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Investment summary

Recent market volatility was caused by nervousness over possible defaults and regulatory concern in China. Losses extend from Asia to the US, which had largely outperformed this year. With global valuations looking rather stretched, there is a high risk of further fluctuations ahead. The Singapore market has been well shielded from the wide global markets fluctuations and it has done comparatively well this year with YTD gain of 7.7%. It has proven to be fairly resilient in these uncertain and volatile times. In addition, trading volume and activities have picked up sharply this year – the best year in the last four years. This seems to indicate that interest is returning to the Singapore market.

• Singapore has outperformed region
• Volatility to remain
• Hold some Singapore stocks

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Put some money into Singapore stocks

The broad re-opening theme is likely to remain relevant for the coming 12 months. In addition, long term high growth secular trends (such as digitalisation, etc.) are likely to remain intact. For the near to medium term, we expect market turbulence to continue, largely due to the regulatory risks and the possibility of more defaults in China. This may add pressure to the already fragile market sentiment. As such, it would be good to have some allocation into Singapore market for a defensive and fairly resilient exposure to stocks. Interest has been rising for Singapore stocks as seen from the 46% increase in traded volume so far this year versus the whole of 2020. If this pace continues, there is a good likelihood that the annualised value in 2021 will be the highest in eight years.

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Potential boost from Temasek and SPACs

In a recent Bloomberg report dated 14 Sep 2021, it was reported that Temasek Holdings is looking to invest in Singapore and regional mid-cap firms. While there is no official confirmation yet, if this takes place, it will provide a nice boost to the local market, especially for mid-cap stocks, which have been somewhat neglected. In addition, the pace of IPOs has slowed and there was a total of only six new listings this year. Of this, there were only three IPOs which raised a total of SGD337.8m. This compared to a total of 15 issues in 2020 which raised more than SGD1.4b. Recently, the Singapore Exchange Ltd has outlined the rules for the listing of Special Purpose Acquisition Company (SPAC). This could potentially help to stem the decline in IPOs and also help to attract companies which are in the high-growth phase.

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Valuations are not demanding

At current valuations, the STI is trading at price-earnings ratio of 12.4x and price-book of 1.0x, with an attractive estimated dividend yield of 4.4%. Most Singapore sectors are up for the year. Based on PER, the STI is currently trading below the 10-year historical average. In terms of price-book, it is also at below 10-year average. With optimism over the gradual re-opening of the economy, earnings have also been revised up. In addition, Singapore valuations are attractive versus other regional markets.

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Investment Highlights

Calm in a sea of volatility

On Monday (20 Sep 2021), US markets fell with losses ranging from-1.7% (for the S&P 500) to -3.2% (for NYSE FANG+ Index). Not surprisingly, this was blamed on the contagion effect from the sell-down in Chinese stocks, with the focus on China Evergrande. China Evergrande has shed 85% from its 52-week high and is now hovering at HKD2.27, erasing some HKD222 billion (USD28.5 billion) from its market capitalisation. On Monday, the stock fell 10.2%. This contagion, with concern over the potential spill-over impact on the rest of the sectors and markets, has finally hit US markets which had outperformed so far this year. In Singapore, the market has proven to be fairly resilient in these volatile times.

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Defensive is good, especially during uncertain times

While key market indices have fallen some 3.9% (MSCI World Index) to 31.8% (MSCI China Index) from 52-week highs, the STI is down a more modest 5.4% – outperforming the Hang Seng Index (-22.3%), the Shanghai Shenzhen CSI 300 (-18.1%) and the KLCI Index (-9.8%). With heightened regulatory risks in China, the Hang Seng Index is now down for four consecutive months (from June to September 2021). In addition, the STI is up about 7.7% YTD versus -11.1% YTD for the Hang Seng Index.

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Potential boost from Temasek

In a recent Bloomberg report dated 14 Sep 2021, Temasek-linked 65 Equity Partners Holdings was reported to be looking into investing in Singapore and regional mid-cap firms. While there is no official confirmation yet, if this takes place, it will provide a boost to the local market, especially for mid-cap stocks, which have been somewhat neglected. As an indication, the STI is up about 7.7% YTD, but the FTSE ST Mid-cap Index is up only 2.5% YTD. An interesting note is that small-cap stocks have largely outperformed with a gain of 11.8% YTD (based on the FTSE Small Cap Index).

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Dwindling IPOs in 2021

In 2020, with the raging pandemic, the Singapore market saw a total of 15 issues which raised more than SGD1.4b. The biggest IPO in 2020 was Nanofilm Technologies International, which raised SGD510m with an IPO price of SGD2.59. Since then, the stock has traded to as high as SGD6.67 (in Jul 2021) before closing recently at SGD4.25 (on 21 Sep 2021). For 2021, the pace of IPOs has slowed and there was a total of only six new listings this year. Of this, there were only three IPOs which raised a total of SGD337.8m.
Recently, the Singapore Exchange Ltd has outlined the rules for the listing of Special Purpose Acquisition Company (SPAC). This could potentially help to stem the decline in IPOs. In addition, it could draw in companies which are in the high-growth phase – generating interest from technology or early-stage businesses.

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SPAC listing framework

The Singapore Exchange introduced its SPAC rules in early September 2021. As part of the listing framework, SPACs must have a minimum market capitalisation of SGD150m. Like most typical SPACs in other countries, de-SPAC must take place within 24 months of IPO with an extension of up to 12 months. De-SPAC can proceed if more than 50% of independent directors approve the transaction and more than 50% of shareholders vote in support of the transaction. With the newly introduced SPAC framework, this could also help to widen the number of investible financial instrument over time.

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Market activities are picking up

After the recent high in 2017, trading volume on the local bourse has declined for three consecutive years. However, this trend reversed this year and trading activities have picked up strongly in 2021. Based on volume traded so far this year to September, it is already 46% higher than the whole of 2020. This is indicative of the renewed interest and trading activities on the local exchange.
In addition, the total value traded has increased. Based on the first nine months of this year, the total traded value is already up 15% from last year. If this pace continues for the rest of the year, there is a good likelihood that the annualised value will be the highest in eight years.

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Big cap stocks led market gains

Based on the STI’s 7.7% YTD gain, the key outperformers were the banking stocks together with selective property-related stocks. Based on market capitalisation, the top 5 stocks are DBS, OCBC, Jardine Matheson, UOB and Singapore Telecommunications. Of these, the three banks posted YTD gains of 13.6% to 18.4%, which helped to prop up the index.

However, in the mid cap category (market capitalisation of USD1.9b to USD5b), the performance was mixed, ranging from -17.3% (for Dairy Farm) to +224% (for iFAST).
We believe that if the funding from Temasek materialises, it will be a nice boost to the small-to-mid cap segments.

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Put some money into Singapore stocks

The broad re-opening theme is likely to remain relevant for the coming 12 months. In addition, long term high growth secular trends (such as digitalisation, etc.) are likely to remain intact. For the near to medium term, we expect market turbulence to continue, largely due to the regulatory risks and the possibility of more defaults in China. This may add pressure to the already fragile market sentiment. As such, it would be good to have some allocation into Singapore market for a defensive and fairly resilient stock exposure.

Valuations are not demanding. At current valuations, the STI is trading at price-earnings ratio of 12.4x and price-book of 1.0x, with an attractive estimated dividend yield of 4.4%.