Asia’s Hidden Jewel: Singapore Equities Outlook – Trade Ideas

Asia's Hidden Jewel: Singapore Equities – Trade Ideas

Thought left behind by its regional peers, Singapore equities are well-positioned for a rally, as the global economy continues its recovery.

Fundamentals and Market Sentiment

As global equities continue to roar to new highs, investors have flocked to the Asia-Pacific region in search of opportunity. Given this trend, one equity market that offers hidden opportunity in our view, is Singapore, as the country appears to be well situated to benefit from a potential recovery in the global economyin a post COVID-19 environment.

Singapore’s Straits Times’ Index (“STI”) was hit hard this year, as the COVID-19 pandemic swept across the globe, causing the STI to be one of Asia’s worst performing equity indices ifor the year so far. The trade-reliant city-state’s economy is expected to contract by -6.0% this year, before rebounding to 5.50% in 2021. While Singapore has recently seen only a handful of daily new virus cases, the country has faced a tough road ahead in light of the surge in new cases worldwide. As a result, the country’s equity market has fallen 21% for the year so far, making it one of the cheapest, but also one of the most attractive, markets in the region. In fact, the STI gauge is currently trading at 11.29x times earnings, versus the regional average of 18.20x earnings.

Despite the current state, we believe Singapore equities are currently undervalued and well-positioned for the recovery in economic activity, trade, and earnings growth, in relation to their Asian equity counterparts, making it one of our most-preferred markets in the Asia-Pacific. Singapore’s cheap equity valuations, strong reliance on the health of the global economy, and its control over the COVID-19 outbreak, are all moving in favor of the city-state, where cyclical industries such as financials and real estate make up more than 80% of the benchmark index. In fact, after removing this year winners – technology and communication services – the STI has over 80% of its weighting in cyclical stocks, with banks accounting for 41%, real estate accounting for 22%, and industrials accounting for 17%, making the STI one of the Asia-Pacific equity benchmarks with the highest concentration in cyclical sectors. We believe this is to be a selling point for Singapore equities going into the end of 2020, and into 2021, as sectors whose fortunes are heavily tied to the business cycle are gaining investor attention amid signs of a revival in world trade, and green shoots appearing throughout the global economy.

Technical Analysis

Strait Times Index – Bullish

On a technical basis, the STI has lagged its regional peers, as the COVID-19 pandemic continues to weigh on Singapore equities. The STI plunged to a low of 2200 in March, but staged an impressive rally up until July, reaching 2845, before cooling off. Since then, the STI has been in a range-bound pattern between 2439-2586 as global macro investors continue to remain cautious on the country’s equities, in light of the COVID-19 pandemic, as capital has gone to other regional equity indices.

Despite the range bound nature of the STI, we believe the technicals for the index are beginning to show some bullish momentum. In terms of the RSI, though “flat-lining” since June, the indicator is slowly starting to tick upwards, as investors slowly trickle into Singapore equities. Further, when it comes to market sentiment, the Bull Power Bear Power Histogram surged from its September low of-23.00 to -2.71, putting it on the cusp of bullish territory. To us this indicates that investor sentiment towards Singapore stocks is taking a turn for the better. Further, the Schaff Trend Cycle has been solidly in green bullish territory, indicating to us that the STI is firmly in a bullish cycle, despite the poor price action. Further, volatility for the index, as measured by the ATR, has been falling since June, indicating that investors are complacent on the index – for now.

Risks

Despite our bullish stance on Singapore stocks, clients should take into account the downside risks as well. With the second wave of COVID-19 infections underway, as the virus spreads in various places, many countries have slowed their reopening initiatives, with some countries and regions even reinstating partial lockdowns to stem the spread. While the swift recovery in China has surprised to the upside and lead to green shoots throughout the global economy, and signs of regional improvement, the global economy’s long march back to pre-pandemic levels does remain prone to difficultly under this current environment. In such an scenario where the global recovery ends up being slower than expected, expected further pressure on Singapore equities.

Overview

Overall, given (the steady) improvement in Asia’s manufacturing gauges and trade statistics, as well as promising updates of a potential COVID-19 vaccine, an uptick in economic activity bodes well for the index. In fact, if the current environment continues to support a faster-than-expected economic recovery, we believe Singapore equities could rise 15%-20% over the next 12 months, versus the 10% gain seen for the broader MSCI Asia Pacific Index. Given this outcome, we believe clients should take a second look at Singapore equities.

Asia’s Hidden Jewel: Singapore Equities Outlook – Trade Ideas

Thought left behind by its regional peers, Singapore equities are well-positioned for a rally, as the global economy continues its recovery.

Fundamentals and Market Sentiment

Technical Analysis

Strait Times Index – Bullish

Risks

Overview

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© 2020 Economics Global Inc.

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Any views expressed here are those of Economics Global Inc. as of the date of this publication, are based on available information, and are subject to change without notice. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.