The market continues to be hungry for the slightest positive catalysts to reaffirm their belief that the outlook is still positive. Among the Singapore sectors, we highlight four sectors that CIMB thinks your investments should focus on in 2H18.
Investors Takeaway: 3 Sectors Where Your Investments Should Focus On In 2H18
Net interest margin expanded across the banks as SIBOR increased on the influence of Fed’s interest rate hike. This was partly helped by a very benign credit cycle where credit costs fell below the cycle average.
Another segment that saw the banks continue to register strong result is the wealth management segment where fee momentum continues to remain robust. Overall, the banks registered 19-49 percent year-on-year growth in wealth management fees. However, CIMB notes that banks’ wealth management fees could drop a notch in 2Q18 especially if market conditions weaken.
CIMB highlights that the banks will continue to generate healthy return-on-equity to maintain their comfortable dividend payout and yet remain well capitalised.
CIMB Rating: Overweight
Top Sector Pick: DBS Group Holdings
- Capital Goods
Crude oil prices have been rallying since the start of the year. Despite recent setbacks, crude oil prices have been recovering strongly. Crude oil prices are now well over the levels of certain offshore projects.
A crude oil production plan for 2019 is also in the books between OPEC and non-OPEC countries. The recovery in crude oil prices has led to a spillover effect on the offshore and marine sector. In particular, operating margins have been improving for companies that have managed to cut costs significantly. CIMB expects margin recovery to continue as long as yards are able to keep up with order momentum.
CIMB Rating: Overweight
Top Sector Pick: Keppel Corp
Revenue per available room (RevPAR) has begun to see a turn and is expected to grow by five percent this year. Hospitality REITs registered a synchronised improvement in 1Q18 RevPARs with Far East Hospitality Trust leading the pack.
Industrial REITs’ organic performance remains sluggish as difficult industry conditions are expected to stabilise only towards year-end. The larger industrial REITs are being propped up by inorganic contributions, while smaller-cap REITs are adversely affected by multi-tenanted building (MTB) conversions.
In the office REIT sub-sector, the spread between average passing rents and spot rents have been narrowing. This is all thanks to the improved office leasing market. With the narrowing rental gap, there is likely to be less drag on office REITs’ earnings in the upcoming quarters.
However, one major concern across the board for REITs is the impact of higher interest rate. Rising interest rates can affect REITs due to higher financing cost as well as the narrowing spread between distribution yields and government bond yields which make REITs less attractive.
CIMB’s sensitivity analysis showed that every 0.5 percentage point change in average interest cost could result in 0-3.4 percent erosion in distribution income.
CIMB Rating: Neutral