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Will Singapore’s resilient growth and outstanding progress on vaccination help drive equity performance?

iFAST Macro Research Team |  Published on 27 Aug 2021

  • Earnings for most companies in the STI have rebounded after a steep decline last year. We expect a robust earnings rebound (48% YoY) in ‘21 and ’22 (14% YoY). Driving this rebound are the banks, Capital goods industry, industrial REITs, developers as well as travel and tourism-related names. However, most of these industries will find it challenging to sustain the above-average growth rates when the cyclical tailwind fades. 
  • With the STI’s valuation being undemanding, we see scope for re-rating in the near-term. Looking ahead, there are two visible re-rating catalysts for Singapore equities – i) a high vaccination rate and soon-to-achieve herd immunity, as well as ii) a robust economic recovery. 
  • However, we remain reserved on Singapore’s longer-term outlook. Unlike the North Asian peers, there is a glaring absence of high growth industries within the Singapore equity market. Companies, on aggregate, are also spending far lesser on R&D and CAPEX when compared to peers. From the macro front, there is also a lack of longer-term upside catalyst once Singapore’s exports strength fades. 
  • We believe the risk-reward for Singapore equities is more favourable in the near-term (’21 – ’22). However, we remain neutral and cautious on the longer-term outlook. Our team projects an upside potential of 22% by end-’23. 

After a challenging 2020, the Straits Times Index (STI) had a boisterous start to the year as the index raged higher in the first four months (up 12.0% in SGD terms). However, all that changed when a resurgence of Covid-19 cases struck across Asia. In 2Q, the STI surrendered 1Q gains, closing 2Q at -1.1% as investment sentiment cratered, dragging many cyclical and recovery names lower.
While the surge in pandemic cases has seemingly thrown a spanner in the works for the outlook of Singapore equities, the situation is quickly improving. As the issue ameliorates, we re-assess our views and strategy for Singapore equities.

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Corporate earnings in recovery mode

After a steep decline in corporate earnings last year (-41% YoY), EPS of Singapore equities have rebounded. Most companies managed to beat earnings estimates in the ongoing earnings season (as of 25 Aug), where up to 60% of theSTI’s companies have reported. On aggregate, STI’s earnings grew 93% year-on-year (YoY) in the second quarter, fueled by a mixture of organic growth and base effect. Further, the STI earnings revision cycle remains on an uptrend, which is another sign of earnings recovery. Consensus earnings estimates for the index are up 15.5% in the year-to-date (as of 25 Aug). 

Cyclical and re-opening names to drive recovery but only for the near-term

We expect EPS of Singapore equities to rebound robustly this year and to a lesser degree in ‘22. Driving this rebound are companies that benefit from Singapore’s re-opening and/or are levered to economic activities. These are the Banks, Industrials (Capital goods), Real Estate (industrial REIT and developers) as well as Travel and Tourism-related names. 
We expect the STI index to generate a strong 48% YoY rebound in EPS growth this year, accompanied by a 15% YoY growth next year. However, as the cyclical tailwind fades and the economy normalizes, most of the above sectors will find it challenging to sustain these above-average growth rates. Thus, we maintain the view that this cyclical-driven rebound is likely short-lived, likely lasting through ’21 to ’22 (chart 1, table 1).

Chart 1: Earnings of Singapore equities are expected to rebound robustly but likely over the near-term

Table 1: Earnings growth ’21 – ’22 expected to be driven by cyclical sectors

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I) Banks – Anchor for STI earnings growth

The STI’s heavyweights, Singapore banks (OCBS, DBS, UOB, collectively around 34% of STI), are amongst the top companies in terms of profit growth for 2Q21. The recent earnings season show that wealth management fees (OCBC: 24%; DBS: 27%; UOB: 32%, YoY) and card fees (OCBC: 8%; DBS: 10%; UOB: 12%, YoY) for all 3 banks grew YoY. Loan loss provisions for all three banks have also fallen drastically when compared to 1H20 as asset quality showed significant stabilisation. Net interest income dipped due to lower net interest margin, however the decline is partially offset by loan growth (OCBC: 3%, DBS: 6%; UOB: 6%, YoY). Bolstered by the cyclical recovery tide, we expect the three banks to continue enjoying above-average EPS growth over the next two years (chart 2). Looking ahead, we believe earnings should derive support from i) decent loan growth owing to a fast Asia expansion, ii) continued growth from wealth management and card fees as Singapore/ Asia re-opens, and iii) further easing of loan loss provisions and writebacks in 2H21. 
Besides the above, we are also cognisant of a potential shift in the Fed rate cycle, which in turn can drive the banks’ earnings. There exists a strong correlation between local interest rates and the Fed policy rates, which ultimately fuels the bank’s earnings through a potential expansion in the net interest margin. With our view that the Fed rate may shift higher by late-’22 (earliest), Banks’ earnings may see reinforced support beyond the next 1-2 years.

