Stock Ideas for the Year of the Horse
Micro-level investment case
Singapore is in the midst of a structural transformation from an input-driven economy towards a productivity driven economy. This transformation is having a significant impact on economic growth rates, inflation, the currency, and the overall structure of the economy.
Based on our previous research on the impact on growth rates from immigration reform, productivity, as well as industry cost structures, we believe Singapore’s inability to continue to rely on immigration flows for growth will present a significant retraining/development challenge. This in turn could create an extended drag on the economy.
Resilience of the growth outlook
While we are expecting a modest rebound in FY14 GDP growth expectations, this is also relative to significantly lower expectations since the start of 2013, with the Street revising FY13E GDP growth seven times from 3.8% to 2.7%. On a longer-term basis, we believe structural growth trends for Singapore will moderate going forward with tepid productivity gains unable to offset the slowdown in foreign labor flows. We expect long-term GDP growth to moderate from a 10-year historical CAGR of 6.2% to 4.1%, in line with the government’s projections of 3-5% p.a.
Drivers, trends, and datapoints we are tracking
We would closely track the magnitude and direction of macro forecast errors, as seen through our JPM Macro Error Index. We would also track key output-related indicators (e.g. GDP, PMI, Electronics indexes) in assessing the strength of the recovery. On Singapore’s labor transformation efforts, we would remain focused on labor productivity trends and wage pressure trends (either through core inflation or from read-throughs via corporate earnings). As we believe investor positioning will entail a cyclical bias, we would also keep an eye on major cyclical-related indices such as the BDI and aviation-related datapoints (load factors, pricing trends).
Key stock picks
We believe this marks the inflection point to position with a cyclical bias given improving economic fundamentals. Common themes within our top picks are names that are sector leaders in either product differentiation/cost efficiency (KEP SP, EZI SP), and names positioned to capitalize on structural industry upcycles (JCNC SP, GGR SP).
Publish date: 18/11/13