Singapore equities well-placed to thrive
The country’s market is expected to perform well in both upside and downside scenarios within an uncertain global environment
SINGAPORE appears well-placed to weather a higher-for-longer rate environment, with high-yield, low-risk stocks positively levered to critical global investment themes of artificial intelligence and restructuring.
In the past 12 months, market expectations for the number of policy rate cuts to be delivered by the US Federal Reserve in 2024 has swung back and forth – from four to two, to six, and back to two. Global equity markets have whipsawed in unison, but Singapore equities as a whole have held relatively steady.
While we are certainly nearer to a rate-cut cycle than we were before, markets are more uncertain on exactly when, and in the meantime, Singapore’s high dividends and defensive qualities will likely prove valuable.
Currently, markets expect an imminent (starting September) but shallower (fewer rate cuts per year) rate-cut cycle than they did earlier, as US inflation has proved sticky. This likely means US 10-year government bond yields will stay persistently high for the rest of the year.
This higher-for-longer interest rate outlook bodes well for Singapore equities, which empirically outperforms other equity markets across Asia-Pacific ex-Japan when real and nominal US 10-year bond yields are high.
Well-placed for global uncertainty
Higher economic growth, continued disinflation, and the start of policy rate cuts in developed markets, provide a conducive backdrop for risk assets over the next six months. Beyond that, however, the outlook in 2025 seems considerably more uncertain, as much is contingent upon the outcome of the US elections, and as the market outlook on interest rates remains in flux.
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Singapore appears well-placed to thrive amid this cloud of uncertainty, and we think it will perform well in both the upside and downside scenarios laid out by our global economics team. In the team’s downside scenario, prolonged inflation pressures lead to higher US interest rates – a positive for Singapore. In the upside scenario, higher China growth (positive for Singapore) leads to, again, higher US interest rates – doubly positive for Singapore.
Topping the ranks among Asean markets, Singapore is the most preferred market in the region based on the Morgan Stanley Asia Equity Strategy team’s market preference order.
Cheap optionality
For a variety of potential global outcomes, Singapore offers cheap optionality, given low investor positioning and below-trend multiples – that is,12-times price-earnings multiple and 5 per cent dividend yield.
This is especially true following the MSCI index rebalancing event in May, which led to substantial passive outflows for five stocks removed from the Singapore Standard index. We see limited risks of further index deletions in the near term, and potential for new inclusions in the longer term.
In addition, proposals for increased market participation from growing private, pension and sovereign capital in Singapore are being reviewed by government authorities. If implemented, the proposals could boost market liquidity and valuation multiples.
Key themes: AI and restructuring
Within Singapore, we find stocks positively aligned with critical global investment themes, such as AI tech diffusion. Besides smaller-cap semiconductor stocks, listed within Singapore are larger-cap utilities companies and data centre owners and operators that stand to benefit from surging demand for AI infrastructure globally.
Growing demand for data centres across the region favours incumbent first-movers with existing operational expertise as well as power providers, as the rapid build-out of data centres likely tips many electricity markets into tightness.
Corporate restructuring is another key theme in place within Singapore that could be a major source of alpha not to be missed. Past examples have delivered about 100 per cent in total returns, and several companies – mostly Temasek-owned – are in the midst of their transformations.
Position in high-yield low-risk sectors
We recommend positioning in sectors and stocks that have positive exposure to the above-mentioned themes and offer high-yield, low-risk characteristics – high and growing dividends and low vulnerability to elevated interest rates.
The banking sector seems to fit these criteria the best, offering the highest dividend yields and the most positive correlation to higher interest rates among blue chip stocks. All three Singapore banks reported substantial earnings beats during their first quarter results, and Street earnings are being revised up.
Selected names within the telecoms, consumer discretionary, and utilities sectors also possess a similarly good fit, and are positively aligned to the themes of AI and corporate restructuring.
Among these sectors, we would lean towards members of the MSCI Singapore Index, which we believe will benefit from rotational flows from off-index alternatives, following the stock deletions announced in the May index review.
The writer is Singapore equity strategist, Morgan Stanley
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