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Singapore: The Road Ahead

Singapore: The Road Ahead

  • 23 August 2021
  • By OCBC Singapore
  • 15 mins read

Singapore recently celebrated her 56th National Day with the new theme song titled “The Road Ahead”, which aptly holds much relevance to Singapore’s economy and equity market.

While the small nation had attained three-quarters of positive GDP growth, the focus on the road ahead is still necessary for the country to plan for the new norm and navigate the economic challenges.

The government has pledged to support industries during this challenging period and has provided incentives for companies to digitalize and be part of the country’s smart nation initiatives.

Meanwhile, there is rising optimism that the economy could re-open as restrictions ease and daily activities resume progressively.

Singapore’s Ministry of Trade and Industry raised the GDP growth forecast for 2021 to 6-7%, up from the previous 4-6%, as the economy outperformed expectations in the year’s first half.

STI’s resilience despite market rout

As a small economy, Singapore’s equity market is typically sensitive to regional and global volatility.

In July, the Chinese government’s crackdown on technology, education, property and food delivery sectors had caught many investors by surprise.

Undoubtedly, concerns from investors had a ripple effect on Asian equities. Market sentiment also turned cautious on stricter regulations across broader sectors that could weigh on equity valuations.

However, Singapore’s Straits Times Index (STI) showed resilience despite the volatility and posted 1.17% gains in July 2021 alone. STI is also among one of the best-performing markets on a year-to-date basis that clocked double-digit growth.

Source: Bloomberg

Most sectors in Singapore are expected to see decent growth rates in 2021 and 2022, and we project earnings growth for major sectors – such as financials and property – to be at 7.9% and 10.8%, respectively.

MSCI World Index’s 12-month target has now surpassed pre-Covid levels and is on the uptrend since the low in April 2020. The positive outlook suggests that the market is optimistic on equities, riding on the re-opening theme.

Source: Bloomberg

Banking on dividends

Banks worldwide have performed well with global economies positioned for recovery, boosted mainly by improved earnings and transactions.

As investors turned their attention to cyclical stocks when the economy is doing well, the stocks of Singapore's three listed banks have clocked positive returns.

The key financial indices have seen year-to-date gains of between 5 to 29%, while the MSCI Singapore Financials Index stood at the upper range of 21.9%.

Second-quarter results for all three local banks were higher than expected and made a strong comeback in their dividend payout due to solid capital positions and a positive economic outlook.

Fuelling to the strength, the Monetary Authority of Singapore (MAS) lifted the dividend restrictions for financial institutions in July, which was well-received by investors as banks can now pay their full dividends for the 2021 financial year.

What does this mean for investors?

The Covid-19 delta variant poses a significant threat to the Asia region, with several countries back on a lockdown that can potentially derail economic growth. Despite the short-term volatility, we believe that the recovery theme is still intact as fundamentals are improving. We prefer a strategy to hold a portfolio of growth and cyclical stocks.

With that, Singapore’s equity market is likely to prove its resilience in tandem with the lyrics of the theme song –

“Come whatever on the road ahead. We did it before, and we’ll do it again.”

Here are some stock picks that investors may consider:

Ascendas REIT is the largest industrial REIT listed on the Singapore Exchange in asset size and market capitalization. Rental reversions remain robust at 8.9%, while portfolio occupancy rose 0.7% quarter-on-quarter. In addition, dividends per unit saw a 5.4% increase year-on-year to 7.66 cents. The proposed redevelopment of its Science Park will boost the value proposition of the property’s portfolio.

SingTel is one of the largest listed companies on the Singapore Exchange by market capitalisation and has a vast network of offices through Asia, Europe and US. The company’s Q1 revenue grew by 8% year-on-year with broad-based growth across various business segments, and we expect recovery to be underway. Meanwhile, we are encouraged by the strategic initiatives highlighted last quarter and the management’s focus on raising the return on invested capital.

SATS Ltd provides food solutions and gateway services and specialises in airfreight, airline catering, food distribution, logistics and passenger services. The non-travel business grew 22.6% year-on-year and made up 46% of the company’s total revenue. We believe that non-travel business will remain a key revenue driver as it will take time for travel-related business to recover.

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