Unmasking Asia Thematic Research Series - Maybank Kim Eng 2016-06-29: The Singapore Fix

Singapore Strategy

Unmasking Asia Thematic Research Series - The Singapore Fix

With sub-2% GDP growth expectations and EPS contractions for equities, Singapore is struggling.
Some of the attributes that have been responsible for its success so far are, ironically, stifling its further growth. These include appreciating property prices, high wage growth, high savings rates and lower returns from overseas investments.
While the government has been evolving steps to address these, we think that radical changes are called for – if not already afoot - to guard against a precipitous loss of Singapore’s relevance to global markets.

Unless property prices plunge suddenly and dramatically, we think that property- cooling measures may not be lifted.
Singapore households have SGD840b of capital or 209% of GDP tied up in residential property. This has resulted in lower disposable income which has impeded consumer spending and muzzled entrepreneurship.
Another less obvious implication of property “overinvestment” is that home-price appreciation fuels wage inflation, reducing Singapore’s cost competitiveness. We think turning property-cooling measures permanent could be an effective way to steer investments away from this asset class to more productive uses in the long run, which may be what the government is contemplating. As this would put developers at the losing end, we turn less bullish on the residential property sector and downgrade it to NEUTRAL.
Wing Tai and CityDev are most exposed to Singapore’s residential market.
Additionally, given the knock-on effects on loan demand, continue to sell banks, which are already grappling with asset-impairment risks and likely fewer lending opportunities. OCBC and DBS are least preferred.

Short-term relief to wage pressures is required, in our view, as wage growth has outpaced productivity gains to hit 43.4% of GDP. Historically, such levels preceded a recession, as in 1985, 1997 and 2000. Without intervention, retrenchments could rise.
Although cutting CPF rates can offer a direct reprieve, it runs counter to concerns about retirement financial security and may be politically unpalatable.
We think that the ideal solution may be for the government to co-pay wages and increase social spending. Businesses could receive a shot in the arm, especially those with high labour content.

At 37% of GDP, Singapore’s household consumption is one of the lowest among developed countries. What’s more, it has been declining.
If a diversion away from property investments and wage relief are successful, we foresee a consumption boost. Such domestic-led growth should be more desirable amid rising anti- globalisation sentiment in parts of the world. Consumer staples could offer the best exposure to this, we believe. We recommend Sheng Siong.

The government is not without a long-term strategy. It has long emphasised the need to create value and innovate. Singapore’s large pool of reserves painstakingly accumulated over the years makes up for its lack of natural resources.
As FY16 is only the first year of the government’s new 5-year term, we expect higher public spending ahead. Two initiatives could take centre stage: 1) R&D support; and 2) the development of a Smart Nation.
R&D development would drive demand for business park and high-spec space: buy AREIT and MINT. Telcos should be natural beneficiaries of smart-nation development: buy Singtel and StarHub.

Growth aspirations and strong free cash flows have sent Singapore companies investing aggressively overseas since early 2000, with varying results. For instance, SingPost’s overseas execution has been patchy.
In our coverage universe, 36% of assets are now to be found outside the country. But many may not realise that Singapore’s returns are higher than overseas returns, with China assets faring the worst. Beware of concentration risks in China.
If Singapore can shed its preoccupation with property, we believe a floodgate of savings will target yields. In which case, Singapore Inc may be better off enhancing the value of existing overseas assets and ensuring future acquisitions generate robust free cash flows. SGX could be the capital market for yields in Asia.