Chart 2: Strong earnings growth for banks should carry over the next few years

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II) Industrials – Recovery led by capital goods industry but not broad-based

Industrials sector is the other group that benefits from the cyclical recovery as well as a global re-opening. While earnings for the sector have improved on aggregate, growth is not broad-based and will likely be driven primarily by many companies within the capital goods industry (Mainly Yangzijiang Shipbuilding, Keppel Corp, and Jardine Matheson) (chart 3).
As outlined below, earnings for the key companies within the capital goods industry remain supported by a mixture of idiosyncratic and macro tailwinds.

  • Keppel Corp – Recent strategic ventures and M&A activities allow Keppel to fast track the expansion of its sustainable businesses, potentially unlocking greater growth in coming years.
  • Yangzijiang Shipbuilding – The industry is undergoing a major recovery led by the improving global economy; Margins are expected to expand moving forward as shipbuilding orders are likely to increase in 2H21 and 2022.
  • Jardine Matheson – Earnings supported by strong growth from holding companies (In particular, consumer companies like Jardine C&C and Dairy Farm) which are experiencing a cyclical uplift as restriction eases and the macro backdrop ameliorates.

Chart 3: Capital goods industry expected to generate double-digit earnings growth over the next couple of years

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III) Real Estate – Mixed outlook but rosier prospects for Industrial REITs and Developers 

Generally, the REITs within the STI are likely to benefit from the recent easing of domestic and border restrictions. However, the recent strong performance suggests that these good news have been baked in. While valuations are still not expensive (Price-to-Book ratio of most REITs are still below pre-covid levels), some sub-sectors like the office REITs and selective retail REITs face structural challenges in the longer term due to trends altered by the pandemic.  
As such, we tend to favour industrial REITs and see it as a growth driver within the Real Estate sector. We expect the DPU growth for industrial REITs to remain underpinned by rental growth from their portfolio of new economy assets including logistics properties and data centres. Within the STI’s industrial REIT, we favour Ascendas REIT who has strong inorganic growth visibility, and will continue to acquire assets that can future-proof its portfolio.
For the developers, we expect a robust earnings growth this year, largely due to the low-base effect (EPS of developers hit pretty hard in ’21). Looking ahead, we see continuous strong support for earnings given a visible pipeline of projects and pent-up demand when Asia reopens. Additionally, earnings drivers are also materialising in terms of i) steady growth in Singapore’s residential market, (which has seen strong residential sales lately), and ii) a recovery in rental income and property revaluation gains. 

IV) Travel and Tourism – Only a short-term earnings boost in ‘22

For the travel-related names (SIA, SATS), earnings growth should remain underwhelming for ‘21 as the recent resurgence of Covid cases has stalled border re-opening plans. With the likely launch of quarantine-free vaccinated travel lane and travel bubbles next year, growth for the sector should pick up in 1H22. Extreme low base in ’20 may also fuel a stronger growth number. However, recovery to pre-Covid level by ’22 is still unlikely as flights and passengers are likely to remain limited while international travel should remain controlled.
For the tourism-related names (Genting), the outlook is slightly more positive. Unlike the aviation sector, Genting is able to fall back on the domestic market for its gaming operations. Moving ahead, the high rate of vaccination and greater likelihood of border reopening should enable a greater flow of foreign tourists next year, possibly uplifting the company’s earnings. Again, given the possibility of controlled international travel, foreign tourist count is unlikely to swing back to pre-Covid level in ’22 which may cap earnings.
In sum, with the re-opening of borders, the travel and tourism-related sectors should see a decent jump in earnings in the next 1-2 years. However, as highlighted above, it is likely to be temporal and growth should moderate eventually. We also note that share prices for many of these companies have priced in the rosier earnings prospect and therefore reduces the re-rating upside.

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Catalysts present for near-term re-rating

With the STI’s valuation being undemanding, as outlined below, we see scope for re-rating. Looking ahead, there are two visible re-rating catalysts for Singapore equities – i) a high vaccination rate and soon-to-achieve herd immunity, as well as ii) a robust economic recovery. We expect these catalysts to remain in play in ’21 and early ’22 but should be neutralised when growth and vaccination for regional economies catch up. Therefore, more catalysts are needed over the long-term to drive re-rating upside.
Singapore has achieved significant progress on the vaccine front (chart 4) and as it is likely to be the first country in Asia to achieve herd immunity. As observed in US and Europe, a rapid vaccination rate not only curtails growth risks from potential virus shocks but also enables faster exit of restriction and consequently, a quicker restart in economic momentum. Singapore is clearly following this path and the nation will hit heard immunity by late-3Q (or early-4Q), which should see reduced growth risks and a broadening recovery. 
Exports have been the bedrock of Singapore’s recovery and have had strong growth for the past seven months. We expect exports strength to extend into ’22 as implied by leading economic indicators, base-effect, and strong expected electronics demand (chart 5). This should continue feeding the expansion of Singapore’s manufacturing sector, keeping the recovery momentum firm in 2H21 and beyond. We anticipate a quick rebound in economic momentum after exiting phase 2 given the milder impact from the recent restrictions. With a broader recovery in 2H21, the nation’s ‘21 GDP growth should hit the Ministry of Trade and Industry (MTI) 6-7% forecast, leaving little room for disappointment. 

