Why analysts fear credit cost hike may hurt banks' earnings momentum

Will this be in the long run?

According to Credit Suisse, there are few top down themes in Singapore – especially any that affect the large caps in a big way. Prospects of the commodity / agri sectors seem unlikely to improve without material global demand improvement – which is something that remains uncertain near term.

They suggested banks and capital goods sectors may do well in periods of increasing interest rates. To a large degree, this has worked.

Here's more from Credit Suisse:

We are worried, however, that the strong 1Q numbers provide a large base, and that increasing credit costs might hurt banks' earnings momentum near term. In our updated model portfolio then, we keep the aggregate banks' weight close to neutral, but are overweight UOB relative to the other two.

We believe there is some potential upside to order inflow estimates for Keppel, and we stay overweight the sector through KEP (and some SCI, SMM).

Within the developers' sector, we prefer stocks with low exposure to the SG market (CMA, CAPL) and like GLP. To take advantage of the correction in the REITS, and our expectation of a limited further upside to rates (and expectations), our portfolio is overweight the sector through CMT, MCT, MINT and MLT.

Telecoms have done well recently; and there is the hope that higher data monetisation can drive earnings. This is more relevant for M1 than for STH. We are neutral weight on SingTel – while currency volatility is an overhang – subsidiary operations seem to be improving.

Mid caps have outperformed large caps in Singapore 99% since January 2003 (but have under-performed over the last nine months). As the liquidity scare recedes, specific bottom up stories should start to work again. As we cannot include stocks we don’t cover, we include a 5% weight in our portfolio to the MSCI SG mid cap index.

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