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Wealth Insights Podcast 2

January 2023

Can the Singapore market overtake its peers in 2021?

Carmen Lee,
Head, OCBC Investment Research,
OCBC Bank

What a difference a year makes!

Last March, the world was in the grip of the widespread pandemic. The repercussions on global markets were harsh as economies shut down and economic activities almost came to a halt.

There were many firsts in 2020, including the unprecedented and concerted effort by central banks to support their economies amid a lockdown that threatened to drag the world into one of its worst recessions in recent history.

However, by the end of the year, things were somewhat different.

Global markets showed an impressive V-shaped recovery as equities rallied on optimism of an economic recovery in 2021. High-growth sectors led the gains in 2020 and successfully bucked a downtrend due to the quick rotation into companies which were able to leverage technology and bring their products and services online.

Global markets ended 2020 with a gain of 14% (based on the MSCI World Index), and the Growth Index led markets with a spectacular gain of 33% (based on the MSCI World Growth Index). Value stocks (based on MSCI World Value Index) fared poorly and fell 4% in 2020, largely as most companies within this space were hurt by the pandemic.

Singapore was not spared

In Singapore, with the high concentration of value and cyclical stocks, it was not surprising that the Straits Times Index (STI) fell 12% in 2020. Earnings for many sectors were hurt by the pandemic as investors turned their attention to companies which were able to benefit from the digitalisation of their businesses or firms that were able to ride the work from home theme.

Sectors that were badly affected in 2020 included the aviation, banks, energy, hotels, industrial and tourism stocks. With the lack of earnings visibility and the duration of the pandemic, cyclical and value stocks suffered the brunt of the selling pressure in 2020.

Vaccines open the path for re-opening

But things could be looking up for Singapore.

With the roll-out of vaccines globally, the possibility of markets re-opening is sparking optimism. Global economic growth is poised for a strong turnaround in 2021, from the sharp global downtrend in 2020, and is good news for Singapore’s export-oriented economy.

This is likely to bring about a recovery in earnings, especially for cyclical stocks, after the dismal performance in 2020. Earnings recovery should also be an impetus for renewed interest in value stocks, in line with the global move into value stocks.

The Value Index is up 9% currently versus a 1% decline for the Growth Index. The MSCI World Index is up 3.9%, with gains coming largely from value stocks.

The Singapore market has a high proportion of value companies and with the rotation out of growth stocks into value stocks this year, the STI has done well and is up 9.3% year to date, versus only 5.1% for the world index, outperforming several regional and global markets.

And the conditions are there for the Singapore market to continue this outperformance.

Underappreciated stocks could come be in focus

The two key pillars of the Singapore market are banks and real estate companies.

Last year, the FTSE ST Financials Index fell 9%, while the FTSE ST Real Estate Investment and Services Index fell 19%.

Amid the current positive sentiment, supported by the impending turnaround in economic activities, we believe that these under-appreciated sectors are likely to be re-rated in coming months.

With an improving outlook due to the vaccine rollout, earnings outlook is looking positive and this could help draw interest back to Singapore stocks.

Sectors that were especially hit in 2020 are likely to see renewed interest in the next 12-24 months, as companies within these sectors gradually witness a recovery in earnings.

As travel restrictions get lifted, there should also be a rise in tourism-related activities, and this should benefit the hotel, retail and other tourism-related sectors.

Financial institutions should also see higher transactions from an economic recovery. Medical tourism could possibly resume.

The local Oil & Gas sector, which fell 24% last year, could also see some interest from higher oil prices. The Real Estate sector, which fell 19% last year, could also see some re-rating.

UStrike a balance between growth and value stocks

The secular long-term trend is being supported by more companies adjusting, adapting and adopting new technologies for their businesses. Consumers are also rapidly accepting and adapting to e-commerce and online services and products.

On the whole, while the economic recovery is likely to be uneven, the longer-term benefit as travel and movement restrictions are lifted should aid global trade and growth. This should benefit both value and growth stocks.

While we are positive on the rotation into cyclical sectors, we believe that it is also prudent to ensure that your investment portfolio is robust. Investors should have a balanced portfolio of growth and value stocks to tap on the longer-term economic recovery theme.

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