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

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

The growth also went beyond initial estimates of a 6-7% GDP increase by Singapore’s Ministry of Trade and Industry (MTI), and marks the largest recorded growth since 2010.

However, asset managers noted that Singapore equities lagged developed market benchmarks and that the strong GDP growth could drive up already high valuations.

Clara Cheong,
JP Morgan AM

“Despite the strong growth numbers, we’ve seen Singapore as well as the broader Asia Pacific ex Japan equities lag versus the developed markets in 2021,” said Clara Cheong, JP Morgan Asset Management’s Singapore-based global market strategist.

“Most of the underperformance is attributable to the more stringent restrictions on mobility as the virus evolved, and the ensuing impact on the service sector,” she added.

One-year returns for the MSCI Singapore index were 10.8% as of November 30, compared with MSCI World’s 25.18% returns, which covers large and mid-cap equity performance across 23 developed markets. The MSCI AC Asia Pacific ex-Japan Index recorded a paltry 1.89% return over the same time period.

Mercer Singapore’s wealth business leader Chong Chee Loong concurred with this view, saying that “Asia, particularly Singapore, have been slower to normalise compared to other regions such as Europe and the US. This is due to the government’s cautious approach in order to not overwhelm our healthcare services with an increase in Covid cases followed by further tightened restrictions.”

Nevertheless, business sentiment among institutional investors for 2022 seems relatively positive, primarily due to the 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 level of vaccination rates now and we expect Singapore to enjoy above-trend growth in 2022, albeit slowing down from 2021,” said Chang Hwan Sung, Invesco’s portfolio manager for Investment Solutions.

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

Mercer’s Chong was more specific as he expects certain sectors to pick up.

“Overall, we expect the impact of Covid to become less important in 2022. Once the Omicron surge subsides, we expect continued normalisation and the economy to open up in the rest of 2022,” Chong said.

“This will benefit Singapore’s aviation and tourism industries which have been heavily impacted by the pandemic in the last two years.”

Interest rate hike

With the Singapore economy now back in the black, on 2022 GDP growth expected at 3-5% according to official estimates, Asian institutional investors also expect interest rates to rise in tandem.

“Alongside moderately stronger core inflation, (the growth) should support higher rates as the economy continues to heal. As financials make up more than 40% of the Singapore equity market, higher rates should be supportive of net interest margins,” said JP Morgan’s Cheong.

Invesco’s Chang expects the US Federal Reserve to start raising interest rates in 2022 and said they will continue to maintain their positive view on the Singaporean stock market compared to other developed markets.

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

Chong Chee Loong, Mercer

Meanwhile, Mercer’s Chong expects banks to perform well this year, “as they benefit from interest rate normalisation (with at least two 25bps rate rises expected in the US in 2022) and the potential write back of provisions made during 2021.”

He noted that the Singapore stock market is quite concentrated and weighted towards financial stocks.

Higher valuations expected

Singapore’s expected steady growth in its GDP could drive up company valuations which would make it more expensive to invest in even if it meant more stable returns, according to Asian institutional investors.

“We note that the Singaporean stock market is no longer cheap and is now fairly valued given the macro conditions such as local inflation levels and interest rates,” said Invesco’s Chang.

“With above-trend growth and elevated inflation levels, we expect it to deliver 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 that valuations are high but the returns could outweigh the costs.

“With consensus next twelve months price to earnings (PE) trading around 16x, which is about +1 standard deviation, valuations are not screamingly cheap,” she said.

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

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

“As supply chain issues continue to ease globally and demand remains strong, Asean companies should be able to grow earnings and hopefully avoid too significant of a margin squeeze.”

As for Mercer’s Chong, he feels that the overall valuations of Singapore stocks are reasonable, compared to the wider markets in Asia ex-Japan and the rest of the world.

“Singapore, as a small open economy, should benefit from the continued normalisation of economies in 2022, compared to those in Asia which have been less quick to loosen restrictions,” said Chong.