Investors upbeat on stock market here despite recession risk

Positive outlook for dividends and earnings overshadows threats from Sino-US trade row

The reason for the optimism is that more than half of the 30-member Straits Times Index generate 50 per cent or more of their revenues outside the city state, and hence are less influenced by the domestic economy, data compiled by Bloomberg show. ST
The reason for the optimism is that more than half of the 30-member Straits Times Index generate 50 per cent or more of their revenues outside the city state, and hence are less influenced by the domestic economy, data compiled by Bloomberg show. ST PHOTO: KELVIN CHNG

Investors are sanguine about Singapore's stock market even as the nation faces the risk of a technical recession, as a positive outlook for dividends and earnings overshadows threats from the trade spat between the United States and China.

Singapore's trade-reliant economy unexpectedly contracted by 3.4 per cent in the April to June quarter from the previous three months, reflecting sluggish global trade and electronics cycles. Following the data release, the International Monetary Fund on Monday cut Singapore's 2019 growth forecast to 2 per cent from 2.3 per cent.

The benchmark Straits Times Index, on the other hand, has surged 9.3 per cent this year. The gauge is among the best performers in South-east Asia and is expected to rise further.

The reason behind such optimism is that more than half of the 30-member gauge generate 50 per cent or more of their revenues outside the city state, and hence are less influenced by the domestic economy, data compiled by Bloomberg show.

While the economy is important, "with more companies deriving a bigger percentage of their earnings from outside of Singapore, the impact on the stock market is now less acute than two to three decades ago", said Ms Carmen Lee, head of investment research at OCBC Investment Research. "The stock market is decoupled from the economy because many of the companies on the stock market are more defensive."

The trade value of Singapore - a major producer of electronics and semiconductors - is more than double its US$364 billion (S$495 billion) economy. Amid trade tensions, not only did the economy contract unexpectedly on a quarter-on-quarter basis, but exports also slumped dramatically last month, making it the second-worst month since the global financial crisis.

  • 9.3%

    The benchmark Straits Times Index has surged this much this year.

"The stock market and domestic economy are two different animals, and have been for some time now," said Mr Daryl Liew, head of portfolio management at Reyl & Cie in Singapore. "Most Singapore-listed companies such as the banks and (telco Singtel) are pan-Asian plays."

HIGHER RETURNS

What is more, cash is king for equity investors in Singapore, who expect the market to cough up a dividend yield of 4 per cent amid low valuations this year, compared with 2.9 per cent on the MSCI Asia Pacific Index.

The benchmark is trading at a price-to-earnings multiple of 12.8 times on one-year forward earnings, lower than its 10-year average of 13.5, according to data compiled by Bloomberg.

"Singapore is one of the few markets in Asia to be trading below its mean historical price-to-earnings ratio and yet paying out one of the highest yields," said Ms Kum Soek Ching, head of South-east Asia research at Credit Suisse Group's private banking unit.

POSITIVE PROFIT OUTLOOK

And while earnings estimates fell at the start of the year, they have risen from their lows in February.

Looking ahead, corporate profits are expected to grow by 4 per cent this year, compared with a 21 per cent decline in the previous year, based on data compiled by Bloomberg.

"The focus going forward remains on the outcome of the US-China trade negotiations," said DBS Bank analyst Yeo Kee Yan.

Singapore's equity gauge may rise to 3,450, implying a 2.6 per cent gain from Thursday's close, as the world's biggest economies work towards a deal, he said.

BLOOMBERG

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A version of this article appeared in the print edition of The Straits Times on July 20, 2019, with the headline Investors upbeat on stock market here despite recession risk. Subscribe