Thursday 28 Mar 2024
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SINGAPORE’s economy is looking at a year of hampered growth. The island nation, which traditionally relies on a booming property market, robust and well-regulated financial sector and export-driven economy, has not been spared from the global economic slowdown. 

Singapore’s economy has been sluggish over the past year for several reasons. The global economic slowdown has bitten into demand for exports, the government’s cooling measures to curb rising property prices has had an impact and there has been a gradual reduction in the country’s reliance on cheap foreign labour.

“The Singaporean economy has slowed down since the last election. The key issues here are immigration worries and elevated property prices. Immigration has caused bottlenecks in the country, whether in job opportunities or even on the MRT [mass rapid transit],” says Gan Eng Peng, head of equities at Affin Hwang Asset Management Bhd.

“Hence, the government has tightened its immigration policy to make it harder for foreigners to find work in Singapore and cooled the property market. The drawback here is that labour conditions have become tight and property prices have fallen, [resulting in] the economy slowing down.” 

In 2009, the government imposed measures to cool the property market, such as limiting the amount homeowners can borrow to no more than 50% of a property’s value. In June 2013, it introduced the total debt service ratio, which allows homeowners to use only 60% of their household income to service debts. 

The cooling measures have certainly had an impact. The Urban Redevelopment Authority’s Property Price Index shows that private residential property prices have fallen an average of 1% for five consecutive quarters ending 4Q2014. Prices fell 4% in last year alone. 

Meanwhile, the influx of foreign workers have slowed to the point that the government has deferred its latest increase in foreign workers’ levy to next year, according to Finance Minister and Deputy Prime Minister Tharman Shanmugaratnam in the recent Budget 2015 announcement.

Government-linked and property stocks to do well

The overall performance of the economy is reflected in the stock market. “The Singaporean market is a slower, more mature market because structurally, its return on equity is low and has been declining the last two or three years,” says Gan, who manages the equity portion of the Affin Hwang Select SGD Income Fund. “Last year, the Straits Times Index returned about 6% compared with markets in Thailand, the Philippines and Indonesia, which returned about 15% to 20%.” 

Nevertheless, the Singapore government is growth-oriented and is aiming to achieve this by improving productivity levels, says Gan. On Feb 23, it announced its pledge to emphasise productivity gains by offering a new SkillsFuture Credit scheme, which offers Singaporeans over the age of 25 S$500 (RM1,332) in credit to spend on government-approved skills training and career development courses. 

Government-linked entities are being restructured in the effort to improve productivity. According to Gan, these entities are looking to streamline the way things work. 

“Within the government-linked companies, there is a lot of duplication of roles. What we are seeing now is the coming together of some entities, and that’s how you improve productivity.

“When entities are restructured, there is an investment opportunity because their assets tend to be realised at market value and the stock price moves up in tandem.”

Another sector Gan is eyeing is property development, as some counters are trading at a discount to market value. “I think the discount is [currently] at about 30%. If the Singapore government loosens property regulations, we will see prices go up and this discount will narrow.” 

These property developers include government-linked companies such as CapitaLand Ltd, which Gan favours for its position in the industry and its potential restructuring by the government. 

“The company has become more streamlined since its new CEO took over a few years ago. We believe it will be accelerating its asset recycling model, and this will narrow its discount to real net asset value (RNAV),” he says. The asset recycling model is one where property developers purchase land, develop it and then sell it to a real estate investment trust for a profit. 

“If CapitaLand does go through more restructuring, there could be more assets being realised at market value. This will force the narrowing of the discount to RNAV,” says Gan.

His other stock picks are iFast Corp Ltd and Oversea-Chinese Banking Corp Ltd (OCBC). “iFast has done very well since listing less than six months ago, but we think it’s a multi-year growth story. It has various strategies that will drive growth for the next few years,” he says. 

Gan cites one of iFast’s initiatives in positioning itself in the retail bond business. “Currently, most bonds are traded between banks, unlike stocks. So, they want to tap this market like a form of exchange, and it is targeted at the retail market. It’s a highly cash-generative business, like an asset management company, and the cost base tends to be quite fixed.”

Gan favours OCBC for its synergies with Hong Kong-based Wing Hang Bank Ltd, which the former acquired in August last year. “OCBC can drive merger synergies in the next two to three years. Also, it will see an expansion in net interest margins (NIM) if the US Federal Reserve raises interest rates. We also like banks because they pay a 3% to 4% dividend yield,” he says.

Gan advises investors to steer clear of oil and gas and supply chain management companies. “The impact of the oil price collapse has only been felt in the last four months. The real impact has not been reflected in financial results. It will take more time to fully reflect in real business conditions and drop in earnings. We will not bargain hunt,” he says. As at March 1, Brent crude oil was trading at US$62.13 per barrel.

“O&G companies have high gearing, and the financial leverage to their bottom line is very large. We expect some bankruptcies to happen among the smaller and weaker companies, and that will have an impact on the sector.” 

Gan also does not favour supply chain management or trading-oriented companies, such as Wilmar International Ltd and Noble Group Ltd. “We don’t like them because they deal with commodities and commodity prices are low [at the moment]. Some of them take a directional view with regards to commodity prices and because the margin in this business is quite low, they tend to get hit quite severely when commodity prices are more volatile,” he notes.
 

This article first appeared in Personal Wealth, a section of The Edge Malaysia, on March 9 - 15, 2015.

 

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