Nomura tips going ‘tactically overweight’ on Singapore market

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Despite Singapore’s stock market outperforming its Asean, or Association of Southeast Asian Nations, peers, the market still warrants a “tactical overweight,” Nomura said in a note on Monday.

For one, across the Asean five — Singapore, Malaysia, Philippines, Thailand and Indonesia — Singapore has the most high-frequency indicators which impact index earnings moving the right way, Nomura said, noting that earnings revisions in the city-state have been the strongest in the region.

It noted consensus forecasts Singapore 2018-19 earnings growth at 8-13 percent, which the investment back said was achievable.

Earnings growth?

It added that Singapore earnings also “correlate well” with oil prices as crude impacts not just the offshore and marine sector, but also the banks on sentiment toward their asset quality, as well as potentially boosting the Singapore dollar on pro-cyclical correlation. Container throughput rates are also up a “healthy” 12-13 percent year-on-year, which is key for a trade-dependent open economy such as Singapore, Nomura said.

Nomura also pointing to an improving housing market, with prices up in 2017 for the first time in four years.

Valuations aren’t stretched either, Nomura noted.

“In terms of relative valuations, the market is not exorbitantly expensive in the regional context (forward price-to-earnings ratio of 13.8 times versus Asean’s 15.3 times),” Nomura said. “Singapore’s current valuation discount to Asean benchmark is around 10 percent – historically this discount has been around 4 percent.”

Singapore’s political landscape is Asean’s most stable, an added attraction as regional peers head into election cycles, it said.

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Despite Singapore banks’ outperformance in 2017 and so far this year, Nomura is keeping an overweight on the city-state’s banks, citing a laundry list of reasons, including benefiting from higher interest rates, solid dividends and commodity price rises boosting asset quality.

“Singapore banks should also be one of the prime beneficiaries of the long-term thematic around rising infrastructure investments on the back of China’s Belt and Road Initiative (BRI) given their well-entrenched project finance capabilities, Singapore’ status as a
regional financial centre, and its status as the second-largest offshore renminbi center outside China,” Nomura said. “We also like the added attraction of the banks’ wealth management businesses – which we believe ranks as one of the best in the region.”

‘Be selective in property’

Nomura tipped being selective among Singapore REITs and property plays as higher yields may not auger well for REIT performance and valuations may already be high.

While Singapore telcos face competitive pressure, Nomura said it was keeping a “small position” in Singtel, which it rates at Neutral, for the “attractive” dividend yield and “diversified exposure.”

The risks

Nomura may have gone tactically overweight, but it said it had long term concerns about the market outlook.

“Ageing/poor demographics and weak productivity growth will likely be major headwinds for sustainable economic and earnings growth rates,” it said. It noted that with the market’s small size, it only has limited growth opportunities, which is why the attempt to position as a regional “innovation hub” for pan-Asean growth isn’t surprising.

Nomura pointed to another risk: The index is dominated by “old economy” sectors, such as banks and property.

“For Asean (and indeed Singapore) equities to attract strong equity flows, we need to see more ‘new economy’ companies coming to the capital markets,” Nomura said. “With some of the best educational institutions, a strong talent pool (and ability to attract talent from
elsewhere), governments focus to transform itself into an innovation and a tech/fintech hub, we hope that overtime we should see more listings on the Singapore stock exchange.”

But it added, that for now, there have been more delistings than listings.

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