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Broker's take: Morgan Stanley warns of 2 potential fragilities for Singapore's stock market


THE MSCI Singapore, a popular stock evaluation measure, is up 14.5 per cent year-to-date, but Morgan Stanley warned that the local bourse could have priced in most of the good news expectations around the better earnings outlook.

The US research house said in a report published on Wednesday that earnings estimate revisions are positive after five years of expectations erosion. Property is back in vogue, as evidenced by the 56 per cent on year rise in primary home sales through the first 7 months of 2017. High-frequency indicators have also generally positively surprised. Consensus estimates for Singapore's gross domestic product growth in 2017 have risen from 1.5 per cent in December 2016 to 2.5 per cent.

"But, two positive pillars have weakened: US inflation expectations and our global trade indicator,'' it said.

It noted that the return of inflation expectations from around October 2016 had been a clear tailwind for Singapore - particularly for banks with the expected return of pricing power. However, inflation expectations peaked in January 2017 while the market continued to soar.

"We suspect part of this can be explained by rising domestic growth expectations - for both the economy and earnings. But, we cannot rule out a rise in market volatility and downside risk should inflation expectations continue to fall."

As for global trade, it noted that the Morgan Stanley Global Trade Leading Indicator (MSGTLI) declined again in July, falling to 0.19, the lowest reading since late 2016, and a material decline from its February peak of 0.9. Despite a further fall, the absolute decline was more modest than in the past four months.

"That said, our macro team expects MSGTLI to moderate further in coming months because of base effects."

For a firmer conviction in the upside, Morgan Stanley said there must be signs of a tangible rise in Singapore Interbank Offered Rate (SIBOR) to support net interest margin (NIM) expansion expectations. There must also be signs of increased domestic property developer participation in more profitable land banking resulting in a growing revalued net asset value (RNAV). A translation of export/macro recovery into domestic consumption recovery must also be evident.

Until these signs are there, Morgan Stanley is "equal-weight" the Singapore market, with about 2 per cent downside to its index target.