Singapore market reforms may lift sentiment in 2026 despite geopolitical, trade uncertainty

[SINGAPORE] Back in early June, I mentioned feeling a tinge of seller’s remorse after liquidating a small portfolio of US stocks that I had held since the global financial crisis. Looking back now, it was probably the right move.

While the S&P 500 index has continued marking new all-time highs in the face of controversial US trade tariffs and continued geopolitical tensions, markets close to home – where I have been investing – have also performed quite well.

Since the beginning of the year, the S&P 500 has advanced 16.2 per cent. The Stoxx Europe 600 index has performed almost in line, rising 15.7 per cent.

In Asia, the Nikkei 225 index is up 24.1 per cent, the Hang Seng Index is 28.1 per cent higher, and the Hang Seng China Enterprises Index has climbed 22.1 per cent.

Here in Singapore, the Straits Times Index (STI) is up 20.7 per cent.

Among the factors that might have helped keep global markets on an upward trend in 2025 are the huge investment flows into the artificial intelligence (AI) space, and a general softening of interest rates. It is also possible that we have not yet seen the full impact of the US tariffs on the global economy, as a result of “front loading” activity over the past year.

Things may take a turn for the worse in 2026, though. For starters, the US is likely to remain a source of global instability as it copes with internal political competition. Last week, US President Donald Trump addressed Americans in a live speech from the White House that was widely seen as an effort to boost his sagging popularity.

Among other things, Trump insisted that consumer prices are coming down and that the US economy is poised for strong growth. He also promised “warrior dividend” bonus cheques of US$1,776 to 1.45 million US military service members. The cheques are to be delivered before Christmas, and are supposed to be funded with revenues from the US tariffs.

Meanwhile, those tariffs have not stopped China’s overall exports from growing, as its shipments to other parts of the world have expanded. While many countries have not retaliated aggressively against the US trade tariffs, the combination of these tariffs and the flood of Chinese exports may eventually spur more protectionist attitudes around the world.

Increased trade frictions and less optimal supply chains could ultimately lead to higher costs and a re-acceleration of inflation.

There are also concerns that the AI boom has turned frothy. The Monetary Authority of Singapore (MAS) made specific reference in its Financial Stability Review last month to “novel and potentially circular private financing arrangements” by hyperscalers to fund their expansions.

MAS also warned that the strong gains by global equity markets, fuelled by technology and AI stocks, could now be susceptible to adverse events. “The continued divergence between equity market valuations and rising downside risks to growth raises the prospects of disorderly corrections in the event of shocks,” the authority said.

Reform support in Singapore

So, what can investors do to sidestep the global uncertainties and stretched valuations in the AI space? My own inclination is to tilt towards value-oriented markets and sectors.

One reason Asian markets performed quite well over the past year is that stock valuations were relatively low, and monetary policy was loosening. European stocks also attracted international capital flows as the region increased spending on defence and infrastructure.

In a recent report, JP Morgan recommended that investors look to Asean markets in the months ahead as a means of diversifying from global technology and AI plays. The research house said it particularly favours Singapore and Vietnam, for their supportive government policies.

This brings me to the equities market review group that MAS formed last year to come up with measures to revitalise the local stock market. While MAS issued the review group’s final report in November, some of its most significant recommendations will not be fully implemented until some time in 2026.

Notably, the “dual listing bridge” that will enable companies to simultaneously list on Nasdaq and the Singapore Exchange is expected to go live only in the middle of next year.

MAS is also still in the process of rolling out its S$5 billion Equity Market Development Programme (EQDP). So far, a total of S$3.95 billion has been allocated to nine fund managers.

Then, there is the Value Unlock programme, in which S$30 million of grants will help companies build competencies in corporate strategy, capital optimisation and investor relations.

The way I see it, the ongoing implementation of these various initiatives in 2026 will contribute to a broad undertone of bullishness in the local market, especially among the smaller cap stocks, despite all the geopolitical risks and trade policy uncertainties.

Optimistic, but discriminating

This would represent an extension of a trend that has unfolded in recent months. With dividends reinvested, the iEdge Singapore Next 50 Index has delivered a total return 25.5 per cent in 2025 (up to Dec 19), according to Bloomberg data.

Much of that return came in the latter half of the year, when the smaller cap index began a steep rally. For the whole of 2024, the Singapore Next 50 index chalked up a total return of minus 0.9 per cent.

The performance of the STI has been more consistent over the past two years. With dividends reinvested, the local benchmark index has returned 26.9 per cent in 2025 (up to Dec 19). This is slightly better than its total return of 23.5 per cent in 2024.

Yet, there was also a broader sense of optimism across the 30 components of the STI in 2025, with only three of them failing to achieve positive returns. Last year, 12 of the STI’s 30 constituents had negative total returns.

Total returns achieved by individual components of the STI continued to vary widely. So far, the best performer of 2025 is DFI Retail Group, a company that is steadily charting a course to higher profitability and larger dividend payouts.

With dividends reinvested, its shares have returned 108.7 per cent in 2025 (up to Dec 19). The next best performer is ST Engineering, with a total return of 79.2 per cent.

Among the banks – which account for more than half the STI – DBS’ strong underlying profitability and its commitment to steadily increase in its dividend payouts has kept its shares on an upward trend. So far this year, DBS shares have returned 33.6 per cent.

By contrast, UOB shares have returned only 1.6 per cent this year, reflecting the slump in its Q3 earnings as provisions for bad loans surged. Meanwhile, OCBC shares have returned 24.5 per cent.

With stock prices elevated and the market discriminating sharply between companies on the basis of their financial performance, investors should tread carefully in 2026. Besides hunting for shares that are reasonably priced, they should focus on companies that have credible and clearly stated plans to drive shareholder value.

The Mark To Market column will take a two-week break over Christmas and the New Year