Are Singapore, Indonesia bank stocks worth it? Apparently, they are
Lion City's export surge means it could well see 3% GDP growth in the next 12 months
I have admired Singapore for its fairy tale rise from a somnolent British colony on the southern tip of Malaya to its role as the financial, aviation, retail and technology hub of Southeast Asia. In the past decade, I have happily braved the perennial afternoon rain and monsoon humidity, the crowds at Changi and the retail razzmatazz on Orchard Road to invest in pre-IPO deals in Singapore industrial property and office Reits. With a per capita income of $50,000, an Anglo-Saxon legal pedigree, a famously uncorrupt government led by the son of the legendary Lee Kwan Yew, a magnet for the world's smart money flows, minimal inflation, the most credible central bank (MAS) and currency (Sing dollar) in Southeast Asia, Singapore is the world's most successful and best managed city-state, a AAA sovereign credit, a modern Titian's Venice or Rembrandt's Amsterdam (though we don't do art, la!).
Singapore's recent export surge mean the Lion City could well see three per cent GDP growth in the next 12 months. The Singapore dollar is now once again undervalued as King Dollar swoons. Money supply and bank loan growth has accelerated, a bullish omen for the Straits Times index. Banking profits and net interest margins have begun to rise. China and India's stellar growth has powered an uptick in Asian trade volumes, whose leveraged proxy is the Strait Times index even as its market breath and momentum rises.
Singapore's Straits Times index and country index fund has risen 14 per cent in 2017 as the Monetary Authority of Singapore (MAS) has opted for easy money to combat deflation risk and boost economic growth. The MAS also tracks central bank easing in China, Indonesia, Taiwan and even India in the past 12 months.
DBS Group, the flagship Temasek owned bank that is the largest financial institution in Southeast Asia, has been my favourite Singapore money centre bank investment since July 2016. Piyush Gupta has transformed DBS' bottom line via cost cutting as net interest margins and loan yields fatten. DBS and United Overseas Bank (UOB) are both ideal proxies for Singapore's economic, earnings and stock buyback cycle. Singapore banks have also built large fee generating wealth management businesses and have largely written off busted oil, gas and commodities loans. A steeper US Treasury yield curve will be bullish for net interest margins and EPS growth in DBS, UOB and OCBC, which has also bought its own undervalued shares. Singapore banks also offer some of Southeast Asia finance's highest free cash flow yield, at 10-12 per cent.
Indonesia's reformist President Jokowi Widodo, the recent tax amnesty and surge in private wealth creation also makes me bullish on Indonesian banks. In 1998, Indonesia's banking system was bankrupt as Jakarta was forced to negotiate an emergency lifeline from the IMF, mobs attacked Chinese owned businesses in Java and President Suharto's 34-year-old kleptocratic dictatorship imploded. Now Indonesia is the world's most robust Muslim majority parliamentary democracy, a colossus of 260 million people whose middle class will happily throng four-star hotels in the holy city of Makkah.
Indonesia's largest retail and consumer bank is Bank of Central Asia. The eight per cent fall in Bank of Central Asia (BCA) shares was due to a cut in its MSCI Indonesia index weighing, not any slip up in its operating profits. Digital/consumer banking will power BCA earnings growth in the next three years. True, BCA is expensive at 17 times forward earnings but high growth consumer banks in consensus darling emerging markets like India and Indonesia are never cheap. Bank Rakyat, which boards the largest branch/mobile banking network in Indonesia could well be an alternative to Bank of Central Asia. Bank Rakyat trades at a modest 12 times forward earnings even though it has grown its deposit base faster than either BCA or Bank Mandiri.
I have never invested in Malaysia, as so many Gulf investors have lost fortunes in the KL property market and Bursa. As crude oil plunges to $48, it makes even less sense to invest in Southeast Asia's only oil and LNG exporter. Najib Razzak's political woes, the free-fall in the ringgit and the 1MDB sovereign wealth scandal further erode the investment case for Malaysia - at least for now. Thailand has been a far more profitable emerging market country pick than Malaysia, let by the 25 per cent sizzle in Krung Thai Bank and Bangkok Bank.
The writer is a global equities strategist and fund manager. He can be contacted at firstname.lastname@example.org
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