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Credit Suisse: Local Economy Slowing in 2015 But Valuations Are Reasonable
Aspire, Investments | 12 January 2015
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By: Lim Si Jie
Articles (169) Profile

2015 Macro Outlook Less Than Encouraging
After a period of strong growth around 2H13, GDP growth in Singapore has slowed materially. In hindsight, the late 2013 growth seems to have been driven by a material inventory cycle. There is very little economic impetus from private and government consumption in Singapore.

Source: CEIC; Indicators are slowing - net exports are down

Source: CEIC; visitor arrivals are also falling sharply

According to Credit Suisse (CS), the macro outlook for Singapore “remains challenged”. “Several macro indicators—GDP growth, net exports, retail sales, visitor arrivals and CPI suggest a continued slowdown in SG”. Weaker property and credit demand, the oil price decline and weaker ASEAN/China growth can continue to impede Singapore’s growth in 2015 for some time.

GDP Growth Pegged to Global Trade

Source: CEIC, IMF, Credit Suisse estimates; Singapore's GDP growth vs global trade

Statistically speaking, CS notes that “Singapore’s economic growth has greater correlation with global trade volume growth than with headline global GDP growth”. The reliance of Singapore’s GDP on net exports leads to the hope that any recovery in global economic activity can lead to GDP improvement.

CS economists are forecasting a recovery in 2015—with global GDP expected to grow 2.9 percent YoY as compared with 2.6 percent YoY in 2014.

However, most of that growth is pegged on improvements in Developed Markets (DM) economies as Emerging Markets (EM) growth is expected to remain soft next year. The US and Europe, which used to account for almost 40% of Singapore’s trade (export plus import by value), now represents less than 30 percent of Singapore’s trade as trade in Asia grew.

Tightening Of Regulatory Measures
There is likely to be limited room for any major change to the government’s tight immigration policy, especially ahead of the elections and due to the debate that ensued after the recent release of the population white paper.

The government itself has been clear on the need for Singapore to restructure and move away from labour intensive industries, and focus on creating higher productivity.

However, the government might ease controls on the property market in the near term. Singapore’s “government cannot afford to have people’s wealth”, where average home ownership rate stood at 90 percent, “to be eroded materially”, CS mentions. Furthermore, easing property controls can be an easy means of supporting the economy.

Impact of US Fed Rate Hike on Singapore
Interest rates are expected to increase sometime next year on the back of a US Fed rate hike (something the market has worried about for a while). Even as some highly leverage companies might struggle in light of higher interest rates, the recent MAS Financial Stability Review suggested that corporates in Singapore should remain resilient in the face of increasing interest costs.

No Forewarning From Data

Source: CEIC; Unemployment continues to remain low

Unemployment in Singapore is still low, and has not started to increase at all. While a small number of firms are restructuring and resizing, there is no ‘stress’ in the jobs market yet. Average wage growth still remains robust at around 2.7 percent. On top of that, core inflation is still above average.

Source: CEIC, Wage growth still robust

Government intervention might be plausible in view of SG50 and the upcoming elections to boost Singapore’s growth, with the Singapore dollar’s depreciation also another option. However, Credit Suisse believes that policy makers are only likely to respond post weakness in data trends, and not anticipate data trends.

Inexpensive Valuation Provides Margin of Safety
MSCI SG ROE is close to lows seen during the Global Financial Crisis (GFC). Its P/B is at “post-GFC lows” while its P/E is at medium term average. CS notes that “the SG market is close to the ‘cheapest four’ in our regional strategist’s list in APAC”. Growth concerns/EM impact of higher rates can make SG a ‘safe haven’ trade in the ASEAN context in 2015.

Source: MSCI, Datastream; SG's P/B at post-GFC lows. Low expectations, in the context of a slowing ASEAN may help SG stand out.

Source: MSCI, Datastream; MSCI Singapore - 12M fwd P/E

Source: MSCI, Datastream; MSCI Singapore trailing P/B

Lack of Investing Opportunities Might Stimulate M&A Activities
Enterprise Value per invested capital (EV / IC) has lowered over the past year. Stocks with current market capitalisation of more than $2 billion have an aggregate EV/IC close to 1.0 while smaller companies with market capitalisation between $500 million to $2 billion have an aggregate EV/IC less than 1.0.

Source: the BLOOMBERG PROFESSIONAL service, IBES, Credit Suisse; While valuations have become modest, and for smaller companies are now less than one

An increasing number of Merger and Acquisition (M&A) activities have taken place in 2014. Deals worth $40 billion have been announced in the past year. Moving forward, low interest rates and a lack of investment opportunities will be key drivers that will drive increasing corporate activity.

Source: BLOOMBERG PROFESSIONAL service, SGX, Credit Suisse; Share buy-backs have increased materially - indicating a lack of reinvestment opportunities.

Possible M&A targets are likely be companies that will improve current returns (ROE) or have low valuations for its net worth.

Gaming and Agribusiness Have The Highest Sector Risk Reward Ratio
Credit Suisse compared across sectors using its R3 (Risk Reward Ratio) measure, which is based on the fundamental upside and potential downside using historical low valuations. A high upside, low downside stock can be attractive (high R3 ratio).

Source: Company data, Credit Suisse estimates; Sector wise upside and downside potential

Credit Suisse highlighted cyclical sectors to feature the best opportunities, namely Gaming, Agri-commodity and property to deliver the best risk-reward ratios base on its R3 measure.

Top Risk Reward Ratio Picks: CapitaMall Trust and Genting

Source: Company data, Credit Suisse estimates; Stocks sorted by the highest R3 ratio

CapitaMall Trust and Genting SP are estimated to provide the best returns base on the R3 ratio analysis. CapitaMall Trust provides an additional dividend yield for investors while Genting’s recent downtrend has made it an attractive buy for the upcoming year.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Genting Singapore  0.910 +0.010 +1.11%   
Business: Develops, operates & mkts casinos & IRs globally, including Australia, M'sia, Philippines & UK. [FY18 Turnover] Gaming (66.1%), non-gaming (33.8%), others & invs (0.1%).

Insight: May-19, 1Q19, despite Co's non-gaming business reg... Read More
CapitaLand Mall Trust  2.670 +0.06 +2.30%   
Business: Co owns and invests in quality income-producing assets which are used, or predominantly used, for retail purposes primarily in Singapore.

Insight: Apr-19, 1Q19 gross revenue and NPI rose 10% and 11... Read More

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