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Earnings Season: Blue-Chip Stocks In The Spotlight

It is that time of the year again when companies provide updates on how they have performed over the quarter. Many things have happened since the last quarterly earnings update.

Globally, the ongoing trade conflict between China and the United States has led investors to shy away from companies that rely on exports. Manufacturing companies in Singapore have predictably taken a big hit in the process with share prices of some of the major companies spiraling down more than 30% from their peaks.

In June, the US Federal Reserve raised the benchmark lending rate to 1.75%to 2%. This is already the second increase of the year, and the Fed has signalled for two more hikes in 2018 and possibly another four in 2019. Central bankers now expect the rate to end the year at 2.4% rather than 2.1% projected back in March.

Closer to home, new property cooling measures were imposed due to over-enthusiastic optimism from home-buyers. The news rocked property stocks as some of the biggest developer stocks plummeted up to 17% overnight.

With all that has happened, here are three sectors that I will be keeping an eye on during the latest earnings season.

Banks

The three major banks in Singapore – DBS Group Holdings Ltd (SGX: D05), United Overseas Bank Ltd (SGX: U11), and Oversea-Chinese Banking Corp Limited (SGX: O39) – have lately been blessed with multiple positive economic tailwinds that have propelled them to record earnings in the first quarter of the year. Higher interest rates, strong home loan market, regional economic growth and improving oil and gas sector were all factors that contributed to the good showing.

With higher interest rates, I expect net interest margins to continue to rise. However, the property cooling measures may hinder home loan growth in the future. Besides decreasing home sales, the lower loan-to-volume ratio will cap loan values to just 75% of the property value, from 80% previously. As of end 2018, over 40% of loans-portfolio of the three banks were related to housing and building and construction. These new laws, will, no doubt impact loan volume growth. It will be interesting to see what the banks have to say and how these new rules will impact their loan volume going forward.

Property development companies

There are three property development companies within the Straits Times Index (SGX: ^STI), namely, City Developments Limited (SGX: C09), UOL Group Limited (SGX: U14) and CapitaLand Limited (SGX: C31). All three stocks plummeted the day after the property cooling measures were announced as investors foresee weaker residential market demand and lower profitability for upcoming projects.

City Developments was hardest hit as it has five residential developments due for completion in the next few years. These developments will be affected by the new rules.

I will be keeping a close watch to see what the management teams of these three companies have to say about their future and what sort of impact they expect from the new cooling measures.

REITs and stapled trusts

The REIT market took a major hit earlier this year as fears of interest rate hikes led to a sell-down of most REITs in Singapore. In fact, a report by the Singapore Exchange earlier this month pointed out that out of the 40 REITs and stapled trusts listed in Singapore, only 10 have had a positive return since the turn of the year. The returns for all 40 only averaged a meagre 3.5%. This is not surprising.

REITs typically have high debt levels, with gearing ratios ranging from 25% to 45%. This means that any increase in interest rates can have a meaningful impact on finance costs, and consequently profitability. A rising interest rate environment would, therefore, have a negative impact on REIT returns.

As mentioned earlier, during the quarter, interest rates were hiked once with further hikes planned for the future. Investors should keep a close eye on REITs that have not hedged their loans or have loans that are due for renewal soon. They should be the most affected by these rate hikes.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on DBS Group Holdings Ltd, Singapore Exchange and United Overseas Bank Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings Ltd.