Country Report

Singapore: Turning positive in 2017

by Chuanyao Lu / Jan 4, 2017

Singapore to benefit from recovery in global trade



Don’t write off Singapore’s yield-heavy REIT plays just yet as the market seems to have priced in the rate-hike risk, and we could see pockets of strength in selected REITs. Trade-dependent Singapore will benefit from the recovery in global trade volumes as commodity prices rally. With GDP growth improving to 2.5% in 17CL, we expect an uplift in the SG market. This is supported by a return to positive EPS growth in 17CL after two years of decline. We thus raise our index PE multiple to 13.7x, or in line with its 10-yr average, implying an index target of 3,071 for 17CL (+11% TSR).

Rate hikes on the way, but REITs are pricing it in; selection is key

  • The Fed’s 25bp hike in Dec’16 is a harbinger of more to come as both our Econs team and the market now expect three rate hikes in 2017, which will bring the 3-month SIBOR to 1.7% by end 2017, vs the current 97bps.
  • While this seems negative for REITs, the sector has moved in anticipation. In a bear case scenario, we estimate that REITs could drop by another -8.4%, which implies a net decline of just -1.7% after factoring in the current sector yield of 6.7%.
  • We thus hold the view that the bulk of the near-term negativity is priced in, but do advocate being more selective in REITS given the macro headwinds. Our picks in the space would be AREIT, MINT, MCT and KDCREIT.

Singapore to benefit from recovery in global trade; bodes well for markets

  • CLSA’s economics team sees the bounce in commodity prices as a clear signal for the recovery in global trade volumes, as strengthening EM currencies spur the growth in import demand and hence stimulate world trade.
  • With trade to GDP exceeding 350%, Singapore’s GDP growth is extremely correlated to global growth, and is poised to benefit from the recovery in trade.
  • Hence, we expect Singapore GDP growth to bounce back to 2.5% after three years of decline, and to reach 3.5% by 2018 as global trade picks up further.
  • Considering that equity-market returns tend to run ahead of actual reported GDP growth figures, this implies a more positive outlook on the market for 2017.