Singapore stocks’ best rally in years may have legs as potential US interest-rate cuts burnish the appeal of the high-yielding market.
Growing confidence that US interest rates have peaked may drive investors to the city-state’s high-yielding real estate investment trusts (REITs) and bank shares. Traders are betting that the Federal Reserve will begin easing policy in September.
The Straits Times Index (STI) has risen nearly 7% this year, helped by gains in lenders amid strong dividend expectations. Brokerages including UBS Group and JPMorgan Chase & Co. recently upgraded Singapore’s equities to neutral as valuations have become less stretched while earnings momentum in index heavyweights remained solid.
“The attractiveness of the Singapore equity market is the currency and dividend yield,” said Paul Chew, head of research at Phillip Securities. “Slowing global growth and potential for interest-rate cuts will see investors rotate to a lower-beta country such as Singapore.”
The benchmark STI provides yields of more than 5%, which is higher than what most regional markets offer, according to Bloomberg-compiled data. Valuations are still reasonable even after the recent rally, with the gauge trading at 10.9 times forward earnings, below its five-year average of 12.3 times.
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While interest-rate cuts may weigh on banks’ margins, analysts said shares of lenders can continue to outperform if policy easing stimulates wealth management fees and loans growth.
Given “visibility that the net interest margin is at least going to hold until the end of the year”, dividend payouts by Singapore banks look sustainable, said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management. Lenders are also “sitting on excess capital”.
Lower borrowing costs also bode well for the country’s real estate sector, while a slump in Singapore’s REITs over the past few years is making them more attractive.
See also: Singapore market to offer stability amidst global volatility in 2023: OCBC
To be sure, the Southeast Asian country will not be spared in an environment of rising geopolitical tension. A potential victory for Donald Trump in the upcoming US election could pose significant risks for Singaporean REITs and manufacturing firms that derive some revenue from China.
“The yield angle is still working out quite well” for Singapore stocks, said BNP Paribas’ Chen. “Singapore is one of the countries seen as a stable proxy to the region” and some international funds are looking to expand their exposure in this market.
Chart: Bloomberg
