Singapore is the value play in South-east Asian equities

Singapore's Straits Times index rose 19 per cent in 2017.

Singapore's meteoric rise from a colonial backwater of the British Empire and an amputated Chinese majority state of the Malay Federation to the world's best governed, richest city state under the late Lee Kwan Yew is an Asian fairytale. If Asia is a growth warrant on the global economy, Singapore is Ground Zero of world trade, with exports 180 per cent of GDP. Once mocked as a "nanny state" in the 1980s, Singapore is Southeast Asia's banking, aviation, logistics, shopping, shipping, oil and gas trading and property hub as well as the incubator of sunrise industries that range from robotics to artificial intelligence software, aerospace design to biotech to e-commerce.
After two years of flat corporate earnings in 2015 and 2016, Singapore Inc's EPS growth rose 11 per cent in 2017, thanks to the first synchronised global economic recovery since the failure of Lehman Brothers and the onset of the Great Recession in 2008. Singapore's GDP growth rose above three per cent as exports, tourism and services (two thirds of the Lion City's economic output) rose in unison. With US consumer confidence at 15-year highs and Chinese GDP growth above 6.5 per cent, it is no coincidence that Singapore's manufactured exports have begun to rise. After all, Xi Jinping's Middle Kingdom is Singapore's largest export destination even though Britain and the United States are its traditional economic and security patrons.
Singapore's Straits Times index (STI) rose 19 per cent in 2017 as the financial markets priced in the new economic and earnings cycle. Even though Brent crude has risen to $60, Singapore equities have rerated due to the highest offshore fund inflows since the 2008 global financial crisis. Will the bull market in Singapore continue in 2018? Yes. Property prices have begun to rise, a ballast for the SGX's 30 plus listed real estate investment trusts (ReitT's). Economic recovery is broadening as Asian growth accelerates, led by India, China and Southeast Asia. Foreign funds are accumulating Singapore, Asean's best regulated stock market. The smart money from China, Hong Kong and Taiwan is loading up on Singapore's office towers, hotels, warehouses and shopping malls. The Lion City is the ultimate proxy for Asian trade.
I expect there will be a sell-off in Singapore shares sometime in the late spring. The three month Singapore interbank offered rate (Sibor) is 1.4 per cent now but is headed 100 basis points higher as wage inflation forces the Powell Fed to hike US interest rates. This will lead to sharply higher bond yields in Singapore and a fall in the STI to 3,200 while the Sing dollar depreciate against the greenback to 1.45. True, the lesson of the Asian currency meltdown in 1997-98 was that foreign funds flee the Pacific Rim tiger economies at the speed of light when the economic climate turns from benign to malign. While I do not see this happening in 2018, I note that Singapore is vulnerable to external shocks, notably a US-China trade war or a global recession.
MSCI Singapore trades at the cheapest valuation and highest dividend yield in Southeast Asia. Singapore trades at 14 times forward earnings, far below the 15-16 times valuations for Malaysia, Thailand, Indonesia and 18.6 times for the Philippines. The dividend yield is still attractive at 3.4 per cent. Singapore REIT's yield 5.8 per cent, higher than peers in Hong Kong, Japan and Australia. As global growth accelerates, Singapore could well rerate to 14.6 times forward earnings by year end 2018. This equates to 3,800 on the STI if my earnings growth crystal ball is on the money.
I expect the Strait Times index to trade in a 3,200-3,800 range in 2018. In Singapore, my favourite sectors remain large cap banks (DBS, UOB), property developers (City Developments), office REIT's (Keppel REIT, Capital Commercial Trust), hotel (CDL Hospitality), technology (Hi-P) and offshore marine platforms (Sembcorp). Risks? An inflation scare could cause the Powell Fed to go ballistic on interest rates. An oil supply shock in the Middle East could cause a spike in Brent crude. A Minsky moment in China would be catastrophic, as would a rise in local taxes (GST?). The geopolitics of the Korean peninsula is still fragile (hence my fondness for Raytheon shares as a hedge. Raytheon makes the world's most lethal missiles!). Given the high correlations between the Straits Times index, Wall Street and Hong Kong/China, cross-market contagion at the speed of light is inevitable if Mr. Market's mood swings turn ugly next year.