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Regional Equity Strategy Q4 2007
Strategy Overview: Asian Equity
Falling US bond yields (enroute to 4.3%) is positive for the Singapore market. In the
previous quarter, we highlighted that the rising bond yield was an obstacle to further
upwards re-rating for Singapore. As long as earnings yield remains higher than the
bond yield, it makes sense to borrow to buy back shares or fund M&A, therefore
lending support for equities.
Strong economic fundamentals
Singapore's domestic economic growth story remains intact, in our view. DBS Economics
is again upgrading 2007 GDP forecasts to 7.7% from a previous 7.3%, due to robust
growth in the construction and financial services sectors this year. The question is whether
Singapore can surprise with another near-8% GDP growth performance next year?
The Singapore economy has been on gear since 2003, growing at near 8% for the past
five years. With the structural changes and cyclical forces in place we believe Singapore
should still be able to grow above its potential growth. Indeed the Singapore government
has recently upgraded its potential growth to between 4-6% from an original 3-5%.
Going into 2008, our economist is looking for a slight moderation to 6.5%, which is still
above long-term potential growth. Under-estimation of construction activities and overriding
concerns on a slowdown in financial services due to the US sub prime could
issue, suggest potential upside to GDP forecasts for next year. As in previous years,
exports growth remains the wild card.
Inflation has been creeping up in Singapore due to both demand and supply side pressure
as can be seen in rising housing costs, wages and raw materials. However we see that
various industry demand cycles where Singapore companies are exposed to have yet to
peak and still remain strong. Global industrials like oil & gas services, shipbuilding and
aerospace engineering have strong capex growth requirements. Domestic demand for
construction, building materials, financial services, legal consultation, advertising and
media are driving growth prospects for the services sector. Private consumption with
regard to luxury goods, autos, restaurant receipts, travel and leisure, and transportation
is also bolstered by high job growth and a lower unemployment rate. With the completion
of the integrated resorts going over the next three years, the Formula One race in 2008,
and the transformation towards becoming a world class global city, it is difficult to be
negative towards this market. As it is, Singapore remains a favourite FDI destination in
Asia as can be seen from foreign participation in numerous domestic projects.
Growing integration with China also makes Singapore less susceptible to a US slowdown,
as well as the potential for inflows of liquidity from the Chinese wall of money. In its
simplest form, a Singapore ETF listing of blue chips on the Hong Kong stock exchange
will act as a conduit of sorts for retail QDII money. A change in China policy to include
the Singapore bourse as the next possible destination for domestic Chinese money is
plausible, considering the close ties of Singapore and China.
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