Singapore equity prices look appetising but investors not biting

Singapore

RENEWED US-China trade tensions have seen regional equity markets undergo a correction in May, and this has resulted in the Singapore market having among the cheapest valuations in Asia.

But investors do not appear to be seizing the opportunity just yet, preferring to wait for the clouds to clear over the trade impasse.

The continued hostility between the US and China over trade (and now technology) could mean that the markets here and in the region may face further volatility and downside risks.

"Uncertainty is likely to continue until Trump and Xi meet at the G20 meeting at the end of June. Until then risk-off sentiment could continue to persist in the market," KGI Securities' head of research Joel Ng told The Business Times.

Investors and fund managers are "waiting for another December", Mr Ng added, referring to last year's fourth quarter sell-off in global equities, which in turn, preluded the stock rally from the start of the year up to early May. "Funds and investors who have made good profits on the market rally may be waiting for more attractive entry points."

DBS Group Research equities strategist Joanna Goh wrote last Friday that the Singapore equity market is likely to experience a further downside of less than 10 per cent, with recent escalations largely priced in.

Credit Suisse senior investment strategist Suresh Tantia agreed, but added that the local market has "yet to price-in the effect of full scale trade war".

HSBC Private Banking's chief market strategist for South-east Asia James Cheo said in an outlook for the second half of the year that Singapore's exports have been affected by the slowing global electronics cycle and trade tensions, and the city-state's current weakness in exports could persist if US-China trade relations remain tense.

KGI's Mr Ng also pointed out economic data for the second quarter, which is expected to be weaker, may serve as downside catalysts for risk assets in the coming weeks.

Despite price corrections, global markets are trading at or close to the 10-year price-earnings ratio, Carmen Lee, the head of OCBC Investment Research, said. As at Friday, the MSCI World Index traded at 15.4 times price-to-earnings, while the index's 10-year average was 16.6 times.

Hong Kong's Hang Seng Index is Asia's lower bound with price-to-earnings of 10.5 times and Malaysia's Kuala Lumpur Composite Index at the other end at 20.2 times.

Singapore's Straits Times Index (STI) is trading at 12.9 times price-to-earnings which, Ms Lee said, puts the blue-chip index at the lower end of the regional range, making it comparatively cheaper than most Asian peers.

With the STI's 10-year historical range of 12.5-14.5 times and average of 13.5 times, the local benchmark index is close to the lower end of its 10-year range, Ms Lee added.

The Singapore market is also helped by a number of supporting factors. Among them, DBS's Ms Goh highlighted is its dividend yield, the highest in Asia.

Mr Cheo said HSBC Private Bank is currently "overweight" on Singapore equities due to the market having high dividend yields, stable earnings growth and attractive valuations when compared with Asean peers.

Ms Goh said should trade relations between the US and China head further south, Asean countries may benefit from trade diversion opportunities and so would Singapore by virtue of being a regional hub.

"Should a worst case scenario of a full-blown trade war pan out, Singapore should still be deemed as fairly defensive among Asian countries with its sustainable long-term growth policies and attractive valuations."

While the local market appears cheap, it lacks strong catalysts in the near-term, Credit Suisse's Mr Tantia said. Instead, among Asean markets the Swiss bank prefers Indonesia, which is poised to grow at 5 per cent this year. Mr Tantia added it is largely insulated from the US-China trade dispute and its valuations appear attractive following a recent pullback.