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Fighting chance to power ahead
SINGAPORE'S economy appears poised to enjoy another year of strong growth in 2018, powered by external and domestic demand. While this provides good support to the Sing dollar , there is limited scope for strong appreciation given that external uncertainties seem to be manifesting in policy caution. Meanwhile, we maintain a neutral stance on Singapore equities as the positives may have been largely priced in.
The Monetary Authority of Singapore's (MAS) recent policy statement suggests that discretion is the better part of valour, something that we would wholeheartedly endorse. Singapore's economy looks set to see pretty strong growth with both domestic and external sectors contributing meaningfully. Over 2017, the Singapore dollar (SGD) gained 8.5 per cent against the US dollar (USD) while Singapore equities were one of the best performing markets in South-east Asia.
With the positives largely priced in, one would be well advised to refocus on the shadier parts of the outlook. The biggest near-term bugbear remains the threat of US-China trade tensions spinning out of control and tripping up global growth. These global uncertainties should limit further gains for the SGD and Singapore equities for now.
Macro: On firm footing
After growing 3.7 per cent in 2017, Singapore has maintained its positive economic momentum into 2018 with advanced Q1 2018 GDP growth estimates coming in at an impressive 4.3 per cent year on year. While growth is anticipated to moderate in subsequent quarters, we still project the economy will grow at a healthy 3.3 per cent in 2018, which compares favourably to the official forecast range of 1.5 to 3.5 per cent. In particular, we expect to see an increasing contribution from the services sector, which could help offset slower manufacturing growth. In addition, the construction sector will likely improve given the pick-up in residential property segment.
However, a key risk for Singapore is the ongoing global trade tensions. Given Singapore's open and trade-dependent economy, a global trade war would be negative for economic growth. Notably, in the March 2018 survey of professional forecasters by the MAS, there was a greater share of respondents (88 per cent compared to just 40 per cent in December 2017) becoming wary of the downside economic risks stemming from increased trade protectionism. The near-term uncertainties could also make it more difficult for policymakers to restructure an economy that is faced with the challenges of slowing population growth, ageing demographics over the medium term and increased regional competition in the manufacturing sector.
SGD: Anchored by robust fundamentals
Given Singapore's robust macroeconomic fundamentals, the MAS recently tightened its monetary policy by shifting the slope of the SGD nominal effective exchange rate (SGDNEER) policy band from zero appreciation to "slight" appreciation. The central bank uses the exchange rate - instead of interest rates - as its main policy tool. The move was in response to the improving economy as well as rising inflation pressures. Notably, core inflation rose 1.5 per cent y-o-y in March 2018 even though it remains at a subdued level.
Despite the positive outlook, the MAS maintained a cautious tone as it highlighted the macroeconomic uncertainties posed by ongoing trade tensions. Thus, it will likely refrain from adopting an overly hawkish stance, especially when inflation is likely to remain moderate. For now, we are not pricing in further tightening at MAS's next meeting in October although it cannot be ruled out should global growth momentum pick up and trade tensions abate.
The market's reaction to the MAS move has been muted as the policy tightening was largely in line with consensus expectations. The SGDNEER is now about 1 per cent above the midpoint of the +/-2 per cent policy band and could continue to hover around the same level. The near-term trade and geopolitical uncertainties, however, could temper the market's inclination to push for SGD strength.
On balance, the SGD should remain fairly supported by the healthy economic fundamentals. While our three-month USD/SGD forecast of 1.31 suggests limited SGD appreciation for now, the SGD could start to trade stronger than our forecast, especially if broad USD weakness were to resume. Notably, the USD/SGD has exhibited strong positive correlation with the Dollar Index (DXY) over the past few years.
Singapore equities: Steady as it goes
Singapore equities have been resilient this year despite heightened volatility in global markets, gaining 4.8 per cent year-to-date (as of May 4, 2018), after a 25 per cent rally last year. We believe Singapore equities can continue to grind higher and deliver double-digit returns this year as a strongly supportive combination of rising interest rate environment, healthy global trade and improving domestic economic indicators are providing a tailwind to local equities.
Last year's rally in Singapore equities was driven by valuation multiple re-rating on recovery in global trade. However, we believe earnings will have to do the heavy lifting this year as valuations are already above historical levels with the MSCI Singapore Index trading at a 12-month forward P/E of 14.0x, above its 10-year average of 13.3x.
Apart from the rising interest rate (Sibor) environment benefiting the banks, positive sentiments in the domestic property market and higher oil prices are driving a rebound in earnings for property developers and offshore oil and gas plays, respectively. In fact, MSCI Singapore has witnessed the second strongest earnings growth revision among Asian countries over the past three months (+2.3 per cent) and the market is likely to deliver 13.5 per cent earnings growth in 2018. As the year progresses and earnings come through, we believe the Singapore market will grind higher.
However, the gains could be moderate for the rest of 2018 as we believe most of the positives have already been priced in, given the strong market returns so far this year. We expect Singapore equities to perform in line with Asian equities. The risk remains on the trade front. If the US were to adopt a trade protectionist approach, it would likely negatively affect sentiment on Singapore equities through a slowdown in global trade. However, we see limited potential for direct trade sanctions on Singapore as it is actually running a trade deficit of around US$20 billion with the US.
In terms of sectors, we expect modest gains in the financial stocks, which have posted a strong 12 per cent rally year-to-date. The fundamental outlook remains robust given the strong credit growth environment, improving asset quality and margin expansion, leading to ROE uplift. However, in the wake of the sharp re-rating, prospects for further upside appear limited.
We believe property stocks are attractive as the current valuations may not have priced in the robust transaction volumes and rising home prices (+3.1 per cent quarter-on-quarter in Q1 2018). On Reits, rising interest rates are likely to continue to weigh on valuations. As such, the potential for capital appreciation appears limited. However, for income-oriented investors, we believe an average dividend yield of 6 per cent will still be attractive.
- Eddy Loh is senior investment strategist, Suresh Tantia is investment strategist and Julian Wee is investment strategist at Credit Suisse.