- In 2020 the STI was down 11.8%. It was the worst performer in Asia coinciding with Singapore’s worst GDP on record
- Singapore’s equities market is in a sweet spot, we contained the pandemic better and economic rebound is more pronounced
- Vaccines, populist fiscal stimulus and low-interest rates offer downside protection to global growth
Review: The STI was down 11.8% in 2020. It was the worst performer in Asia, coinciding with Singapore’s worst GDP contraction on record of -6% to -6.5% in 2020. The pandemic triggered consensus earnings to be slashed around 27% this year. The worst-hit sectors were the pandemic epicentres of transportation (-30%) and hospitality REITs (-20%). Sectors that managed to clock gains were industrials (+9%), industrial REITs (+10%) and healthcare (+30%).
Outlook: We believe Singapore’s equity market is in a sweet spot. Our containment of the pandemic will lead to an earlier and more pronounced economic rebound than many countries, where the pandemic is still raging on. Globally, new COVID-19 cases average 561k per day. In Singapore, community cases averaged one per day over the past week. Phase 3 reopening should add to the economic momentum as bigger group activities resume. Other conditions conducive for an equity rally include low interest rates, undemanding valuations and attractive dividend yields. Vaccines and populist fiscal stimulus offer downside protection to global growth, in our view. Approval of Moderna’s and Pfizer’s vaccines can support 1.8bn doses for 900mn people in 2021. If all the 10 leading vaccines are approved, there is capacity for 9.3bn dosses in 2021, enough to cover two-thirds of the global population and most of the developed markets. Vaccines can bend the infection curve in 2021. Yes, risks remain. The most obvious are vaccine failures to tame mutations of the virus, their side effects or even inefficacy. Other factors that could unsettle markets are monetary-policy misjudgements by the Fed or foreign-policy faux pas by the new U.S. administration. But we think the likelihood of such pitfalls is low.
Recommendation: Sectors we favour in 2021 are hospitality, banks and REITs. We are taking a longer-term stance on hospitality. Pent-up demand for travel is likely to result in a prolonged upcycle for the hospitality industry. Airline stocks may be tantalising after their steep drops amid expectations of a return of travel but we have our concerns. Firstly, competition in the industry has not abated due to support from governments. Secondly, airlines are now even more leveraged than before the crisis. In the banking sector, we expect multiple headwinds to change direction. As our economy comes out of lockdown and loan moratorium ends, we expect the aggressive pre-emptive provisioning to reverse. The next positive could be the MAS’ removal of dividend caps. This has already come to pass in some jurisdictions. A corollary tailwind will be better loans growth as economic uncertainties recede. Where REITs are concerned, the pandemic has introduced unwonted volatility for risk-averse yield investors. Both asset values and dividend payments suffered in 2020. With global negative bonds at a record US$17.7tr, the search for yield remains integral to our equity strategy. Our preference is U.S. REITs for their attractive 9% yields. While work-from-home trends had already taken root in the U.S. before the pandemic, average leases of five years should anchor near-term yields, even if some tenants shift more aggressively and permanently to home-based work arrangements.
The full 53-page report in which we go into detail about the sector narratives and our top picks in Singapore is available to Insights Pro subscribers.
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