Singapore Market Strategy
2 January 2013UBS
Global conditions favour cyclicals.
On one hand, we believe that incomingdata in the early part of 2013 will support a thesis for improving cyclicalconditions for Asian equities. Singapore’s small, open economy traditionallybenefits from a pick up in global growth. Loose global monetary conditions alsofavour Singapore, given the sovereign’s solid triple-A credit rating and strongcorporate balance sheet.
Singapore economy being restructured.
However, domestic conditions willpose challenges for Singapore equities. In early 2013, the government willpublish a Population White Paper, its land use master plan and land transportmaster plan. The papers will provide signposts to the government’s long termpolicy plans on these topics; the White Paper will be debated in parliament inJanuary. With the discussion, investors’ attention would be refocused onhousing, wages and land transport issues. Importantly, the government has madeit clear that while economic growth remains important, it wants to achieve“good quality economic growth”, not growth at all costs. It hopes to improveper-capita wages for Singapore by driving productivity growth rather thanadding cheap foreign labour.
Domestic conditions difficult.
Discussion of these issues will generally cast adownbeat note for domestic stocks, in our view. With an economy at fullemployment, more restrictive immigration policies, and above-average inflation,short-term cost pressure will continue to restrain margins for companies whichgenerate most of their revenue within Singapore. The issue of housing demand –or more pertinently, the higher vacancy rate from H213 – that could result fromtighter immigration policy, will also be of concern. Meanwhile, Singapore’sMonetary Authority, in a recent paper, has also indicated additional vigilance onloan quality.
Yield stocks to stay in favour.
Amid these conditions, we expect stocks whichoffer decent dividend yields to remain in favour. This theme worked well in2012, and valuations are in many cases no longer at bargain levels. However webelieve investors are today willing to accept somewhat compressed yields. Thecombination of loose monetary conditions, gradual appreciation of theSingapore dollar, strong domestic household balance sheets, healthy corporatebalance sheets, high inflation and low imported interest rates will sustain interestin yield plays through this year in our view.
Summary of sector views.
Overweight Industrials, S-REITS (Office and retail),consumer discretionary. Neutral Developers, financials, telco. Underweighttransport.
Our stock picks focuses on companies which benefit from a globalcyclical recovery and at the same time have demonstrated a high propensity forgenerous dividends to shareholders. We favour stocks which are well placed toavoid the worst of tighter domestic conditions (e.g. possess pricing power,flexible business model, wages as % of cost is low) as well as stocks which cantap demand growth via operations outside of Singapore. Our top picks areCapitaLand, CapitaCommercial Trust, DBS, Keppel Corp, Genting Singapore,Noble, Suntec REIT, SingTel, Tiger Airways.