Briefs

Cheap valuations, strong links to the global economy and better control over the virus outbreak are all seen working to the advantage of shares in the city-state, where cyclicals such as financials and real estate command a more-than-80% weighting in the benchmark index.

“We rate Singapore one of our most-preferred markets in the region” backed by “recession valuations” and expectations of an earnings recovery, said Hartmut Issel, head of APAC equities and credit at UBS Global Wealth Management.

Stocks whose fortunes are heavily tied to business cycles are gaining investor attention amid nascent signs of a revival in world trade, some improvement in Asia’s manufacturing gauges and promising updates by drugmakers racing to develop a coronavirus vaccine. Analysts forecast the Straits Times Index (STI) to climb about 15% over the next 12 months, versus an 11% gain seen for the broader MSCI Asia Pacific Index.

At about 84%, the weighting of cyclical stocks in the STI gauge makes for the highest exposure among major benchmarks in the Asia Pacific region. That is even after excluding pandemic winners like technology and communication services. Banks — 41%, real estate — 22% and industrials — 17% are the most dominant sectors.

HSBC Private Banking is betting on dividend-paying property managers as Singapore strives to resume business activities. Meanwhile, UBS favours banks, citing their regionalised business model, which means lenders will benefit once economies rebound. Any rise in US Treasury yields will also be a boon for their net interest margins.

That said, many things need to fall in place for a sustained rebound in the city-state's shares.

The trade-reliant economy shrank by a record margin last quarter, and the government expects a contraction of 5–7% this year. While only a handful of daily new virus cases are registered recently, Singapore has faced a tumultuous road coping with the issue, and Trade and Industry Minister Chan Chun Sing last month warned of “recurring waves of infection and disruption”.

Meanwhile, this year’s steep decline — the second-worst in Asia Pacific — has cheapened the valuation of shares. Down 21% so far, the STI gauge is trading at 0.9 times its estimated book value, versus an average of 1.2 over the past decade.

“If there is a rise in global rates coupled with a strong domestic economic and earnings recovery, the Singapore market could do well vis-à-vis the peers,” said James Cheo, HSBC’s chief market strategist for Southeast Asia. — Bloomberg

DBS receives approval to establish JV securities company in China
DBS Group Holdings has received approval from the China Securities Regulatory Commission (CSRC) to establish its joint venture securities company, DBS Securities (China).

DBS Securities, which the DBS Group will have a controlling stake in, will engage in the brokerage business, securities investment consulting, securities underwriting and sponsorship, as well as proprietary trading.

The company will be located in Shanghai, with a registered capital of RMB1.5 billion ($298.5 million).

The DBS Group holds a 51% stake in the joint venture company. Its other shareholders — Donghao Lansheng Investment Management, Shanghai Huangpu Investment Holdings (Group), Shanghai Huiyang Asset Management, and Shanghai Huangpu Guidance Fund Equity Investment — each hold 24.67%, 13.33%, 6.5%, and 4.5%, respectively.

According to a Sept 2 statement by DBS, the new securities company will be “an important part” of the group’s strategy in China.

“The ability to set up a securities company in China represents yet another key milestone, enabling us to make available the best of DBS’s capabilities and offerings, and provide customers in China with a full range of onshore and offshore financial services,” says DBS CEO Piyush Gupta.

“The establishment of DBS Securities will further support the long-term sustainable development of DBS Group in China and meet the changing needs of customers in multiple aspects. With the continuous expansion of DBS’s onshore business platforms, the Group is committed to providing more comprehensive financial services to Chinese customers,” adds Neil Ge, China head of DBS Group. — Felicia Tan

Decoupling with US will cut China’s growth to 3.5%, says Bloomberg study
The worsening conflict between China and the US has damaged bilateral trade, but a complete decoupling between the two largest global economies would be even more damaging to China’s long-term growth prospects, according to Bloomberg Economics.

The country’s potential growth rate could fall to about 3.5% in 2030 if it decouples with the US, Bloomberg economists Tom Orlik and Bjorn van Roye wrote in a note. That is down from the current forecast of 4.5%, which assumes relations remain broadly unchanged.

Such a decoupling — defined as ending the flow of trade and technology that boosts growth potential — would have a much larger impact on China than on the US as China gains more from cross-border exchanges of ideas and innovations. The US potential growth rate would be 1.4% in 2030 instead of the current forecast of 1.6%, the research estimates.

In this scenario, China’s productivity growth will slow due to the stop in technology transfer, and capital spending could also be weaker. However, the results would not be catastrophic as the country has substantially narrowed its technology gap with advanced economies over the last 20 years, the study published on Sept 3 argued.

“If China moved to increase domestic funding for research and development, and expanded its ties with other advanced economies, it could hope to offset a significant amount of the drag,” the economists wrote.

China already looks to be preparing for less connection with the global economy. President Xi Jinping’s new strategy positions the domestic economy as the main driver of growth, seeking to insulate the nation from a slowing global economy and rising hostility. While the details still need to be fleshed out, it is clear China wants more self-reliance in advanced manufacturing and technology innovation.

China would face even more disastrous consequences if the US can coordinate its key allies, such as Japan, South Korea, Germany and France, to also decouple. In that case, China’s growth potential could fall to 1.6% in 2030, and it would be harder for Beijing to offset with countervailing policies, according to the forecasts. — Bloomberg

Correction
In our story “Are diamonds an investor’s best friend?” (Issue 948, Aug 28) TLV Holdings does not sell costume jewellery, contrary to what was described. The error is regretted.