Chart 4: Vaccination rate in Singapore is significantly higher than regional peers 

Chart 5: Rising electronics demand (gauged by global semiconductor sales) have driven Singapore electronics exports 

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Lack of strong long-term equity drivers

In our view, there is a lack of strong long-term drivers for Singapore equities. Unlike China, S. Korea, or Taiwan, there is a glaring absence of high growth industries or ‘new economy’ stocks within the Singapore equity market. Its sector composition remains tilted towards Financials, Industrials, and Real Estate, which have decent earning strength, but is incomparable to those of high growth industries. As such, long-term earnings growth for Singapore equities has lacked regional peers.
STI companies, on aggregate, are spending far lesser on research and development (R&D) as compared to Asian peers such as China. S. Korea, Taiwan, Japan. The current R&D-to-sales ratio for Singapore equities stands at 0.1%, which is a stark contrast against Asia ex-Japan equities’ 4%. Further, capital expenditure for STI equities has largely remained flat – in terms of value and percentage to sales – over the past 13 years. While high R&D spending and CAPEX numbers do not necessarily imply stronger profitability, it suggests that there is a general shortfall in terms of the investment towards long-term growth.
From the macro front, there is also a lack of longer-term upside catalyst once Singapore’s export strength fades – when the global trade cycle tapers. While we are witnessing an upswing in the trade cycle now (and likely in ’22), it is unlikely to sustain over a longer period.  The combination of a higher base, easing supply chain constraint, and demand normalisation should pressure the trade cycle eventually, leading to a moderation in GDP growth. When that happens, we believe domestic demand, which has taken a massive hit during the Covid period, is unable to substitute as the growth driver. In our view, it will take a long time for demand to return to its pre-Covid growth rate. This is because the transition from a pandemic to an endemic will likely entail limited mobility restrictions and periodic disruptions (from seasonal Covid surges) – both headwinds for domestic demand.

Chart 6: SG corporates have been spending very little on R&D while most regional peers have increased their expenditure

Chart 7: Capital expenditure (CAPEX) for STI) have largely remained flat over the past 13 years 

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Valuation undemanding and is reasonably priced

Valuation multiple for Singapore equities (in terms of forward FY PE ratio) is trading at a minor premium of 3.7% at the current moment, at 14.5X, against a historical average of 14.0X (chart 8). Despite so, the PE multiple has de-rated from a +2 standard deviation level around end-Mar (at 16.4X) as earnings were revised notably higher (+11% from end-Mar to end-Jul) while equity prices traded largely side-ways. 
On a regional basis, PE multiple for Singapore equities looks more attractive. The nation’s equities are trading at a much smaller premium and Z-score to the historical average (lower standard deviation from the mean). Relative valuation to ASEAN (gauged by MSCI AC ASEAN index) paints a similar story. Singapore equities are fairly valued relative to ASEAN peers currently, with the former trading at a 10% discount to the latter, against a historical average of 7% discount. 

Chart 8: Multiples have de-rated significantly and is still trading at a minor premium to the historical average

Table 2: SG equities are trading at a much smaller premium and Z score (to historical average) compared to regional peers

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The road ahead – Two different tale

In totality, we believe the risk-reward for Singapore equities is more favourable in the near-term (’21 – ’22). On one hand, cyclical and reopening tailwinds should support corporate earnings recovery in 2H21, thereby driving equity performance. In addition, near-term re-rating catalysts are present and can help drive upside. On the other hand, risks to equities are milder given a rapid inoculation rate. 
That said, we remain neutral and cautious on Singapore’s longer-term outlook. The lack of long-term catalysts alongside a glaring absence of high growth industries and investment in long-term growth are issues that can hamper equity returns down the road. Our team expects an upside potential of 22% by end-’23. All things considered, we retain our 3.5 Star “Attractive” rating on Singapore equities. 

Chart 9: Singapore equities’ price performance and EPS

Table 3: Singapore equity market projection ’21 – ’23

Singapore (STI Index)FY2020FY2021FY2022FY2023
PE ratio (X)19.714.512.711.5
Projected earnings growth (YoY %)-40.8%48.3%14.6%10.5%
Projected Earnings Per Share (EPS)144214246271
Target fair price (Based on 14.0X Fair PE ratio)3,800
Potential upside (%)22.2%
Source: Bloomberg Finance L.P., iFAST estimates. Data as of 25 Aug 2021. 

Table 4: Recommended product for Singapore equities

Unit TrustETF
SingaporeNikko AM Singapore Dividend Equity SGDSPDR® Straits Times Index ETF
The Research Team is part of iFAST Financial Pte Ltd.