2014: Singapore a Relative Pick as ASEAN Consolidates
Catching up as ASEAN consolidates—While the STI Index (-2% YTD through 6 Dec) has underperformed Philippines and Malaysia, there has been a degree of relative outperformance for Singapore in the past six months as the US tapering phase gets priced in. We expect this relative trade to continue into 2014. Singapore, which had been hit earlier by slower momentum as its growth model rebalanced over the past two years, is now relatively more attractive as the pace of GDP growth picks up and currency, CAD woes and politics get in the way of neighbours Malaysia, Indonesia and Thailand. We expect GDP growth of 3.5% and 4.0% in 2014 and 2015 respectively post 4.0% in 2013 and 1.3% for 2012. We are looking for mild upside for the STI in 2014 – our Gordon Growth derived STI target is 3,278, translating to a P/E of 15.6x. The STI is now trading at ~14.7 P/E, below the historical mean of 15.2x and at 1.3x fwd P/B (below -0.5SD).
Stay in stock-picking mode; prefer external over domestic names — We expect stronger exports, especially to Europe, to filter in and lift Singapore’s earnings, which had recently already formed a bottom post 3Q13 results. With several of Singapore’s domestic segments close to peaking, we prefer stocks exposed to external drivers. Top picks - Keppel Corp (rig cycle intact despite oil price volatility); two China exposed firms, Wilmar (conduit for Asia’s food needs) and CMA (robust B/S, recurring income in SG); DBS (highest NIM/earnings leverage to eventual SGD rate rises); and Keppel Land (sustainable pre-sales from China, potential divestment of MBFC Tower 3). Investors have begun reducing weights in interest-rate-sensitives given 114 bps rise in 10Y yields since mid-2013 and tapering expectations in 2014. With the US$ strengthening, investors could focus on industrial dollar earners: ST Eng, Venture. Avoid SMRT, SPH, SIA, Starhub, Cosco Corp.
Risks as Singapore’s household debt spikes up, SMEs/MNCs restructure, challenges from cross-linkage to the region— Normalization of SGS 10Y yields and interest rates as US taper occurs may have an uneven impact on firms and consumers, especially those that found themselves on the short end of the curve. Singapore’s household debt, led by mortgages, has already risen to 77% of GDP, putting it in amber zone and has led regulators to impose anti-debt measures. Credit-card rollover balances and charge-off rates have also risen, suggesting overconsumption is already an ongoing theme. Selected demographic segments may have utilized asset pledges to obtain leverage, resulting in possible overexposure to property and yield-heavy products. A rise in interest rates, rental vacancies, positive real savings rate and a more subdued job environment as SMEs here restructure could lead to reduced consumption and lower property prices as weaker hands divest. Singapore's property, tourism, wealth management and 18% of NODX are linked to the prosperity of its ASEAN neighbors (Thailand, Malaysia and Indonesia) and these economies have begun to cool.
Publish date: 12/12/13