Investors in Singapore have welcomed in a new year, putting the horror show that was 2022 behind us.
Yet, while we have nearly the whole of 2023 ahead of us, it’s worth pondering what Singapore stocks might outperform this year and beyond.
One area which has attracted a lot of interest on the Singapore Exchange (SGX) over the past year has been the local banks.
That’s because Singapore bank shares are benefitting from the rise in interest rates in the US.
As investors, since 2009, we’ve gotten used to rock-bottom interest rates but that scenario is now changing given the higher inflation that countries worldwide are experiencing.
One of the top beneficiaries in Singapore’s banking sector is United Overseas Bank Ltd (SGX: U11), also known as UOB.
My colleague, Billy, has also written about the bank and UOB happens to one of his top Singapore picks for a resilient portfolio.
But how has it done so far in 2023 and are there are any particular reasons for its share price performance?
Down in 2023 but interest rates still up
While UOB’s share price is only down around 2.3% over the past year, so far in 2023 UOB shares have declined by around 4.9%.
Yet that has come as major stock markets around the world, including China, are rallying. So, what’s behind this phenomenon?
First off, many professional investors foresee that the US Federal Reserve (Fed) is coming to the end of its rate hiking cycle.
That cycle has seen the Fed raise interest rates at the fastest pace in more than 40 years. From March to December 2022, the Fed raised its Fed Funds rate by 400 basis points (bps), or 4%, to a range of 4.25-4.50%.
It’s a huge move in a short space of time when talking about central bank interest rate hikes.
While banks – like UOB – benefitted from these rate hikes, talk of the Fed pausing at closer to 5% mean many investors think the good days for banks are coming to an end.
Yet, as I’ve argued before, many investors are assuming there will be interest rate cuts as early as 2024 as the Fed tries to stimulate a slowing US economy that could enter a recession.
That’s a huge “if” and assumes the Fed will start cutting at the first sign of any trouble in the US economy. However, as we’ve seen before, the Fed is extremely committed to bringing down the inflation rate.
Can UOB continue to perform in 2023?
In fact, UOB’s share price is up over 12% since a recent low in October of 2022. It shows investors that you can not count out a bank like UOB, which has a strong franchise and multiple growth levers.
With a rebound in economic activity in Southeast Asia – on the back of China’s reopening – UOB is positioned to be a key beneficiary given its dominant presence (at least among Singaporean banks) throughout the region.
Finally, for dividend investors, UOB also offers up a solid yield of 4.1% with the potential for the bank to hike its dividend per share (DPS) when it announces its full-year 2022 earnings on 23 February.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.