Singapore likely to slow too; emerging markets to regain favour

SINGAPORE (Dec 31): With the US poised for a slowdown, what does this mean for Singapore’s economy in 2019? Morgan Stanley economist Deyi Tan says it is inevitable that the city state will follow suit. “I think there is no avoiding the situation that Singapore’s GDP growth will also slow down.”

But Tan thinks the difference between 2019 and previous late phases of the economic cycle is that there could be some support from the property sector, resulting from the spate of en bloc activity seen in the past few quarters. “Construction has begun and this tends to filter into the construction capital expenditure numbers with a lag. We think this would show up more evidently in the numbers next year,” she explains.

Bank of America-Merrill Lynch also thinks Singapore will suffer in tandem with the global slowdown, given its “small and open economy”. The bank estimates that Singapore’s GDP growth will decline from 3.3% in 2018 to 2.8% in 2019 and 2.5% in 2020. Nevertheless, BOAML notes that there are several “defensive qualities” to Singapore’s resilience.

For one, the labour market has improved. Unemployment remains low and there is “good” wage growth in real terms. Policy buffers are substantial and support can be quickly rolled out if necessary, says BOAML. Singapore’s cyclical sectors have also benefited from diversified sources of end-demand. Although 67% of all value-add created in Singapore is connected to external final demand, no single country or region accounts for a share bigger than 10%, says BOAML.

With growth expected to slow, inflationary pressure should remain manageable, says DBS. The bank estimates core inflation to peak in 2019, and subsequently ease towards about 1.5% in 2020. However, the all-item consumer price index series is expected to rise to 1.8% in 2019, from 0.7% this year. This largely stems from a low base effect, owing to declines in car prices arising from the supply glut in the secondary car market. “Barring any supply side shock in the external environment, inflationary pressure should remain subdued amid a slow-growth scenario,” says DBS.

DBS expects the Monetary Authority of Singapore to keep normalising monetary policy in 2019. It notes that the scope for more normalisation is also reflected by the rise in the Singapore dollar nominal effective exchange rate (SGD NEER) to the top of its policy band.

The Singapore dollar policy first returned to a modest and gradual appreciation stance in April 2018, with a slight increase in the policy band. This was followed by a similar back-to-back adjustment in October. “According to our model, the slope has yet to return to the appreciation pace seen before the first easing in January 2015,” DBS says.

Investors need to be cautious

So, what should investors do in the light of the coming global slowdown? State Street Global Advisors suggests a more cautious return-seeking approach, with a diverse combination of defensive equities, high-quality credit and exposure to equities, currencies and local currency bonds of selected emerging markets.

Edward Perks, chief investment officer at Franklin Templeton Multi-Asset Solutions, favours assets that typically perform well during the latter stages of a business cycle, or offer explicit inflation protection, such as inflation-linked bonds. Additionally, alternative assets can provide diversification against potential weakness in stocks and bonds if an unexpected uptick in inflation occurs, he says.

DBS Bank chief investment officer Hou Wey Fook and strategist Jason Low, meanwhile, advise investors to adopt a “barbell strategy” to maximise the risk-return on their portfolios. This strategy entails weighting assets heavily at both ends of the risk spectrum. “That is, investors should harness growth and capital gains through long-term investment themes and sectoral calls, while ensuring portfolio resilience through income and cash flow through dividend equities, real estate investment trusts [REITs], cash and BBB-/BB-rated bonds,” they write in a Dec 5 note.

In terms of equities, Goldman Sachs Asset Management prefers emerging-market equities over their developed-market peers. This is because emerging markets are expected to recover in 2019 from an unexpected moderation this year, while their valuations remain attractive relative to developed markets, it says. In particular, GSAM still sees opportunities in Chinese equities.

“While we acknowledge the near-term slowdown in growth in China, we believe that domestic Chinese equities will be supported by strong medium-term fundamentals from a combination of a secular transition to consumption and innovation-driven growth, ongoing reforms and accommodative policy,” it says. “We also remain positive on Indian equities on tailwinds from strong economic growth, ongoing structural reform and favourable demographics.”

That is not to say that there are no opportunities in developed-market equities. However, investors have to be selective. GSAM remains “constructive” on Japanese equities as reforms forge ahead. It also believes that valuations of US equities are more attractive following the selldown in recent months. In particular, GSAM is positive on smaller-cap US equities for their higher exposure to domestic revenue, which shields them from trade tensions.

“We expect 2019 earnings growth for small-cap equities, while valuations have fallen following outsized declines in the recent selloff, with the Russell 2000 index now trading at a third lower than the historical 10-year valuation premium to the S&P 500 index,” it says.

Local picks

On the domestic front, OCBC Investment Research points out that a few key sectors have largely emerged fairly unscathed or bounced back convincingly from the Asian and global financial crises. They include financials, telecommunications and property.

It believes that firms in these sectors should be well positioned to ride out any potential economic slowdown. Today, the majority of these companies have healthy balance sheets and are not overly geared. In addition, they have maintained dividend payouts that are more generous among regional index stocks. OCBC has a “buy” call on blue chips such as CapitaLand, DBS Group Holdings, Singapore Telecommunications, Singapore Exchange, Singapore Technologies Engineering and SATS.

That aside, the defensive nature of Singapore REITs could come in handy too. DBS notes that S-REITs currently trade at a forward FY2019 and FY2020 yield of about 6.3%, with a yield spread of about 3.8%, which is in line with the historical average yield. The bank favours retail and industrial sector REITS. “Near term, we expect the retail sector to deliver the fastest growth, owing to the impact of inorganic growth from acquisitions and benefiting from asset enhancement initiatives. The industrial REITs, owing to their higher absolute yields, provide a better buffer to the impact of rising interest rates,” say DBS equity strategist Joanne Goh and credit strategist Neel Gopalakrishnan.

This story appears in The Edge Singapore (Issue 863, week of Dec 31) which is on sale now. Subscribe here