Singapore equities: Shelter in the storm
WE see Singapore equities as a safe haven amid choppy global markets in the next 12 months, with bank stocks likely to lead the way.
Safety amid global uncertainties
“Tempest” is the word our global cross-asset strategy team describes the current global investment climate. Global markets are grappling with growth moderation as fiscal stimulus rolls off, rising interest rates as central banks tighten monetary policy, and higher inflation driven by supply shocks created by events in Ukraine and China.
Singapore’s FTSE Straits Times Index is among the few major indexes within Asia Pacific, and within developed markets globally, that have remained in positive territory so far this year. While interest and inflation rates in Singapore have risen more quickly than we had expected, Singapore’s macro conditions appear relatively robust. We see Singapore equities as well-placed to weather the storm, and we see further upside over the next 12 months.
Above-trend growth in 2022
Singapore is set for a second straight year of above-trend GDP growth in 2022, in our view, despite headwinds from China’s growth slowdown and higher oil prices. The Monetary Authority of Singapore expects growth of 3-5 per cent this year, underpinned by recovery in the domestic-oriented and travel-related sectors as Covid-19 measures and border restrictions are lifted.
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In April, Singapore’s borders were opened to fully vaccinated travellers; group size limits for gatherings and capacity limits for office workers were also lifted. Most Covid-19 restrictions have been eased in an approach to treating the virus as endemic as daily infections subside, and healthcare capacity remains sufficient.
Reopening progress could further support ongoing steady gains in the domestic labour market, where unemployment rates have receded to pre-Covid levels of around 2 per cent in March, according to data from the Ministry of Manpower.
As the status quo reverts closer to pre-Covid norms, we think recovery in economic activity will support market confidence and sustain corporate earnings growth. Singapore equities in aggregate are likely to sustain around 20 per cent p.a. earnings growth through 2024, based on our EPS forecasts for the MSCI Singapore Index, exceeding many DM and regional economies, and about twice as much on average.
Interest rates to rise, but more slowly than in the US
We expect corporate earnings to grow amid a relatively benign rise in interest rates. This limits the risk of large cuts to consumer spending, as well as to corporate investment activity and margins.
Singapore’s 3M Sibor (Singapore Interbank Offered Rate) has risen from 0.4 per cent at the start of the year to 1.2 per cent currently, and our economics team for Asia expects it to rise to 1.9 per cent by the end of the year. The expected 150-basis points (bps) increase is a meaningful amount, yet it is far more moderate compared to our US economics team’s forecast of a 250bps increase in the Fed Funds Target Rate.
The reason for a relatively slower climb in interest rates is because of MAS’s tightening of monetary policy to combat imported inflation - by targeting more Singapore Dollar (SGD) appreciation relative to a trade-weighted basket of currencies, rather than targeting interest rates directly.
We believe the relative strength and stability of the SGD encourages capital flows to SGD assets, including Singapore equities, and supports our constructive view of the market.
Banks to lead the way
Within Singapore equities, we believe bank and energy stocks will likely outperform the property sector as interest rates rise and high inflation persists.
Singapore banks, in particular, seem well-positioned given current macro conditions. Their historical share price performance shows a positive correlation with GDP growth, interest rates and SGD appreciation, while showing little correlation with inflation over the past 20 years.
Rising interest rates work in favour of positive earnings momentum for banks, in our view, and could drive more positive earnings estimate revisions from here as the near-term outlook for their net interest margins improves further.
Banks also offer positive earnings exposure to reopening progress in the region, similar to stocks in travel-related sectors, while providing more growth certainty and better trading liquidity.
In fact, banks’ ability to sustain earnings and dividend growth may prove especially valuable amid high inflation. It’s for this reason we believe they could serve as more viable alternatives to stocks in the real estate sector as an inflation hedge.
Singapore’s 3 major local banks offer an average 1-year forward dividend yield of 5 per cent, on average growing dividends by more than 10 per cent each year over the next 3 years, according to our banks analyst’s forecasts. This seems to be a more favourable return profile compared to most large cap Singapore Reits.
The writer is a Singapore strategist at Morgan Stanley.
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