Singapore stocks: mostly unexciting, ignored, and cheap in Asean

Singapore

THE Singapore market is now trading at cheap valuations relative to its Asean neighbours, but there is little reason for international investors to get excited.

Opportunities beckon in bigger markets like China, which is cheaper; and India, which is expensive but growing fast. Other high-growth Asean markets like the Philippines and Indonesia are also getting more attention.

Nevertheless, analysts and fund managers point to global cyclical stocks like airlines, soft commodities and real estate investment trusts (Reits) as interesting opportunities in the local market. They also like banks and telcos.

"Indifferent rather than cautious is the right word . . . On a relative basis, North Asia looks better," said Hozefa Topiwalla, Singapore-based Asean head of research and equity strategist for Morgan Stanley.

"Emerging market investors don't look at Singapore. Developed market investors - it's too small in the benchmark . . . It's so small, so far away. When the focus is on Europe, Japan and the US, Singapore falls through the cracks," he told The Business Times over the phone.

"For Asia ex-Japan investors, the focus is more on emerging Asean rather than developed Asean," Mr Topiwalla said. He is also "a bit cautious" on Asean this year due to high expectations, slowing growth, and high valuations.

Victor Wong, senior director of Asean equities at UOB Asset Management, pointed out that the MSCI Singapore Index, trading at 13.7 times forward earnings below its 10-year average of 14.3 times, looks attractive in the Asean context.

All other Asean markets are trading above their 10-year means, with the Philippines and Thailand trading at the upper bounds of their 10-year range, he noted.

"In terms of sector positioning, we are overweight on banks, telecommunications, healthcare and information technology in Singapore," Mr Wong said.

"We are overweight on the banking sector as the majority of Singapore dollar-denominated loans are priced at a floating rate and the recent increase in Sibor (Singapore interbank offered rate) will have a positive impact on net interest margins of the banks," he said.

"We like the telecommunications sector in Singapore due to the benign pricing environment. We expect growth in the healthcare sector to continue to be driven by a growing ageing population and advances in medical treatments."

Andrew Gillan, head of Asia ex-Japan equities at Henderson Global Investors, said that Singapore is traditionally known as a relatively cheap market that pays a good dividend yield relative to the region.

Mr Gillan, who oversees US$3.4 billion in Asia-Pacific ex-Japan stocks, has a higher percentage of money invested in Singapore in both the firm's growth and dividend income funds relative to what their benchmark indices would otherwise call for -- known in industry jargon as being "overweight".

He has been holding stocks like DBS, OCBC, Singtel, Ascendas Reit, CapitaMall Trust, and Mapletree Greater China Commercial Trust.

The local banks are at fair value relative to their profitability, he said. Their net interest margins are lower relative to the region, but they are well run and conservative, he added.

"Singapore banks kind of encapsulate Singapore and the stock market. If you're a long-term investor, you've made pretty good returns over the last 10 years with a reasonable dividend yield and good earnings growth. But there will be high-growth stories out there," he said.

Mr Gillan's key "overweight" position is in India. "It is not cheap, but I still think earnings growth and returns on equity that companies deliver are higher than what we can find elsewhere," he said.

In the longer term, the argument for being exposed to Asian stocks and currencies still stands, he said.

"Real interest rates are higher in Asia, so Asia has that policy flexibility," he said. Central banks in South Korea, Indonesia, India and China have cut rates to stimulate their economies in the past few months.

The easy money has been made in the US and investors will examine fundamentals like economic and population growth in the years to come, Mr Gillan said.

Asia stands in good stead where fundamentals are concerned, and Singapore can continue to tap Asian growth, he said.

Morgan Stanley's Mr Topiwalla said net profit margins for Singapore corporates have collapsed because of sluggish global growth since the global financial crisis. They are now at 8 per cent, compared to their 10-year average of 13 per cent. If one believes global growth has hit a bottom, then margins can grow looking ahead, which will improve earnings, he said.

He likes global cyclical plays like airlines, and thinks soft commodity stocks have also bottomed out.

Meanwhile, the fact that Sibor is rising ahead of the US Fed funds rate reduces the probability of a hard landing in the property market as the rising Sibor is a cooling measure of sorts, he said. The reduced risk of a property hard landing means a lower equity risk premium - which leads to higher valuations for equities.

"There'll be pressure (on property), for sure, but that's been discussed and debated for five years now. It's not a shock," he said.

DBS Group Research, meanwhile, is "overweight" China A-shares and H-shares, and neutral on most Asian countries including Singapore.

Statistically, Singapore is the most sensitive to a US rate hike among Asian countries, DBS said in a March 13 note.

Near-term, there is uncertainty, with the Singapore dollar having depreciated 5 per cent year to date and with Sibor having jumped.

Declines in orders, production output, and higher inventory levels suggest a weak outlook for manufacturing. "We maintain our 'neutral' outlook on the Singapore market with a year-end (Straits Times Index) target of 3,600 points," DBS said.

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