Why Singapore’s stock market rally may have legs

SINGAPORE - The Singapore market is rocking to tunes emanating from Wall Street and Washington.

So far in July, the Straits Times Index (STI) has rallied 4.3 per cent to a six-year high – beating the S&P 500’s 3.2 per cent gain. In the year to date, the benchmark index has gained 7.3 per cent. In terms of total returns, which include dividend payouts, it is up 10.2 per cent.

As Reuters pointed out, the speed of the local market’s rally is noteworthy and suggests a shift in investor allocation is under way.

Mr Geoff Howie, chief market strategist and head of research at the Singapore Exchange (SGX), points to a turn in the tide of liquidity in recent weeks.

“Close to one-third of the net institutional outflows across the Singapore stock market during the first half of this year has been reversed over just the past eight sessions,” he said.

Indeed, trading value on the SGX averaged $1.15 billion during the first eight sessions of July, compared with $1.1 billion during the entire month of June, and $0.9 billion in January.

Much of the local market rally has been driven by Singapore banks, which make up nearly half of the STI by weighting, with DBS Bank, UOB and OCBC Bank reaching record highs on July 10. But the rising tide has also lifted other boats. Fellow blue chip Singtel climbed to its highest level in over a year. S-Reits (Singapore real estate investment trusts), which had been beaten down over the past year amid elevated interest rates, are rising. Offshore and marine stocks like Beng Kuang Marine and Mermaid Maritime have been on a tear.

Analysts credit Singapore’s strong track record in dividend payouts. In fact, at an average of 4 per cent, Singapore is seen as one of the best dividend markets in the Asia-Pacific.

Singapore’s Big Three banks top the average with dividend yields of about 5 per cent, and the bet is that their dividend payouts will be sustainable. While rate cuts will weigh on net interest margins, they may also boost their loans growth and wealth management business. The banks are also sitting on excess capital.

Market strategists also credit the Singapore market’s rejuvenation to events in the United States, where traders have upped bets that the Federal Reserve will begin cutting interest rates in September after remarks by its chairman Jerome Powell to the United States Congress this week.

Mr Thilan Wickramasinghe, Maybank Securities head of research, said the Singapore market could be experiencing a serendipitous convergence of bullish factors.

“On the one hand, the Fed chair’s recent congressional testimony is bringing forward bets of earlier interest rate cuts, which is a favourable tailwind for S-Reits,” he said. “On the other hand, the odds of a second Trump term are increasing following the last presidential debate. This may encourage some safe-haven flows to Singapore, especially to the banks, which could be big beneficiaries of supply chains relocating to Asean and more wealth flows. Plus, the industrial players could see onshoring order wins, given some of them have capacity in the US.”

Mr Hou Wey Fook, chief investment officer at DBS, said markets were also getting more confident as there are no signs of recession with the latest economic data prints. “A soft landing and gradual rate cut trajectory outlook is a bullish environment for risk assets,” he pointed out.

Mr Hou sees the global stock rally broadening to laggard sectors like energy and financials and emerging markets catching up. But for the moment, much of the global rally is being fuelled by technology stocks, which despite their high valuations, continue to attract investor attention amid an artificial intelligence revolution.

Still, there is concern in some quarters that having risen some 15 per cent over the past 12 months, markets are looking somewhat frothy. But those that do not subscribe to this view point to still-robust earnings which are supportive of these stock prices.

Indeed, analysts point out that there is more than US$6 trillion (S$8.1 trillion) sloshing around in US risk-free money market funds and deposits, earning relatively high interest rates. But when rates start coming down, much of these yield-seeking funds will likely head to bond and equity markets.

For Singapore, the seeming change in fortunes is long overdue. The local bourse has been stuck in a rut since late 2013, when the penny stock crash involving the likes of Blumont Group, Asiasons and LionGold resulted in regulators coming down hard on market manipulators and scaring away many investors. Indeed, long-suffering market players here must be holding their collective breath as they hope for this rally to be sustained.