OCBC Investment Research (OIR)’s Singapore strategist Carmen Lee remains optimistic towards the Singapore market due to the presence of steady economic growth and improving sentiment in Asia.
In view of these positive outlooks, Lee is confident that the Singapore market will provide “decent” total returns.
“In recent months, it has become increasingly challenging to navigate the changing investment landscape, especially for a small open economy like Singapore,” says the analyst in her report dated June 25.
Despite this, the analyst notes that Singapore’s official government growth forecast remains intact at 1% to 3%, boosted by expectations towards manufacturing and trade-related sectors seeing gradual improvement.
Lee also cites improving tourism levels in Singapore as an important catalyst for benefitting retail and food sectors where higher spending levels could boost support payment channels and credit card-related businesses.
That said, she adds that “higher for longer” US interest rates could heavily impact geared industries and sectors, resulting in higher operating costs and limiting further investment or expansion plans.
Singapore’s 1QFY2024 gross domestic product (GDP) growth stood at 2.7% y-o-y, as reported by the Ministry of Trade and Industry (MTI). This growth in 1QFY2024 was supported by finance and insurance, transportation and storage and wholesale trade sectors, writes Lee.
Additionally, the analyst notes due to an upward revision of China’s GDP growth rate where consensus GDP growth for China improved from 4.5% at the start of 2024 to 4.9% currently, sentiments towards Asian equities have improved.
“Market sentiment in Singapore is also heavily dependent on its neighbours and the improving sentiment augurs well for regional trades, making this region an attractive investment hub,” adds Lee.
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The analyst also highlights the strong outperformance achieved by Singapore banking following record profits and bumper dividends.
On the stock market front, the benchmark Straits Times Index (STI) announced gains of 2.3% in 2024, as of June 24.
“The “higher for longer” interest rates environment has proven to be conducive for financial companies but posed several challenges for companies with high gearings or extensive loans or stocks offering higher yields,” writes Lee
She adds that this “stellar” performance of Singapore banks is also reflected by the FTSE ST All-Share Financials Index (FSTFN) which surged 11.5% ytd, outperforming several key Asian equity indices and global banking sector indices. This excludes an attractive dividend yield of 5% to 6%.
The analyst identifies several factors driving this outperformance, including the strong improvement in net interest margin (NIM) supported by the higher interest rates environment. For 1QFY2024, DBS and UOB reported a NIM of 2.16% and 2.09% respectively,
Lee also cites higher fee income as a contributing factor, highlighting the strong growth in credit card income following increased tourism and mega concerts throughout the region. DBS and UOB saw a 22% and 65% increase in credit card income respectively in FY2023.
Going forward, the analyst says that following increasing regional trades and growing interconnectivity, “Singapore banks should be able to leverage on their regional footprints to continue to expand their business reach and embark on more cross-selling opportunities”.
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Additionally, Lee notes that valuations remain inexpensive with the STI offering the highest dividend yield of 5.8% among key Asian markets which boosted total returns, giving a fairly decent return of 8.0% in 2024 so far.
Singapore remains a particularly “attractive” market for ease of doing business, writes the analyst.
“With rising geopolitical risks elsewhere in the world, this region being comparatively more stable will continue to attract companies,” she adds.
The STI currently trades at 10.5 times FY2024 price-to-earnings (P/E) and 10.2 times FY2025 P/E while earnings growth is projected at the single-digit level for 2024 and 2025, which is “decent” for a stable economy.
In terms of price-to-book (P/B), STI is trading at the lower end compared to its regional peers and below historical 10 year average at 1.1 times P/B.
The analyst maintains an overweight position on the Singapore market with her preferred picks including banking, tourism-related, domestically focused and certain industrial stocks.
