Singapore stocks’ showing may hinge on reforms in 2025, but outlook for some sectors look bright

ANALYSTS expect Singapore stocks to outperform and see significant upside in 2025, but there is a caveat: This is likely to happen only if market reforms are put in place to raise their relative valuations.

Macquarie analysts expect companies to post an estimated 5 per cent rise in earnings-per-share growth, bringing the benchmark Straits Times Index (STI) to their base target of 4,000. Meanwhile, positive “value-up” style reforms could lead the index to a bull case target of 4,410.

“Practically, given the huge weight of financials on the index, much of the upside hinges on whether the banks can continue to rally,” they said in an outlook note in December, adding that they were “constructive” on Singapore equities.

As at Dec 30, the STI stood at 3,795.73, up 17.1 per cent year-to-date. It currently trades at 12.7 times earnings.

Meanwhile, Morgan Stanley analysts said that in their base case, Singapore stocks could trade at an above-trend level of 14 times earnings – or 16 times earnings in their bull case – in response to market reform announcements.

“The combination of seemingly stronger political will and low market expectations drives our conviction that soon-to-be announced initiatives will likely have a meaningfully positive market impact, even if their exact details are still to be fleshed out,” the analysts said.

“We believe new measures will focus on improving stock trading liquidity likely through an injection of capital (possibly from Central Provident Fund), and valuation multiples could rise as much as 20 per cent to narrow the gap to global peers,” they added.

The bullish outlook comes after the Monetary Authority of Singapore in August set up a review group to recommend measures that will strengthen the local stock market.

Second Finance Minister and chair of the review group Chee Hong Tat later in September said regulators are ready to make bold changes and focus on Singapore’s unique value proposition to investors and companies seeking to list.

Industrials and banks rise

As for individual sectors, equity analysts appear bullish on industrials and banks in 2025.

Maybank analyst Krishna Guha chose Sembcorp Industries as a key stock pick for the industrials sector.

In a December report, Guha focused on the fact that Singapore has been taking steps to achieve net-zero emissions by 2050, and has made moves to increase power import capacity from Malaysia and Australia.

Sembcorp’s long-term performance will depend on policy, and progress is often non-linear as key technologies are adopted or become obsolete, he said.

“For example, the current global energy infrastructure and value chain have been established over the last century and can only be supplanted slowly,” he added.

As Singapore’s demand for electricity steadily increases from digital sectors, advanced manufacturing, transport and food processing industries, this will continue to benefit the company.

“(Sembcorp’s) nimble contracting strategy for the gas business allows it to benefit from gas price fluctuations,” he said.

The report also stated that the company’s return on invested capital is expected to improve from 5 per cent to 10 per cent by FY2025.

Meanwhile, RHB analyst Shekhar Jaiswal upgraded the banks to “overweight” from “neutral”, after upgrading UOB to “buy” from “neutral”. His top picks in the sector are UOB and DBS.

“We think market volatility may persist following the 2024 US presidential election and shifting expectations on the US federal funds rate path, among other factors,” he said, adding that Singapore banks offer investors a “solid defensive option” to tide through the uncertainty.

On Dec 18, the US Federal Reserve lowered its policy rate by 25 basis points to a range of 4.25 to 4.5 per cent. However, central bankers also forecast that there could be fewer rate cuts in 2025 as inflation remains stubbornly high.

Furthermore, Jaiswal noted that dividend yields from the banks still look attractive, with room for yields to compress as rates fall. The banks also have excess capital that they could return to shareholders.

“With Basel III reforms having gone live and Singapore banks reporting fully phased-in CET-1 ratios of more than 15 per cent, above the comfortable business-as-usual operating level of about 13.5 to 14 per cent, we believe capital returns will be one of the key thesis for Singapore banks next year,” he said.

He added that investors will be looking out for details on the banks’ capital management plans in the fourth-quarter reporting season.

Telecoms is another sector that could do well in 2025.

CGS International analyst Kenneth Tan said that while market conditions remain tough as players compete in the value segment, he remains watchful of potential consolidation between StarHub and Keppel subsidiary M1.

He added that a “reasonably valued” acquisition of M1 could drive a re-rating of StarHub’s shares.

“StarHub seems well positioned to engage in M&A opportunities given its healthy balance sheet and large domestic scale, while Keppel continues to remain laser-focused on executing its S$10 billion to S$12 billion medium-term asset recycling target,” Tan wrote in a December report.

Still, he said that Singtel remains his preferred pick as there are multiple drivers spurring growth in its core businesses as well as its associates.

“In addition, we see room for further asset monetisation initiatives ahead as Singtel works on its S$6 billion medium-term asset recycling target. With free cash flow set to improve meaningfully in FY2026, coupled with value unlocking opportunities, we see scope for Singtel to potentially engage in large share buybacks to further return excess capital to shareholders,” he added.

The launch of its Tuas data centre will also position the company well to sail on longer-term artificial-intelligence tailwinds, and will drive growth in earnings before interest and tax.