Following the Singapore economy’s return to growth, the STI chalked up a total return of 13.6% in 2021. The big question is: can the STI continue to deliver in 2022?

07 Jan 2022

  • Following the Singapore economy’s return to growth, the STI chalked up a total return of 13.6% in 2021. This is a reversal from the loss of -8.1% in 2020.
  • The COVID-19 situation in Singapore has since improved significantly. But with the emergence of the Omicron variant, the recovery of various sectors in the economy is expected to remain uneven.
  • Looking ahead, while the manufacturing sector is likely to remain as the key engine of growth, its momentum is likely to soften. The global demand for semiconductors is likely to normalise over the next few quarters.
  • The Fed is likely to kick-start its rate hike cycle in 2022. One of the prime beneficiaries of higher interest rates is none other than the Singapore banks, given that more than 50% of their revenue comes from net interest income.
  • We reckon that the uneven recovery of S-REITs will continue into 2022. Industrial and data centre REITs are likely to deliver resilient growth. At the same time, we expect the remaining sub-segments to experience a gradual recovery.
  • We project an upside potential of 23% for the STI by end-2023, with an attractive dividend yield of 4.4% over the next two years. We maintain our star rating of 3.5 Stars “Attractive” rating for the Singapore equity market.

Historically, Singapore’s equity market has lagged behind regional as well as global peers. But in 2021, Singapore’s equity market, as gauged by the Straits Times Index (STI), outperformed regional peers for a change.

Following the Singapore economy’s return to growth, the STI chalked up a total return of 13.6%. This is a reversal from the loss of -8.1% in 2020.

On the other hand, Asian equities, as gauged by the MSCI AC Asia ex Japan Index, were dragged down by a resurgence in COVID-19 cases and regulatory crackdowns in China, delivering a total return of -2.8% in SGD terms over the same period.

Figure 1: In 2021, the STI outperformed Asian equities, but still underperformed global equities


Moving forward, a combination of factors such as rising interest rates, the continued rollout of booster shots, and an evolving COVID-19 pandemic are expected to come into play.

Against this backdrop, can the STI continue to deliver in 2022?

A moderated economic growth is expected in 2022

In 2021, the Delta strain had sparked a new wave of COVID-19 cases in Singapore, where the majority of the population had already been fully vaccinated. Restrictive measures soon came in place, which delayed the economy’s reopening plans.

Nonetheless, driven by the robust manufacturing sector, Singapore’s economic growth for 2021 is expected to come in at 7.2%, according to advance estimates from the Ministry of Trade and Industry (MTI). This would beat the forecast range of 6% to 7%.

The strong global demand for semiconductors was a key to Singapore’s robust electronic exports growth in 2021 (Figure 2). With strong sales momentum over the past few quarters, chipmakers have been overwhelmed by the sudden surge in demand for chips, resulting in the shortage that we are experiencing today.

In an effort to alleviate the shortage of chips, semiconductor companies have been furiously investing to build capacity or have announced plans to do so. Looking ahead, we think that demand is likely to normalise as new capacity gradually comes online. Moreover, when demand eventually normalises, the industry could grapple with an inventory build-up and an overcapacity. Hence, we believe that the growth momentum of electronic exports in Singapore is likely to soften in 2022.

Figure 2: Global semiconductors growth has supported SG electronics exports


Additionally, while the purchasing managers’ index (PMI) of Singapore’s key export markets has been in expansionary territory (a reading above 50), the pace of expansion has been moderating (Figure 3). This signals a slowing external demand, which is likely to affect Singapore’s manufacturing sector.

Figure 3: PMI in expansionary territory, but the pace has been moderating


In the non-electronics segment, we believe that exports such as specialised machinery and petrochemicals can benefit from a cyclical recovery. Specialised machinery stands to benefit from increases in production volume and the automation of labour, while petrochemicals generally benefit from increases in energy prices. Geographically, China, which is Singapore’s largest trading partner, has largely contributed to the non-electronics segment of non-oil domestic export (NODX).

As more countries reopen in 2022, we believe that supply chain constraints could ease. This could result in a smoother flow of labour and raw materials into Singapore, leading to a resumption in construction activity. The reopening plans are also likely to be supportive of a more broad-based recovery in the services sector, particularly in the areas of transport on the back of higher international travel. As such, the rebound in the construction and services sectors could help to pick up the slack left behind by the manufacturing sector.

On the whole, we believe that Singapore’s economic growth will moderate in 2022. According to consensus estimates, GDP growth is likely to normalise to 4.0% in 2022 (Figure 4). The official forecast by MTI is in the range of 3% to 5%.

Figure 4: GDP growth is expected to normalise


Prospect of higher interest rates will be a major catalyst for Singapore banks

Against the current backdrop of rising inflation, there is also added pressure for a monetary policy tightening. The Fed is likely to kick-start its rate hike cycle in 2022. In fact, during the December 2021 Federal Open Market Committee (FOMC meeting), it was announced that the Fed is projecting three rate hikes in 2022 to curb inflation.

One of the prime beneficiaries of higher interest rates is none other than the Singapore banks – DBS (SGX:D05)OCBC (SGX:O39), and UOB (SGX:U11). The trio are also important constituents of the Singapore equity market, making up approximately 40% of the STI.

Prospect of higher interest rate: The main interest rate benchmark for SGD financial markets, Singapore Overnight Rate Average (SORA), generally tracks the US Federal funds rate. Hence, we foresee an expansion in the net interest margins of the three local banks when the Fed starts raising rates this year. This will be a significant development for the Singapore banks, given that more than 50% of their revenue comes from net interest income.

