China Recovery Imminent? Buy Singapore’s Bank Stocks

July 7, 2022

China’s economy showed further signs of improvement in June with a strong pick-up in services spending as COVID-19 outbreaks and restrictions gradually start to ease.

The official manufacturing purchasing managers index (PMI) increased to 50.2 from 49.6 in May.

While it was below analysts’ estimates, it was the first time that the index was above 50 since February. An index reading above 50 indicates expansion in output.

But investors may be asking which stocks in Southeast Asia can benefit from a strong rebound in the Chinese economy?

Singapore bank stocks knocked by recession fear

Overall, this bodes well for Singapore’s banking stocks, which have seen their share prices dampened by the fear of a recession in the near term.

While the top three banks in Singapore have performed relatively better compared to the broader market, the share prices of all three have fallen between 15% to 20% from their recent high over the last few months.

Below is a table that shows some key performance metrics for the top three banks in Singapore; DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corporation Limited (SGX: O39), also known as OCBC, and United Overseas Bank Ltd (SGX: U11), better known as UOB.

Source: Bloomberg, ProsperUs

Singapore’s government confident of navigating risks

Aside from that, Singapore’s government has also signalled its capability to overcome recession risks.

Singapore’s Finance Minister, Lawrence Wong, said that the Singapore’s economy is not at risk of a recession or stagflation next year – despite growing concern about the impact of global monetary policy tightening and persistent upward inflationary pressures.

Wong, who is also the deputy prime minister, said in Parliament on Monday that:

“We do not expect a recession or a stagflation scenario next year. But things are unpredictable, volatile — there can be new shocks — so we will continue to monitor the global and domestic environment very closely and if the need arises the government will adjust its approach and measures accordingly,”

Opportunity to buy into banking stocks

The weak market sentiment in Singapore banking stocks (amid fear of a recession) provides a good opportunity for investors to buy into them at a bargain.

Source: WSJ Markets, ProsperUs

Based on the average target price (TP) compiled by Wall Street Journal Markets, the upside potential in Singapore’s banking stocks represent an increase of between 21% to 30%.

Here are among some of the key drivers for the bank stocks in the near term.

  • Earnings upside with faster rate hikes
  • Strong earnings growth
  • Economic recovery in China

The economic recovery in China will play an important role to rejuvenate the economy in Southeast Asia, including Singapore.

However, the downside risks remain as China sticks to its COVID-zero policy.

Shanghai is currently conducting mass testing for COVID-19, fuelling concerns that the financial hub in China will return to lockdown.

If you are looking for the best banking stocks to buy in Singapore, you can read up our article on the comparison of earnings between the three banks.

Going into the second half of this year, I believe long-term investors should accumulate some of Singapore’s banking stocks that have a strong track record and which provide further upside in the event of an interest rate hike.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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