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Singapore's US$520 billion market looks past recession risk

Raffles Place business district in Singapore. (PHOTO: Roslan Rahman/AFP/Getty Images)

By Ishika Mookerjee, Yongchang Chin and Abhishek Vishnoi

(Bloomberg) -- Investors are sanguine about Singapore’s equity market even as the nation faces the risk of a technical recession, as a positive outlook for dividends and earnings overshadows threats from the U.S.-China trade spat.

Singapore’s trade-reliant economy unexpectedly contracted by 3.4% in the June quarter from previous three months, reflecting sluggish global trade and electronics cycles. Following the data release, the International Monetary Fund on Monday cut Singapore’s 2019 growth forecast to 2% from 2.3%.

The benchmark Straits Times Index, on the other hand, has surged 9.8% this year. The gauge is among the best performers in Southeast Asia and is expected to rise further. The reason behind such optimism is more than half of the 30-member gauge generate 50% or more of their revenues outside the city-state, hence less influenced by the domestic economy, data compiled by Bloomberg show.

While the economy is important, “with more companies deriving a bigger percentage of their earnings from outside of Singapore, the impact on the stock market is now less acute than two to three decades ago,” said Carmen Lee, head of investment research at Oversea-Chinese Banking Corp. “The stock market is decoupled from the economy because many of the companies on the stock market are more defensive.”

Here are three reasons for the divergence of Singapore’s economy from its $520 billion stock market:

Breaking Economic Correlation

A major producer of electronics and semiconductors, Singapore’s trade value is more than double its $364 billion economy. Amid trade tensions, not only did the economy contract unexpectedly, exports slumped dramatically in June, making it the second-worst month since the global financial crisis.

“The stock market and domestic economy are two different animals, and have been for some time now,” said Daryl Liew, head of portfolio management at Reyl & Cie. in Singapore. “Most Singapore-listed companies such as the banks and Singapore Telecommunications are pan-Asian plays.”

Higher Returns

What’s more, cash is king for equity investors in Singapore, who expect the market to cough up a dividend yield of 4% amid low valuations this year, compared with 2.9% on the MSCI Asia Pacific Index. The benchmark is trading at a price-to-earnings multiple of 12.8 times on one-year forward earnings, lower than its 10-year average of 13.5, according to data compiled by Bloomberg.

“Singapore is one of the few markets in Asia to be trading below its mean historical price-to-earnings ratio yet paying out one of the highest yields,” said Soek Ching Kum, head of Southeast Asia research at Credit Suisse Group AG’s private banking unit.

Positive Profit Outlook

And while earnings estimates fell at the start of the year, they have risen from their lows in February. Looking ahead, corporate profits are expected to grow by 4% for 2019 compared to 21% decline in the previous year, based on data compiled by Bloomberg.

“Focus going forward remains on the outcome of U.S.-China trade negotiations,” said DBS Bank Ltd.’s analyst Kee Yan Yeo. Singapore’s equity gauge may rise to 3,450, implying 2.6% gain from Thursday’s close, as the world’s biggest economies work toward a deal, he said.

© 2019 Bloomberg L.P.