The road ahead: Two different tales for Singapore

AFTER a steep decline in corporate earnings last year (-41% year-on-year [yoy]), earnings per share (EPS) of Singapore equities have rebounded.

Most companies managed to beat earnings estimates in the ongoing earnings season (as of Aug 25) where up to 60% of the Straits Times Index’s (STI) companies have reported.

On aggregate, STI’s earnings grew 93% yoy in 2Q 2021, fuelled by a mixture of organic growth and base effect. Furthermore, the STI earnings revision cycle remains on an uptrend which is another sign of earnings recovery.

We expect EPS of Singapore equities to rebound robustly this year and to a lesser degree in 2022. 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.

Likewise, the STI index is expected 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 normalises, 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 2021 to 2022.

Near-term re-rating catalysts

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 throughout 2021 and early 2022 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 (see chart 1) 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 herd immunity by late-3Q 2021 (or early 4Q 2021) 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 foresee exports strength to extend into 2022 as implied by leading economic indicators, base-effect, and strong expected electronics demand.

This should continue feeding the expansion of Singapore’s manufacturing sector, keeping the recovery momentum firm in 2H 2021 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 2H 2021, the nation’s 2021 GDP growth should hit its Ministry of International Trade and Industry’s (MITI) 6%-7% forecast, leaving little room for disappointment.

Lack of long-term equity drivers

In our view, there is a lack of strong long-term drivers for Singapore equities. Unlike China, South 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.

On aggregate, STI companies are spending far lesser on research and development (R&D) as compared to Asian peers such as China. South 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 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 2022), 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-19 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.

Undemanding valuation

Valuation multiple for Singapore equities (in terms of forward FY price-to-earnings ratio [PER]) is trading at a minor premium of 3.7% at the current moment at 14.5 times against a historical average of 14 times.

Despite so, the PE multiple has de-rated from a +2 standard deviation level around end-March (at 16.4 times) as earnings were revised notably higher (+11% from end-March to end-July) while equity prices traded largely side-ways.

In totality, we believe the risk-reward for Singapore equities is more favourable in the near-term (2021-2022). On one hand, cyclical and reopening tailwinds should support corporate earnings recovery in 2H 2021 thereby driving equity performance.

In addition, the presence of near-term re-rating catalysts 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-2023. – Sept 17, 2021


iFAST Capital Sdn Bhd provides a comprehensive range of services such as assisting in dealing, investment administration, research support, IT services and backroom functions to financial planners.

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.

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