Singapore Equities: Where to Invest In 2005?

The Singapore equity market has been among the best performing markets in the region for 2004. Right up till late November this year, the Straits Times Index was the second best performing index, chalking up a year-to-date gain of 15.04%. This performance was only outdone by the Jakarta Composite Index which rose 25.85%, making Indonesia the likeliest contender for best performing market in 2004 (click here to view article on top performing indices for 2004).

At Fundsupermart, we are upbeat on the prospects for the Singapore equity market. In fact, our research team believes that the STI can hit 3,000 by points by the end of 2006 (click here to read a related report). What's the underlying basis for our bullishness? To begin with, economic expansion this year has been very healthy, as non-oil domestic exports benefited from overseas demand. GDP growth for 2004 is expected to fall between 5-7% and that is considered by some to be on the conservative side of goverment estimates. Economic growth has been accompanied by higher employment figures and the increase in job hirings this year, has certainly added to the feel good factor. It is thus unsurprising that the Singapore equity market has rallied strongly. However our research team suggests that isn't the end of the story. For one thing, valuations for the Singapore market are currently around 16 times PE (price-to-earnings ratio), which isn't high by historical standards. In addition, the Singapore market also offers a dividend yield of around 3%. This is relatively high for the region, and certainly higher than the average dividend yield for American and European equity markets.

As a result of the rally in the local market, Singapore equity funds have well this year. Amongst its peer funds, the Shenton Thrift Fund (click here to view the factsheet) has a been a very strong performer (see performance table below).

Fund manager Roy Phua has been the managing the fund since 2000, and the fund has developed a reputation for unearthing gems, typically overlooked by other investors. For 2005, Phua says that his efforts will be directed at identifying out-of-favour companies that that were largely ignored in the rally this year. He explains further in this email interview.

Q: Earlier in August 2004, you were little cautious on the Singapore market and indicated that there was not going to be a broad based rally. Rather going forward, selected stocks would outperform. Do you still feel the same way?

A: Yes. Investors have generally been cautious and unwilling to look at the longer term prospects for relatively new companies and sectors. As a result, benchmark blue chip companies, particularly those supported by dividend yields, have done well.

A closer analysis will show that non-benchmark stocks have fared far less well, and herein lies an opportunity. Where the general investment sentiment appears to focus mainly on blue chips, we have directed our efforts toward identifying out-of-favour companies with solid business prospects over the next 2 to 3 years, and which we feel are under valued today. These companies could be benchmark, or non-benchmark stocks.

We believe growth in 2005 and the next few years would come from sectors and stocks that can ride the growth themes of

Q: The Singapore stock market has done well in 2004. Do you think the performance was truly the result of underlying economic fundamentals (i.e. corporate profit and attractive valuations) or was it purely sentiment driven?

A: A combination of good fundamentals supported by ample domestic liquidity. Singapore's earnings trend has been more resilient than that of many of the other regional economies, and valuations are still at undemanding levels. In addition, the benchmark stocks are defensive in nature, for instance technology stocks are a minor index component. All in, these qualities make Singapore equities a preferred choice when compared to other regional markets.

Q: Blue chips have been big beneficiaries of the rally in 2004, but small cap stocks (such as those listed on the SESDAQ) have not. Typically in a rally, small caps tend to outperform. Why hasn't this happened?

A: 2004 has been a challenging year for global equities, plagued by concerns over slower global economic growth, high energy prices, and rising inflation. Against this backdrop, blue chips typically do better than the small cap sector given the perceived "safer" status offered by blue chip companies.

Looking ahead, though, blue chips have become arguably over-owned, well researched, and also more expensive; as such, we would not be surprised to see performance being more balanced.

Q: What then is the outlook for small cap stocks? Are you overweight this area for the fund?

A: Our investment process is not dominated by any particular style (i.e. big cap vs. small cap or growth vs. value etc); therefore it would be difficult to provide an outlook for small cap stocks.

Our investment principle is to identify unique competitive businesses to invest in over the long term rather than focus on short term market trends or fads. Take for example a company like Hyflux; the stock had largely underperformed the ST Index or the blue chip universe for the first 3 quarters of this year, but has more than caught up since the start of October with a return of almost 70% year to date.

The Hyflux example demonstrates the point that strong businesses are unlikely to remain under valued over long periods of time and identifying such businesses is a much more rewarding strategy than market timing over the longer term.

Indiscriminate selling (in our view) of non blue chip stocks, regardless of business fundamentals or balance sheet strength, has provided us with an opportunity to add to our weightings in selected stocks.

A: We invest in IPO's which meet our investment criteria. The key is to identify strong businesses to invest in. Whether it is an IPO, listed company, large cap or small cap is less relevant for us.

Q: To what extent are high oil prices and overheating in China concerns for the stock market?

A: Most analysts have already factored in high oil prices; as long as oil prices remain at close to current levels, it is not a major concern. The China risk is more of a concern as the majority expects the economy to engineer a "soft" landing i.e. economic growth to trend closer to a long term sustainable rate of 8% or so without much disruption to major sectors or companies. This could be overly optimistic, and it is also one of the reasons why we expect some degree of market volatility in the coming year.

Q: To what extent is the falling USD having a negative impact on the stock market? If the USD continues its downward trend, and exports fall as a result, will that pose an extreme risk for the Singapore equity market?

A: A downward trend in the USD is instinctively negative for exporters, as it implies a decline in cost competitiveness. On the other hand, a gradual depreciation in the USD might not necessarily be bad for the economy as a whole. A strengthening SGD should provide for a more accommodative monetary environment, and benefit the non export segment of the stock market. What we could continue to see as a result of currency shifts is further divergence in performance between "domestic" stocks and "exporters".

Q: Financial services companies currently form about 35% of the fund. Are these stocks export related, or do they play into domestic consumption? Why is the weighting high in this particular sector?

A: The fund's weighting in the financial sector is high on an absolute basis, but it remains a slight under weight when compared to the ST Index.

We view the financial sector as a core holding for a Singapore country fund. Expectations for earnings are reasonably low, valuations undemanding, and dividend yield decent. The banks do provide a good proxy to the underlying domestic economy, with its lending and wealth management businesses. Over the years, geographical diversification means that investors also gain exposure to regional economies through this sector.

'No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimers.