Analysts, economists take guardedly hopeful stance for second half of 2024

SINGAPORE – The Straits Times Index (STI) appears to be pausing for breath after peaking earlier in July as investors take profits and weigh their next move amid uncertainties.

It has been a profitable year so far with the STI gaining around 8 per cent since Jan 1 and hitting a year high of 3,499.89 points on July 17. On a total return basis, the index would have made close to 7 per cent, or almost 10 per cent if dividends were reinvested.

The local bank stocks, which make up nearly half the index, were behind much of that rise as investors piled in, buoyed by the prospect of higher interest rates for longer and a resilient real estate sector.

There also seems to be a shift in portfolio allocation from overseas, whether because of Singapore’s reputation as a safe haven amid geopolitical uncertainties or the local economy’s strength and more benign inflation numbers.

Investors are now asking: What is in store for the rest of 2024?

The known unknowns include the conflicts in Ukraine and Gaza that are keeping energy prices elevated and disrupting supply chains and, in turn, hampering global trade.

Unsurprisingly, there has also been a growing divergence in monetary policy among major central banks as each grapples with its own challenges, given the uneven inflationary backdrop and varying economic conditions that include tight labour markets and sector-specific issues.

There is further complication in the form of the 40 or so national elections being held in 2024, including major economies such as the United States, India and Indonesia, that could affect political stability and spark market volatility as investors try to navigate the shifting policy landscape.

The local market may also be facing some degree of sector rotation, with investors moving cash away from financial-sector stocks.

Though bank shares have made significant gains this year, loan growth is expected to wane to the low single digits, while other sectors appear to offer relatively better value or growth prospects.

However, the overall market appears to be somewhat undervalued despite the gains posted in the first half.

Notably, the STI’s price-earnings and price-to-book ratios are both trading at a discount – somewhat below their long-term averages. This suggests that there are still buying opportunities given the undervaluation.

Underscoring the market’s attractiveness is the STI’s dividend yield – an estimated 5.3 per cent for 2024 – which is ahead of its long-term average of 4.3 per cent.

Another factor supporting the market is the outlook for the economy. While there are risks to the forecast, Singapore’s gross domestic product is expected to grow by between 1 per cent and 3 per cent this year.

DBS economist Chua Han Teng, who raised his forecast for the year from 2.2 per cent to 2.7 per cent, said: “External-led sectors will likely be supportive, with manufacturing and modern services rebounding and trade-related services remaining in expansion.”

OCBC Bank chief economist Selena Ling concurred, adding that the Singapore economy should be able to maintain reasonable speed in the second half, “with all three engines – manufacturing, construction and services – firing amid a more benign economic environment where a global soft-landing narrative has taken root”.

Being an open economy, however, means that the Republic’s prospects hinge on its key trading partners – China and the US.

While China grapples with lacklustre domestic demand and may be too reliant on exporting its manufacturing output, the

US seems to be faring better than in 2023.

In America, recession fears have given way to a broad recovery on the back of milder inflation and expectations that the economy will expand by more than 2 per cent in 2024.

Elsewhere, growth in Europe, Britain and Canada is likely to expand by 1 per cent at most, whereas Japan’s could shrink amid tepid wage growth, which is hampering end demand.

The other key factor is global interest rates and where they are headed.

Several major central banks, including the European Central Bank and its counterparts in Canada, Switzerland and Sweden, have been lowering rates since March 2024, with headline inflation anticipated to decline gradually through the rest of the year.

In contrast, central banks in the US and Britain have held out. This is partly due to specific local conditions, such as constrained labour markets and their impact on domestic inflation, even though globally, the pace of price increases should continue to trend lower.

Hence, most analysts appear cautiously optimistic. OCBC Investment Research head Carmen Lee feels that while the Singapore market is still comparatively attractive on a long-term basis, “it’s going to be hard to see a similar level of high single-digit growth for the STI for the rest of the year”.

She expects more uncertainty and volatility in the market as a result of the US presidential election in November.

“This situation might refocus attention towards value stocks or defensive sectors, potentially bolstering investor interest in the Singapore market,” she added.

Ms Lee expects investors to revert to the fundamentals, as the Singapore market is projected to enjoy earnings growth that is just shy of 6 per cent for the 2024 financial year.

“This will largely be supported by solid earnings from the financial sector,” she added.

CGS International deputy group head of research Lim Siew Khee said: “Amid a higher-for-longer interest rate environment, we advocate investors adopt a value-driven approach to stock-picking, preferring companies or sectors with near-term catalysts or those offering high dividend yields and good earnings visibility.” 

While higher interest rates have taken a toll on rate-sensitive sectors, there could be some reprieve in sight.

Paragon Capital Management chief executive and chief investment officer Paul Lee said: “For the second half, we are expecting to see inflation in the US continue its downward trajectory and the Fed to cut interest rates.

“With the ongoing uncertainty around geopolitics, we continue to stay invested and will be positioned to benefit from lower interest rates.”

Echoing the sentiment, VP Bank chief investment officer Felix Brill said it is better to take a long-term view when investing because there is too much noise in the short term. “It’s more about time in the market rather than timing the market.”