in the economy. The second is the significant international trade flows that come through Singapore. The third is related to how Singapore prides itself on business competitiveness.

As that has worked through the stock market, the Straits Times Index (STI) has maintained a single-digit percentage total return while most developed indexes are in the red.    

The banks have been more defensive than the tech sector this year, with the tech sector driving the bigger global benchmarks.

The banks have expanded their net interest income, so net interest margins are up significantly. The three local banks reported a combined $7.4 billion net interest income for the third quarter and that’s $1.3 billion up from the second quarter alone, mainly due to the appreciation of Sora (Singapore Overnight Rate Average). 

But at the same time, despite the growth headwinds, the trio have been expanding their loan books, with their loan growth at around mid single digits of around 6 per cent year on year. They have also reduced their non-performing loans. Another point is the international trade flows, the fact that trade is such an important aspect of Singapore’s economy. 

When you take the STI and you look at it from a weighted perspective, it is actually 49 per cent revenue from Singapore and 51 per cent from elsewhere in the world, of which most is within the Asia-Pacific, paralleling the significant trade relations with Asean, China and Hong Kong. 

If you look at the three strongest STI stocks so far in 2022, they resonate with that international perspective. Yangzijiang Shipbuilding is a Jiangsu-based shipbuilder that generates revenue in US dollars and has achieved record container ship and tanker ship orders this year. You’ve got Jardine Cycle & Carriage, which reports 90 per cent of its revenue to Indonesia selling motor cars. And then the third stock is Sembcorp Industries, which makes 60 per cent of its revenue here in Singapore.

Now that third stock also brings up that third point, how Singapore prides itself on business competitiveness. And we’ve seen since 2020 a significant drive by companies to improve their operational efficiencies when times were tough. These companies were taking strategic initiatives to transform their businesses, whether by making significant disposals or transforming the business entirely with capital and investment, or wherever they are pivoting and making acquisitions in new areas. 

Sembcorp Industries is strategically increasing its renewable energy portfolio. Other examples have included Keppel Corp with its sustainable urbanisation drive, and CapitaLand Investments completing its restructure in September 2021. 

Q: How do you think we should be changing our portfolio allocation? The 60:40 (60 per cent equity, 40 per cent bonds) portfolio has performed poorly.

Mr Yap: The last decade has been a wonderful decade for the 60:40 portfolio where equity valuations went really high and we had one of the longest bond market rallies ever. Now, it’s more about the expectation of what happens in this interest rate cycle. And the sell-off or the adjustment that we had this year was really to reflect where bond and equity prices should be on the back of a higher interest rate environment.

But if you look at the past few decades, the fixed income market does give portfolio diversification to investors and mitigates risk well. So investors should ask, for their portfolio, is it working or not?

What we could put into a 60:40 portfolio would be some exposure to commodities. In most situations, a 60:40 portfolio will work except in a runaway inflation environment. To mitigate that, we suggest adding some exposure in commodities such as precious metals.

If you have a number of years ahead, you can afford to take a little more risk. It’s never about timing the market, it’s always about the time in the market.

You want a company to work for you. And by the nature of the equity market having a higher risk premium, if you’re in your 40s, you can still afford to take on a little bit more risk, maybe slightly more exposure to equities.

In your 60s, when you are looking to enjoy the fruits of your labour and spend on your lifestyle and do what you like with your money, a constant stream of income is more important. A higher tilt to a fixed income allocation will be recommended.

Q: What is the outlook for 2023?

Mr Howie: Decelerating growth and trade is expected on a global scale in 2023. We are looking at inflation globally between 6 per cent and 7 per cent. So, every one of those FOMC (Federal Open Market Committee) meetings next year will matter, including all the economic data that assessed at those FOMCs. The Fed is expected to remain hawkish, on their premise that inflationary expectations fuel expectations, as they also look to mitigate risks of any ignition of a wage price spiral. The sensitivity of treasuries, currencies and stocks have created an interesting time for traders, with the added volatility.

Our most traded stock is DBS Group Holdings. Amid significant volatility, retail investors net bought $1 billion of DBS in 2020, which coincided with the value weighted average price of the stock around $21.60. And then in 2021, we saw retail net sell DBS $1.2 billion when the value of volume weighted average price for that year was more than 30 per cent higher at around $29.00.

So the volatility can of course provide opportunities. If you were looking at the markets yearly, you probably are now looking monthly, if you used to look at them monthly, now you are looking at them weekly.

Q: How can investors prepare themselves for 2023? 

Mr Tan: Many know the income they earn but don’t really know how much money they need every month. Many of them think you only need to have six months of savings. Actually, that’s just for emergency funding. The question that you should always ask yourself is: When I retire, do I have access to funds to pay not just for six months of expenses, but 240 months of expenses for 20 years of retirement?

As part of financial planning, you need to make your money work harder. What struck me was the financial habits that many people have in Singapore.

A person recently got scammed and he had $500,000 in a savings account which was earning very little interest.

In today’s rate, if you put it in a fixed deposit, you can earn quite a lot of interest. So you should not leave too much money in a savings account.

Also, start thinking about the expenses. Start thinking about what you need. Once you know what you need, you will plan better for it. 

No one knows for sure where the markets are heading, but you stand to gain, if you are an informed investor, by being up to date with the news. If you want to know the ups and downs about inflation, the Fed, Russia-Ukraine war, you have to keep up with the news. If you read the news, you will get a better idea as to why certain stocks are going up or down. 

When it comes to their own investments, many people operate on autopilot. Whether markets are up or down, there will always be winners and losers. The winner will always be the one to keep up with the news; he will know the company in and out and he will make an investment because he has done the research and not just because somebody tells him it is a good investment. 

Q: What is the role of investment advisers as they support investors who are facing an uncertain 2023?

Mr Yap: When I’m looking at my own investments I am more emotional. Investment advisers can be impartial, they will look at your portfolio, look at your risk profile, look at your needs and look at what is happening in the market and adjust your portfolio accordingly.

The wide range of support is really important too, because it’s unlikely for an investment adviser to have all the necessary support and skill sets. Being part of a larger investment advisory team has its benefits.

Investment advisers are also able to provide updated market developments from the collective information that the firm is gathering. Hence, we are able to offer more timely and holistic advice.

Follow ST on LinkedIn and stay updated on the latest career news, insights and more.