«We fear banks’ performance could be vulnerable to fund outflows, as the sector has been the key recipient of inflows from institutional funds over the past few years,» Daiwa said in a note.

Japanese investment bank Daiwa downgraded Singapore banks to Neutral from Overweight and deleted DBS from its portfolio as the investment bank positioned away from rate-sensitive plays.

It pointed to the U.S. Federal Reserve’s recent signalling that it would hit the pause button on its interest rate hiking cycle.

Vulnerable to Fund Outflows

«We fear banks’ performance could be vulnerable to fund outflows, as the sector has been the key recipient of inflows from institutional funds over the past few years,» Daiwa said in a note this week. It noted institutional funds have sent S$3.1 billion into the bank stocks over the past three years.

«We fear the boat has titled too far to one side and any reversal of fund flows could accentuate the underlying price movements with the sector,» Daiwa said.

DBS Has Greatest Sensitivity

In addition, analysts in general have been cutting banks’ earnings forecasts for the past few months, it said. That spurred the removal of DBS from the top picks list.

«At the individual bank level, DBS has the greatest sensitivity to the level of SIBOR rates due to its current and savings account (CASA) deposit base in Singapore,» it said. It pointed to a «strong correlation» between SIBOR and the U.S. Federal Funds rate.

UBS Remains in the Portfolio

But it kept UOB in the portfolio as the banks are index heavyweights and UOB is well-capitalized and the bank thinks it offers the greatest capacity to pay higher dividends and also has the least exposure to Greater China.

Concerns over interest rates also spurred, in part, Daiwa’s cut to its Straits Times Index target for end-2019 to 3,330, down from a mid-2019 target of 3,485.

Adding Telecoms

To compensate for cutting the bank outlook, it upgraded consumer goods to Overweight from Neutral, particularly on a more positive outlook for crude palm oil (CPO) prices.

It also said it preferred adding telecoms to the Singapore REITs, as it estimated the telecoms offer better dividend yields. It added NetLink NBN Trust to its picks as it offered a slightly higher yield spread of 3.6 percentage points than the REITs’ average.

Preference for City Developments

Overall, Daiwa remained Neutral on property developers as the sector has rebounded from lows, but it kept a preference for City Developments.

This article has previously been published on Shenton Wire.