Bullish case for Singapore equities

The dismal performance of Asian equities (excluding Japan) since last summer was due to five major macro events: The Bernanke Fed’s planned rollback of its epic Treasury/mortgage buying programme (the taper), China’s credit market bubble, the collapse of high current account deficit countries (India, Indonesia), economic slowdowns and political unrest (Thailand, Pakistan). So it did not surprise me that Asian equities grossly underperformed Wall Street and Japan in 2013.

As China’s PMI is well below 50, its credit market Frankenstein close to a Lehman moment and the Politburo determined to curb local government spending/bank loans, Chinese GDP could well fall below seven per cent this year. This would be catastrophic for China-centric exporters, from South Korea to Indonesia, Singapore to Malaysia.

Asia, after all, is not just a warrant on global growth but also on growth/reforms in the Middle Kingdom. This is all the more true if Chinese growth falls at a time when US dollar interest rates rise due to the Fed taper. This macro double-whammy is negative for Asian shares in 2014, as it was in 2013.

I do see pockets of fundamental value in South-east Asia. Singapore, home of some of the region’s best-managed public companies, now trades at 13.4 times earnings. Singapore has traded as low as 10 times earnings during the Asian flu and as high as 18 times earnings in the pre-Lehman credit bubble in 2007. However, the Singapore dollar is no longer the hard money Asia Swissie, the MAS is worried about leveraged speculation in the property market (the reason Capital Land, Keppel Land, City Development, Mapletree Industrial Reit, etc. were such losers) and the riot in Little India, China-Japan tensions and the Indonesian election create political risks. Strangely, I see Vietnam, the Gulf and frontier markets outperformed Singapore, the regional safe haven.

The average daily trading volumes on the SGX are still mediocre at $1.5 billion, an indicator that global funds have neglected the City of Lions (the penny share and S-chip collapse scandal did not help either!). However, Singapore’s economy could finally rise by four per cent in 2013, though the Big Three banks are plagued by huge consumer debt. However, I see the Straits Times index as undervalued in the 2,800-2,900 range for a 3,200-3,300 target. A convenient Singapore index fund is listed on the Amex. The index fund symbol is EWS and it tracks the Straits Times Index.

After a flat year in 2013, Singapore trades at a modest valuation of 13.4 times earnings, a discount from past cycles. However, earnings growth for companies in the Straits Times index could well be in the eight-to-10-per cent EPS range. If global growth accelerates, Singapore is a clear beneficiary. If China resolves its credit crunch, the Singapore dollar would regain its status as the haven currency of the Pacific Basin. I expect Singapore property prices to drop by 10 to 15 per cent in 2014 so I am reluctant to buy banks, property developers and most (but not all) Singapore Reits.

I prefer to invest in Singapore’s oil and gas services sector, notably Keppel Corporation and Sembcorp Marine. Will the Straits Times Index fall five to seven per cent in a global stock market correction? Absolutely. So I estimate an ideal buy range is somewhere near 2,850, when the risk reward calculus is overwhelmingly in the investor’s favour. This could be implemented via a put sales on the Singapore STI index fund (symbol EWS, now at 12.60).

Singapore’s dividend yield is attractive at 3.4 per cent and its price to book not excessive at 1.32. I expect nothing spectacular from Singapore shares in 2014. However, a 15 per cent to 20 per cent return in Keppel and Sembcorp Marine is all too possible for an investor with little patience and I for value, la!