A rally in one of Asia's best-performing stock markets is stalling amid rising virus cases at home and a rethink of the global reflation trade.
Second only to Taiwan among Asia's major benchmarks this year, Singapore's Straits Times Index (STI) has slipped 1 per cent so far this month, paring this year's gains to about 12 per cent.
The reintroduction of tighter curbs following the emergence of new clusters has weighed on investor sentiment, despite the country having one of the highest vaccine coverage in Asia.
But this isn't only a Singapore story. The Asian financial hub is a microcosm of the worldwide economic rebound, with exports standing at more than 150 per cent of gross domestic product.
And with an Asia-leading 86 per cent weighting in so-called cyclicals, the STI has stuttered alongside a pause in the global rotation to such economically sensitive shares.
"We believe the STI is poised for a pullback", given the near-term reintroduction of Covid-19 measures and a seasonally weak month of May, said DBS Bank strategist Yeo Kee Yan. "We see the STI turning sideways" in coming months, he added.
The benchmark was down 0.6 per cent yesterday, even as the broader MSCI Asia Pacific Index climbed. The STI has fallen on average 3 per cent in May over the last 10 years, according to data compiled by Bloomberg.
After a flare-up linked to the new coronavirus variant first identified in India, Singapore on May 4 announced three-week-long restrictions such as limiting social gatherings to five people and a tightening of border curbs. The move risks another delay to the country's proposed travel bubble with Hong Kong.
Analysts see the restrictions hurting real estate investment trusts, tourism and land transport stocks the most, a group that includes office and retail Reits such as Keppel Reit, SPH Reit and Starhill Global.
More stringent actions "would certainly impact consumer sentiment and household spending", hitting the consumer discretionary and service sectors the most, said Mr David Chao, a global market strategist for Asia-Pacific ex-Japan at Invesco.
"Reduced circulation may also reduce public transport usage and raise concern for names such as ComfortDelGro," Citigroup's Arthur Pineda wrote in a note last Wednesday.
Meanwhile, with financials accounting for about half of the STI, and real estate and industrial stocks almost 40 per cent, the benchmark's relative regional performance has mirrored that of global value versus growth shares.
After beating its growth counterpart by over 8 percentage points in the first quarter as investors rushed to gain exposure to a stimulus-fuelled economic recovery, the MSCI AC World Value Index has trimmed its outperformance to less than 1 percentage point so far in the second quarter.
The value rally, part of the so-called reflation trade, has paused as Treasury yields retreat from year-to-date highs with traders debating how long-lasting the economic recovery and inflation will be.
"Any setback in the global economic rebound will have an impact on Singapore given our dependence on global trade," said DBS' Mr Yeo.
That makes the future for Singapore's shares linked to a resumption in the rotation to global cyclical shares, something that money managers including Invesco, Janus Henderson Investors, JPMorgan Asset Management and UBS Global Wealth Management are betting on.
"Even if the market experiences a few near-term hiccups from the pandemic-related noise, I still think that Singapore's economic fundamentals remain sound and that the STI should end the year higher than where it is now," said Invesco's Mr Chao.
BLOOMBERG
