Just last week, stock markets around the world retreated as investors reacted with fear over concerns of the yield curve inversion. Overnight, the inverted yield curve became a hot topic of the financial markets. Since yields for both 3 month and 1 year treasuries rose higher than the 10-year treasury on March 22, many have speculated for an imminent recession.
This week, however, stock markets seems to be singing a different tune. The fear seems to dwindle down and instead burst into immense optimism as global stock markets rallied on the back off positive Chinese PMI data.
The sentiments at home in Singapore were jubilant as well with the STI breaking new-highs since 21st Jan 2019. Shares of banks and well-known blue chips displayed bullish momentum as investors rush in to accumulate. The STI thus far has gained 5% from its recent low.
The rally was led by strong bullish momentum in the Shanghai Composite Index and Hang Seng Index ahead of the resumption of trade talks between the U.S. and China in Washington.
Despite the recent recovery, the worse is not over. There are questions still lingering in our minds:
Are we in a bull market now? Or should we be cautious about the rally?
How will Singapore stocks perform relative to other stock markets going forward?
Are Singapore stocks still attractive for domestic and foreign investors?
In my opinion, there are only 2 factors that drives the stock market’s long term performance: valuations and fundamentals. Here, we look into 5 valuation metrics comparing Singapore stocks against stock markets globally:
Price to Earnings Ratio (P/E): Per share measure of stock price to total net profit of companies. Price to earnings is one of the most popular forms of equity valuation. The basic price to earnings ratio (P/E) simply tells us what multiple the market is paying for profits. For instance, a P/E of 20 means investors are willing to pay 20 times the current level of earnings to own shares of the company. Singapore ranks 9th cheapest P/E out of the 40 countries with P/E 13.
Price to Book Value: Per share measure of stock price to Net Asset Value. The ratio is used to compare a business’s net assets that are available in relation to the sales price of its stock. A reading under 1 suggests that stock prices are cheaper than the value of its net assets.
Singapore ranks 5th cheapest P/B out of 40 countries with P/B 1.1
Dividend Yield %: Historical dividend as percentage of stock price. The dividend yield is the ratio of the annual dividend compared to the current share price and is expressed as a percentage. Generally, the higher the dividend yield the more attractive it is to invest.
Singapore ranks 14th highest dividend yield with yields at 3.7%
ASEAN – 5
Comparing Singapore to its ASEAN peers, the chart below shows how undervalued we are in the region. Singapore rank closes to the axis which indicates that Singapore stocks are cheapest among 5 ASEAN markets, while Indonesia is on the opposite end of the spectrum – highest PE & PB valuation.
Yield Spread (Dividend Yield vs Bond Yield)
The yield spread is the difference between the Dividend Yield (stock market) and the Government Bond Yield. A positive difference between Dividend Yield and the Government Bond Yield tells us that the stock market offers a better yield than government bonds, while a negative difference indicates otherwise. The larger the spread between the 2 securities, the greater margin of safety you will have.
Presently, Singapore the 3rd highest yield spread among the 11 Asian markets in comparison. Singapore is behind Japan and Taiwan in terms of yield spread, which suggest that Singapore stocks are one of the cheapest in the region.
Earnings Yield – Bond Yield Spread
Here is a similar comparison of the Earnings Yield vs Govt Bond Yields across major markets globally, this yield spread compares the relative attractiveness between equities and bonds. A large positive spread indicates that equities are more attractive than bonds.
In Asia, Singapore is behind South Korea, China, Japan & Taiwan while South East Asian counterparts like Indonesia and Philippines offers less returns.
Singapore stocks ranked on lower quintiles of P/E and P/B ratios while ranked in median range for Dividend yield. Comparisons against its regional peers, suggests that Singapore stocks are relatively undervalued and attractive for investors. Despite recent recovery, Singapore stocks are still relatively undervalued compared to regional counterparts.
Singapore Leading Economic Indicator Index
In Singapore, the Composite Leading Index is a tool to predict economic contractions or expansions. The index is computed quarterly with the consideration of nine economic indicators:
- Total new companies formed
- Money supply (M2)
- Singapore Stock market indices
- Business expectations for wholesale trade
- Business expectations for stock of finished goods (manufacturing)
- US Purchasing Managers’ Index (manufacturing)
- Total non-oil Seaborne Cargo Handled
- Domestic liquidity indicator
- Total non-oil retained imports.