Loan growth: In the first nine months of 2021, the three banks managed to record an average loan growth of around 11%, a factor that has helped support their net interest income while net interest margins remain low. Loan growth is expected to continue in 2022, which we believe will be derived from the manufacturing and property-related sectors following the gradual reopening of economies.

Fee income: Moreover, the banks’ fee income, particularly wealth management fees, will remain a key earnings driver going forward. We maintain our stance that Singapore banks are in a good position to capitalise on the fast-growing wealth management space in Asia, supported by the rising income of the wealthy middle-class. Wealth management fee income is likely to sustain its double-digit growth rate in the next couple of years, in line with the double-digit growth projections made by PwC in its report on Asia Pacific wealth management industry (Figure 5).

Figure 5: Wealth management fees will remain to be a key earnings driver


Strong capital positions: Lastly, the Singapore banks remain well-capitalised. They have also proven to be resilient during the peak of the COVID-19 pandemic last year despite pressure on asset quality and higher levels of provisions. Besides, this reaffirms their capabilities to maintain sustainable dividend payouts. On average, investors can expect a dividend yield of approximately 5%.

(Related article: Prospect of higher interest rates will be a major catalyst for Singapore banks in 2022)

Uneven recovery of S-REITs to continue

Besides the Singapore banks, another notable component of the Singapore equity market is the Singapore REITs (S-REITs).

We reckon that the uneven recovery of S-REITs will continue into 2022. Industrial and data centre REITs are likely to deliver resilient growth, at the same time, we expect the remaining sub-segments to experience a gradual recovery.

Industrial REITs: Industrial spaces that cater to the new economy are expected to be resilient. Trends driving their demand include the acceleration of e-commerce, shift from “just-in-time” to “just-in-case” inventory, and growth of the tech and biomedical science sectors. On the supply side, warehouses will see the lowest increase in supply out of all industrial spaces between 2022 and 2024.

Data Centre REITs: Data centres have emerged as a bright spot among real estate asset classes during the pandemic. The pandemic has accelerated several long-term trends which drive data traffic, such as an increase in spending on cloud services, emerging technologies, and the growth of internet platforms. With higher data traffic, the demand for data centres is expected to increase.

Office REITs: Near-term rental rates in the central business district are likely to be supported by a low level of supply, as well as demand from growth sectors. However, we believe that the long-term outlook of office REITs remains bleak. More office supply is expected to be completed beyond 2022. The increasing adoption of a hybrid work model may also result in office space eventually being returned to the market.

Retail REITs: With the acceleration of e-commerce, online retail sales proportion has climbed throughout 2021. That being said, suburban malls are still more resilient due to their higher exposure to essential goods and services. In the near-term, we think retailers will continue to face a challenging operating environment, and that landlords have to continue to provide rental rebates.

Hospitality REITs: The emergence of the Omicron variant has served as a reminder that the fight against COVID-19 is far from over. This time round, travel restrictions have been imposed by governments around the world almost immediately. As the travel recovery is likely to be delayed, we see a lack of near-term catalysts that can drive a re-rating across hospitality REITs.

Overall, despite the uneven recovery, we believe that there are still pockets of opportunities within the sector. Investors should be selective, focusing on REITs that can provide a sustainable stream of passive income.

Key investment risks

Threat posed by Omicron variant: As at 6 January 2022, the COVID-19 situation in Singapore has since improved significantly (Figure 6). But just when we were beginning to see light at the end of the tunnel, the new Omicron variant has presented new risks.

Figure 6: Restrictive measures have helped to stabilise the COVID-19 situation


More Omicron cases have been picked up in Singapore. Even with high vaccination rates and booster rollouts, infections may still rise. This could lead to new social distancing measures being imposed again, and delay the economic recovery. On a brighter note, there are early indications that Omicron may be less deadly than initially thought.

Potential slowdown in China: Due to a property market downturn, energy constraints, as well as a zero-tolerance COVID policy, China could face an economic slowdown in 2022. As China is Singapore’s largest trading partner, the slowdown could drag on exports growth in Singapore.

Earnings recovery to continue

Considering the sustained economic recovery, we expect to see a continued earnings rebound for Singapore equities in 2022, largely driven by the three Singapore banks. However, the earnings growth is expected to normalise, due to the absence of a low base effect.

Based on our fair PE ratio of 14X for the STI, our target price for the index is 3,913. As at 6 January 2022, our target price translates into an upside potential of 23% by end-2023. We maintain our star rating of 3.5 Stars “Attractive” for the Singapore equity market.

Additionally, dividends will remain as an attractive quality of the Singapore equity market. The current dividend yield represents a spread of approximately 245 basis points (bps) over the 10-year Singapore government bond yield, which is much higher than the historical average of 160 bps (Figure 7). Over the next two years, the STI is expected to offer investors an average dividend yield of 4.4%.

Figure 7: Attractive yield spread


Equity MarketUnit TrustETF
SingaporeNikko AM Singapore Dividend Equity SGDSPDR Straits Times Index ETF (SGX:ES3)
Table 2: Earnings growth of the STI
STI IndexFY2020FY2021EFY2022EFY2023E
PE Ratio (X)19.714.612.711.3
Earnings Growth-40.8%50.0%14.8%12.3%
Earnings Per Share144.4216.7248.9279.5
Target Fair Price (Based on 14.0X Fair PE Ratio)3,913
Potential Upside23%
Source: Bloomberg Finance L.P, iFAST EstimatesData as of 6 January 2022
Figure 8: STI Price vs EPS