Singapore posts 7.2% GDP growth for 2021, but are investors drawn in? | Fund Managers

At first glance, Singapore beat all odds, having beaten gross domestic product (GDP) estimates for 2021. But not everyone was impressed by the numbers.

The city-state revealed that 2021 GDP jumped 7.2%, reversing a 5.4% contraction in 2020.

Growth also exceeded initial estimates of a 6-7% GDP increase by the Singapore Ministry of Trade and Industry (MTI), and marks the strongest growth recorded since 2010.

However, asset managers noted that Singapore stocks were lagging behind benchmarks in developed markets and strong GDP growth could push up already high valuations.

Clara Cheong,
JP Morgan AM

“Despite the strong growth numbers, we saw stocks in Singapore and Asia-Pacific ex-Japan lagging behind developed markets in 2021,” said Clara Cheong, global markets strategist at JP Morgan Asset Management based. in Singapore.

“Much of the underperformance can be attributed to tighter mobility restrictions as the virus progressed and the resulting impact on the service industry,” she added.

The one-year returns for the MSCI Singapore Index were 10.8% as of November 30, compared to 25.18% for MSCI World, which hedges the performance of large and mid-cap stocks in 23 developed markets. The MSCI AC Asia-Pacific ex-Japan index posted a derisory return of 1.89% over the same period.

Mercer Singapore CEO Chong Chee Loong concurred with this view, saying that “Asia, especially Singapore, has been slower to normalize than other regions such as Europe. and the United States. This is due to the government’s cautious approach so as not to overwhelm our health services with an increase in Covid cases followed by even tighter restrictions. “

Nonetheless, the business climate among institutional investors for 2022 looks relatively positive, mainly due to rising vaccination rates in Singapore.

Chang Hwan Sung, Invesco

“Even though the Omicron variant has brought additional uncertainties, Singapore is in a stronger position with higher vaccination rates now and we expect Singapore to experience above-trend growth in 2022, although it will slow down. from 2021, “said Chang Hwan Sung, Invesco’s portfolio manager for investment solutions.

Cheong echoed this view, saying that as vaccination rates rise, Singapore and the Asean region should be in a better position to continue to reopen.

Mercer’s Chong was more specific as he expects some sectors to recover.

“Overall, we expect the impact of Covid to become less significant in 2022. Once the Omicron push subsides, we expect continued normalization and an opening up of the economy for the rest of 2022, “Chong said.

“This will benefit Singapore’s aviation and tourism industries which have been severely affected by the pandemic over the past two years.”

Rising interest rates

With Singapore’s economy now back in the dark, with 2022 GDP growth expected at 3-5% according to official estimates, Asian institutional investors are also expecting interest rate hikes in tandem.

“Along with moderately higher core inflation, (growth) is expected to support higher rates as the economy continues to recover. As financials account for over 40% of Singapore’s equity market, higher rates should support net interest margins, ”JP Morgan’s Cheong said.

Chang of Invesco expects the US Federal Reserve to start raising interest rates in 2022 and has said it will continue to maintain its positive view of the Singapore stock market relative to other developed markets.

“However, we believe that other emerging markets in the Asean region such as Indonesia and the Philippines may benefit more from the long-term recovery of Covid-19 and recommend a diversified portfolio in the region,” said he added.

Chong Chee Loong, Mercer

Meanwhile, Mercer’s Chong expects banks to perform well this year, “as they benefit from the normalization of interest rates (with at least two 25bp rate hikes expected in the United States in 2022) and the potential reversal of provisions made in 2021 “.

He noted that the Singapore stock market is quite concentrated and focused on financial stocks.

Higher valuations expected

According to Asian institutional investors, the expected steady growth in its GDP could push up company valuations, making investments more expensive even if it meant more stable returns.

“We note that the Singaporean stock market is no longer cheap and is now valued at its fair value given macroeconomic conditions such as inflation levels and local interest rates,” said Chang from Invesco.

“With above-trend growth and high inflation levels, we expect it to generate a high single-digit total return over the next market cycle. And in the long term, we expect a strong dividend yield of around 3%, ”Chang added.

JP Morgan’s Cheong agrees valuations are high but returns could outweigh costs.

“With the next twelve month consensus between price and earnings (PE) trading around 16x, which is roughly +1 standard deviation, valuations aren’t insanely cheap,” she said. .

“However, we expect the earnings outlook to continue to improve, which would have the effect of reducing the PE ratio as the denominator increases,” she added.

She expects earnings per share growth for Singapore stocks to be around 35% over the next 12 months – a higher rate than the Asia-Pacific ex-Japan region at 22% and stocks developed at 18%.

“As supply chain issues continue to ease globally and demand remains strong, ASEAN companies should be able to increase their profits and hopefully grow. avoid excessively squeezing margins. “

As for Mercer’s Chong, he believes that the overall valuations of Singapore stocks are reasonable, relative to the broader markets in Asia excluding Japan and the rest of the world.

“Singapore, as a small open economy, is expected to benefit from the further normalization of economies in 2022, compared to those in Asia which have been less quick to ease restrictions,” Chong said.

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