Data on Friday showing Singapore's economy contracted in the second quarter of the year is unlikely to dent the appeal of the country's stock market, one of this year's outperformers in Asia, strategists say.
Vasu Menon, Vice President, Wealth Management Singapore at OCBC Bank says Singapore is becoming a favorite among international fund managers, because its blue-chip companies are paying out higher dividends than companies in other parts of the world facing a sharp slowdown in economic growth.
"If you look at the performance of Asian markets year-to-date, Singapore stands out like a sore thumb - it is the second-best performing market in Asia in U.S. dollar terms [total returns] after the Philippines," Menon said on CNBC Asia's "Squawk Box."
Singapore's benchmark Straits Times Index (FTSE International: .FTSTI), which has gained almost 16 percent so far this year should extend its rally to the 3,200 level over the next few months, a gain of almost 5 percent from current levels, said Menon.
He added that Singapore offers a lot more opportunities in terms of dividend-yielding stocks compared to the rest of Asia.
"You can actually get pretty good dividend yields here compared to deposit rates which are pathetic, dismal," Menon said. "Deposit rates are less than 1 percent and you can actually find good dividend paying stocks, they pay you like 5-6 percent dividends and not just that, I think it's sustainable as well."
Menon says investors looking for high-yield should focus on growing sectors like real estate investment trusts (REITs), which pay dividends of up to 8 percent.
"I think the commercial property market in Singapore is still quite buoyant - retail sales are coming through fairly well, and rentals are able to sustain the payouts that some of these commercial property REITs can offer," Menon said.
Christy Fong, Investment Manager at Aberdeen Asset Management Asia, says investing in Singapore companies that will benefit from growth in the region is also a safe bet in the long term.
"Banks are a good example of that, very conservative, well run banks, they have been investing in Singapore for the last decade or so, and they're very well capitalized as well," Fong said.
"They're [Singapore stocks] still offering a decent yield in times of uncertainty and volatility. I think there's probably quite a bit of support for a segment like that."
Fong says the strong performance of Singapore stocks this is year is a reflection of investors' preference for "quality" and defensive stocks amid market volatility.
"Given the fact that Singapore listed companies tend to be quite conservative, quite well-run and have been investing in the region and valuations are not excessive, we still think it's quite a safe haven to be invested in," Fong said. "More than that, it's the strength of the balance sheet that we pay attention to."
Still, Fong added a note of caution.
Despite the strong performance of the Singapore market, which is trading at around 13 -14 times price-to-earnings, the stock market is not immune to a slowdown in growth both at home and abroad, Fong said.
Data on Friday showed Singapore's economy contracted 0.7 percent in the second quarter from the first on an annualized and seasonally-adjusted basis, hit by global economic uncertainty. This was not as bad as an advance estimate in July of a 1.1 percent contraction, but economists, who had expected an expansion, were taken by surprise.
"Singapore is still very exposed to what's happening outside of the country and we've seen some of the weakness in the more globally exposed stocks like SIA [Singapore Airlines] for example," Fong said. "Obviously that's to do with the fuel price as well, but generally demand is quite weak across the board."
Singapore Airlines' (Singapore Exchange: SIAL.SI) shares have risen 6 percent for this year, but that performance has lagged the broader market, which has gained almost 16 percent since the start of the year.
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