Singapore – A Market Not To Be Underestimated Part 1 May 23, 2017
Singapore – A Market Not To Be Underestimated Part 1
Author : iFAST Research Team

Singapore – A Market Not To Be Underestimated Part 1

• Singapore equities, as represented by the Straits Times Index (STI), rallied 13.7% (13.1% in local currency terms) year-to-date as of 19 May 2017

• Economic growth in 4Q 2016 and 1Q 2017 were driven by stellar growth in the manufacturing sector which grew 11.6% and 6.6% respectively

• Significant growth in the electronics and precision engineering manufacturing clusters likely to continue to far outweigh declines in the general manufacturing and transport engineering clusters

• Apart from strong manufacturing sector growth, growth in several other sectors likely to improve and offset the weaker sectors

• Economic growth in 2017 may be better than consensus expects and should support valuations and a higher market

STI's Strong Rally Year-To-Date

Chart 1: STI's performance over the past 10 years.

The Straits Times Index (STI) has staged a strong comeback this year, rising 13.7% year-to-date as of 19 May 2017. Much of this increase was attributed to the 13.1% rise in the index in the first quarter of 2017 and its 1-day uptick of 0.9% on 2 May 2017, the first trading day after Prime Minister Lee Hsien Loong delivered his annual May Day Rally speech. In his speech, PM Lee had fed investor sentiments when he expressed that there is a “good chance” of domestic economic growth exceeding 2% this year, which is the upper end of the government’s official GDP growth forecast of 1-3% for 2017. In addition to positive sentiments regarding the city’s growth outlook, Singapore equities’ performance in the year thus far was further supported by expectations of improved global economic activity. The cyclical banking sector’s stocks had not only benefitted from improved sentiments regarding domestic and global economic growth, but also continued expectations of higher interest rates ahead. Furthermore, DBS’s, UOB’s and OCBC’s recently announced 1Q 2017 earnings, which revealed a 1%, 5% and 14% year-on-year increase in net profit respectively, had further supported investors’ optimism. Meanwhile, the easing of some cooling measures and expectations of an improved outlook for the sluggish property sector had propelled the share prices of property-related stocks as well. As of 10 May 2017, a significant 25 out of 30 stocks in the STI were trading at prices higher than at the start of the year.

With such a strong performance, do we still think the Singapore market presents an investment opportunity today? In explaining our continued positivity towards the Singapore equity market, we will cover, in two parts, a review of the Singapore economy which we believe will surprise to the upside and thus be a potential catalyst for the market over the next few quarters; as well as take a look at the market’s valuations, earnings and dividend yield estimates, which look attractive at this juncture.

Economic Growth Well-Positioned To Positively Surprise

Chart 2: Recent Strong GDP Growth
Chart 3: Manufacturing Sector Contributed Bulk Of Growth In 4Q 2016 & 2016

In the most two recent quarters, 4Q 2016 and 1Q 2017, Singapore’s economy had grown 2.9% and 2.5% (advanced estimates) year-on-year respectively, which were the highest growth rates captured by the domestic economy in the last 9 quarters. Much of the strong growth can be attributed to the manufacturing sector, the largest (contributes to around 20% of the city’s nominal GDP) and fastest-growing sector in the last two quarters.

Table 1: Manufacturing Growth Driven By Electronics & Precision Engineering Clusters, Weighed Down By General Manufacturing & Transport Engineering Clusters

Manufacturing Clusters
Weights (%)
4Q2016 YoY Growth (%)
1Q2017 YoY Growth (%)
General Manufacturing Industries
Biomedial Manufacturing
Biomedical Manufacturing
Transport Engineering

Source: Singapore Economic Development Board (EBD), iFAST compilations. 1Q2017 numbers are advanced estimates.

The largest sector in the economy, the manufacturing sector, surged 11.5% year-on-year in 4Q 2016, the highest growth rate since 2Q 2011, and extended this increase with a 6.6% year-on-year growth in 1Q 2017, based on advanced estimates. The strength in the manufacturing sector was largely due to robust growth in the electronics and precision engineering manufacturing clusters which far outweighed the output declines in the transport engineering and general manufacturing clusters. While the most recent manufacturing sector growth rate in 1Q 2017 has moderated from its high in 4Q 2016, we believe the sector’s growth rates over the next few quarters would continue to come in at levels that are well-above its growth rates in recent times (from 1Q 2015 to 3Q 2016, the manufacturing sector’s growth rates in each quarter had ranged from -6.3% to 1.7% year-on-year).

Over the next few quarters, it remains likely that the recovery in the global semiconductors industry would continue to spur growth in the largest manufacturing cluster, the electronics cluster (27% of manufacturing sector), and the precision engineering (14% of manufacturing sector) cluster. Continued healthy demand from the smartphone industry, a current driver of the semiconductors industry, coupled with the success of Chinese smartphone manufacturers to whom Singapore semiconductor firms supply to, can reasonably be expected to continue supporting growth in the domestic semiconductor segment, the largest segment in the electronics cluster (62%), and the machinery & systems segment, the largest segment in the precision engineering cluster (60%). As revealed by a recent survey of over 400 manufacturing establishments conducted by the Economic Development Board (EDB), the electronics and precision engineering manufacturing clusters had led optimism in the manufacturing sector, with a net weighted balance of 16% of the firms in each cluster projecting business conditions for 2Q 2017 and 3Q 2017 to improve from that in 1Q 2017. Also, while April 2017’s electronics PMI numbers have dipped slightly to 51.6 from 51.8 in March, the numbers have showed an overall strong upward trend since February 2016 (48.2 reading) and had trended above the 50.0 neutral mark since August 2016, signalling expansion in the electronics manufacturing cluster.