After the strong bullish momentum since 2016, Singapore’s Leading Economic Index remained unchanged at 112 Index Points in the fourth quarter of 2018 from 112 Index Points in the third quarter of 2018.
Singapore’s economic growth slowed in the first three months of 2019 as falling electronics output dragged down the manufacturing sector.
Singapore’s GDP grew 1.3 per cent year on year in the first quarter of 2019 a pale comparison to the 1.9 per cent growth recorded in the last quarter of 2018 (MTI).
The contraction of Singapore’s manufacturing sector was largely due to slowdown in the engineering and electronics industries as slowing demand for semiconductors hit the electronics supply chain in Asia in recent months.
To measure economic activity and business conditions, investors and analyst often rely on the Purchasing Managers’ Index (PMI). A reading above 50 indicates economic expansion, while a reading below 50 points toward contraction.
Singapore’s manufacturing Purchasing Managers’ Index (PMI) edged higher to 50.8 in March 2019, up from 50.4 in February. The PMI indicates a modest improvement in the health of Singapore’s business sector. This is the highest PMI reading in three months and marked 31 consecutive months of expansion.
The electronics PMI, which has been in contraction since November, also edged up to 49.8 in March from 49.5 in the previous month.
However, the SIPMM noted that March’s improvement in the order backlog index for the whole manufacturing industry was not enough to change the contraction seen in the past six months.
Singapore’s uptick in manufacturing activity is in line with the modest recovery seen across its Asian counterparts. Most of Asia including Vietnam, Indonesia, China, Thailand, Taiwan and South Korea saw improved PMI readings in March.
Singapore’s PMI recovery was mainly due to improving conditions from its largest trading partner, China. As business activity in China improves, Singapore benefited from the rebound as well. The uptick in Chinese PMI was primarily due to additional stimulus which included tax cuts to boost manufacturing and other sectors. Manufacturers benefited as taxes fell by 3% to 13%, while transportation and construction companies saw taxes fell by 1% to 9%.
In January, the PBOC announced a 1% reduction in the lenders’ required reserve ratio to encourage borrowing, mainly targeted at the private sector and SMEs. In the same period, public spending was also raised for housing and property development. (South China Morning Post)
Despite fundamentals indicating a slowdown in the earlier months, March’s rebound could mean a positive impact of the stimulus policies. Though it is still to early to conclude a permanent recovery in China, the government plans to review the pace of its stimulus policies to cope with changing economic conditions.
The chart above shows the close relationship between the PMIs of China and Singapore. Therefore, any indication of Singapore’s future economic performance can be predicted by understanding the developments of Chinese PMI.
On the whole, the uptick in global PMI does not exactly indicate a permanent recovery in global business conditions. We have to remain patient for a confirmation of at least 3 consecutive months of steady recovery.
Growth Catalyst That Could Boost The Singapore Economy
Unveiled by the government in the 2019 Draft Master Plan, the Singapore economy looks set for a boost from the proposed plan of upgrading the two integrated resorts in the next few years.
The proposal would mean that the integrated resorts will receive fresh investments of S$9bn to expand its hotels, theme parks and entertainment arena. This amount represents two-thirds of the Integrated Resorts’ initial investment (S$15bn) in 2006.
This development would mean that Singapore’s construction companies will receive the first boost from contract awards, followed by banks and the tourism sector; and eventually to the general economy.
Singapore’s construction sector has been struggling over the past 5 years as construction stocks remain depressed in general. Our local construction firms could potentially benefit from the proposed investments as these firms have already established track records in IR development in 2007-2010 – this is opportunity for bargain hunts.
Companies such as Yongnam Holdings, Tiong Seng Holdings, CSC Holdings, Tee International and Lian Beng Group were previously involved in the development of the first IR. Due to their experience and technical know-how, they could potentially land contracts for the 2nd development (CGS-CIMB Research).
Besides the construction sector, tourism will also be another beneficiary. Upon completion of the IR upgrades, tourism arrivals and spending are likely to grow. These also means more employment opportunity within the retail and hospitality sector.
Stocks to watch:
Overall demand for hotel, service residences and construction services could see a boost going forward. Given that these sectors have been struggling lately, there are many opportunities to position your portfolio to benefit from the proposed investment.
Despite the recent recovery in the STI, Singapore stocks are still undervalued when compared to global and regional peers.