Singapore Stocks Poised to Gain from US Fed Rate Cuts

Impact of Anticipated US Federal Reserve Rate Cuts on Singapore’s Stock Market

As the US Federal Reserve gears up for an expected rate cut this month, the Singapore stock market has already enjoyed a total return of 4.1% since the end of June, buoyed by the anticipation of lower interest rates and a strengthening currency. Analysts are optimistic about the midterm benefits of this easing cycle for Singapore’s stock market, which could support corporate profit growth.

Key Beneficiaries: Real Estate Investment Trusts, Developers, and High Debt Companies

Lu Minyi, Deputy Director of Research at China Galaxy Securities Singapore, noted in a recent report that during the last two rate cut cycles in 2007 and 2019, most Singapore stocks posted positive returns one month prior to the actual rate cuts. He expects this year to be no different. As the rate cut cycle draws near, sectors like internet, consumer goods, transportation, and Real Estate Investment Trusts (REITs) have performed well over the past month.

“If there are no major adverse factors, potential beneficiaries of the rate cuts include real estate investment trusts, developers, and companies with high levels of debt. The reduced capital costs resulting from lower interest rates could also enhance valuations for internet companies,” Lu stated.

Currency Fluctuations and Their Impact

However, currency fluctuations accompanying the rate cuts could impact certain stocks. Lu noted that from January 2022 to July 2024, ASEAN currencies experienced significant depreciation. From August 1 to 23 of this year, however, ASEAN currencies rebounded by 5% to 10% against the US dollar.

The narrowing interest rate differential with the US dollar is expected to favor ASEAN currency appreciation. China Galaxy International Securities economists predict that by the end of 2025, the Malaysian ringgit, Indonesian rupiah, and Thai baht will appreciate further by 1% to 2.7% against the US dollar, while the Singapore dollar is expected to remain relatively stable.

Weak US Dollar: A Boon for Certain Corporations

The weakening US dollar, coupled with stronger ASEAN currencies, could benefit companies that report financials in US dollars, such as Japfa and Wilmar International, as well as internet companies like SEA and Grab. Conversely, a weaker dollar could negatively impact tech manufacturers holding substantial net long USD positions and companies whose sales prices are pegged to the dollar, like Riverstone Holdings.

During the recent Q2 earnings season, about 40% of Singapore companies reported results below expectations, 30% exceeded expectations, and another 30% met expectations. The tech sector generally underperformed due to challenging operating conditions and delayed recovery prospects, with only Frencken Group meeting expectations. However, most tech companies anticipate an improved business environment in the second half of the year and are more optimistic about demand prospects for FY2025. Additionally, a lack of new private residential launches in the first half of the year dragged down quarterly performances for developers and real estate agencies.

Capital Goods Sector Outperforms Expectations

The capital goods sector generally outperformed due to new orders and effective cost management. Following the quarterly earnings release, China Galaxy International Securities revised its earnings expectations for Singapore companies downward by 0.7% for FY2024 and by 0.8% for FY2025, primarily due to poor performances in the real estate, tech, transportation, and commodities sectors. However, improvements in the financial sector partially offset these effects.

The Easing Interest Rate Cycle: A Midterm Boon

In the midterm, Lu believes that an easing interest rate cycle will aid corporate profit growth and reduce capital costs. He is bullish on sectors such as capital goods, commodities, construction, gaming, internet, real estate investment trusts, tech, and telecommunications.

Among individual stocks, ComfortDelGro, CapitaLand Ascendas REIT, FLCT, iFAST Corp, SATS, Sembcorp Industries, Singtel, ST Engineering, Seatrium, and UOB are China Galaxy International Securities’ top picks. Additionally, small caps like CSE Global, Hong Leong Asia, and SingPost are also viewed favorably.