Given the good likelihood of continued strong growth in the semiconductors and machinery & systems segments on the back of a recovering global semiconductors industry as well as the significance of those segments on the manufacturing sector, it remains likely that those segments will continue to be one of the key drivers of the manufacturing sector over the next few quarters.

Additionally, while output in the second largest manufacturing cluster, the biomedical cluster, would likely continue to be volatile given that the pharmaceuticals segment is dominated by a few large firms in Singapore, there remains a good likelihood of the sector performing resiliently over the next few quarters in view of the cluster’s high export-orientation, which should likely see demand in the sector supported by improved global economic conditions. Furthermore, in the same EDB survey of Singapore manufacturers, a net weighted balance of 4% of the firms in the biomedical cluster expect business conditions in 2Q and 3Q 2017 to improve from that in 1Q 2017 and significant net weighted balance of 38% of the firms expect a higher level of output in 2Q 2017. The pharmaceuticals expect higher output in 2Q 2017 from a different product-mix while the medical technology foresees benefitting from good export demand for medical devices. The healthy level of optimism amongst manufacturers in the biomedical cluster signals well for the city’s manufacturing sector in the near term.

The transport engineering manufacturing cluster had been the greatest laggard in the manufacturing sector in recent times, as they continued to register larger year-on-year declines in output whilst possessing a significant weight in the overall manufacturing sector (17.6%, the third largest cluster in the manufacturing sector). Given the still gradual improvement in oil prices amid oversupply concerns, the demand for oil & gas production and exploration equipment would likely continue to remain sluggish over the next few quarters. Similar to the transport engineering cluster, the general manufacturing cluster (which had weighed on growth in the overall manufacturing sector) would likely continue to be weak. The printing segment makes up 15% of the general manufacturing cluster and this segment is likely to be faced with continued tepid demand for print products and construction-related materials in the near term. It is worth noting, however, that the general manufacturing cluster may see a smaller decline this year compared to last year given the city’s plan for more public construction projects this year although the private construction sector would still continue to be weak, with a comparatively smaller increase in the number of projects.

With a consideration for the expected significant growth in the electronics and precision engineering clusters, and resilient growth in the biomedical cluster over the next few quarters, it remains likely that the collective growth in the said clusters would far outweigh declines in the transport engineering and general manufacturing clusters, potentially coming in at 2-3 times the rate of decline, leading to continued stellar growth in the manufacturing sector.

It is worth noting that the forward-looking manufacturing PMIs have continued come in above the 50.0 neutral mark in the recent months, up from the earlier months in 2016 and in 2015, where PMIs consistently came in below 50.0. Consistent readings above the 50.0 mark bode well for growth in the manufacturing sector ahead as it signals optimism and an extension of expansion in the sector. Furthermore, the electronics non-oil domestic exports (NODX) had increased year-on-year for the fifth consecutive month in March 2017 after 8 consecutive months of year-on-year declines. This shows a trend of strong electronics exports, and this trend is likely to be sustained over the next few quarters given the stronger external demand amid an improvement in global economic conditions.

Economic Growth In 2017

Apart from the manufacturing sector, growth across general sectors of the externally-orientated domestic economy would likely benefit from the pickup in global trade activity, particularly the more externally-orientated sectors such as the wholesale trade and transportation & storage sectors. The cyclical finance & insurance sector would likely see improved growth in the remaining quarters as well, particularly in the business lending segment, amid improved global and domestic growth and business outlook for most sectors. The improved demand in residential properties which was partly supported by the slight easing of cooling measures, coupled with the supported demand in office properties amid a generally improved business outlook, would likely result in a real estate market performance that is better than 2016. This leads the business services sector to be well-positioned to benefit, given the real estate segment’s dominance (29% share in terms of nominal GDP) in the sector in conjunction with supported demand in other business services segments.

Weaknesses in the economy remain, particularly with more domestic-orientated sectors. One such area of weakness is the retail trade sector which would likely be subdued amid a soft labour market. Additionally, the still gradual recovery in oil prices would likely continue to weigh on the marine & offshore segment. However, the positive effects from improved global trade and economic conditions is likely to outweigh its adverse impact on affected sectors such as the finance & insurance sector, wholesale & retail trade and transport & storage sectors.

With a consideration for the strength and weaknesses of the various sectors in the economy in the remaining quarters of the year, it is likely that the opportunities of growth, particularly that in the manufacturing and finance & insurance sectors, would more than make up for weaknesses within the economy such as that in the retail trade segment of the wholesale & retail trade sector. We estimated the economy’s growth to potentially come in at 3.2% for the year 2017, which far surpasses the consensus (as of 10 May 2017) 2.1% GDP growth. The potential 3.2% GDP growth for 2017 is more than 1.5 times the GDP growth expected and signals that the Singapore equity market is currently pricing in relatively, in our view, conservative GDP estimates.

In the next part of this Singapore market review, Part 2, we will discuss the market’s valuations, earnings and dividend yield estimates (which look attractive at this juncture!) as well as how investors could access this investment opportunity.

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