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What Next for Singapore Shares?

IT was only natural that a small, open economy with the highest exports/ GDP ratios in the Pacific Rim would be the first to feel the impact of the Wall Street credit squeeze.

So the Singapore economy come to a shuddering halt when GDP contracted two successive quarters into to the recession mode, the Singapore dollar fell from 1.35 to 1.47 against the greenback as the MAS eased monetary policy in response to the GDP slowdown and the Straits Times Index plunged from 3800 to 2000.

While valuations are meaningless on the eve of the global recession, the STI trades at 10 times forward earnings. The three macro metrics that will most determine the outlook for the Singapore stock market are GDP growth, the fall in property prices (given the office space glut and luxury condo madness), trends in the offshore marine and crude oil markets. In a global recession, we could see GDP growth at 2 per cent, property prices plunge 50 per cent below their peak, $30-50 crude oil prices and 2500 on the Baltic Dry Freight shipping index. The STI is extremely correlated to global financial distress, so it is no coincidence that its fall accelerated after the failure of Lehman Brothers, the Fed takeover of AIG, the collapse of Fannie Mac and Freddie Mac and the shotgun marriage of Merrill Lynch and Bank of America.

Liquidity outflows, slower bank loan growth, earnings downgrades, shipping freight rates and crude oil in free fall, GDP downgrades will all pressure Singapore shares in the months ahead. While the Straits Times Index is dirt cheap relative to its 15.6 times earnings in the last three years, there is no reason it could not fall below its historical range below 9X. The stock market trades at only 1.3 times book.

While Singapore’s dividend yield is almost 4 per cent, which suggests a classic value zone relative to historical metrics, I believe dividend cover and net cash are better metrics. Since earnings will be downgraded. Singapore Airlines is a buy at Sing $ 14 as it trades at book value, offers almost a 7 per cent dividend yield, has Sing $ 3 in cash reserves on its balance sheet that benefits immensely from the plunge in crude oil prices, even though tourists arrivals to the Lion City will be impacted. Selected Singapore REIT’s that have low gearing on their balance sheet, low refinancing risk, access to bank capital and long tenancy contracts will outperform property developers, particularly defensive health care and industrial REIT’s not exposed to office space glut and the fall in the luxury condo sales. The Ascendes REIT is the largest industrial REIT in Singapore. While global recession will hit demand for industrial space, AREIT has a comfortable 6 year tenant leases, rental costs are a small fractim of industrial tenant cost curves and most development projects have been presold or built to client specifies. The AREIT yield of 8 per cent should thus be an attractive defensive play on Singapore’s role as the industrial hub of Southeast Asia.

Singapore is also one of the world’s great service hubs for Big Oil, similar to Rotterdam, Piraeus, Houston and Dubai. It is premature to bottom fishing in Singapore oil and gas plays because attempts to catch falling knives only results in bloody fingers. Yet I believe Big Oil capex budgets will increasingly focus on the construction of floating, offshore rigs. This will benefit Ezra Holdings, which charters offshore construction and support vessels on long term contracts, even though oil could well below $60.

I believe Singapore’s recession will not be protracted or severe. The Singapore government has diversified its traditional economic base and promoted new growth sectors such as clean energy, infrastructure and asset management. Yet the valuation metrics of Singapore stock market will not revert to their 15-16 times earnings range between 2000 to 2008. the Straits Times has been (traditionally) correlated to GDP growth, inflation rates and the Singapore dollar. However, GDP growth is now negative, the Monetary Authority of Singapore has abandoned its “strong dollar” policy to protect manufactured exports on the eve of global recession. The Wall Street credit crisis also hit Singapore banks with CDO exposures or capital market franchises. Such as DBS. Tourist arrivals, despite the Formula One races, International Cruise Centre and the Gardens by the Bay, will naturally plummet during a global recession given high fuel costs and the trauma in the financial markets.

Singapore inflation has clearly peaked now and its interest rates are among the lowest in the Southeast Asian financial markets. I expect the Straits Times index to trade between 1800 to 2400 in the next six months and the Amex Singapore equities ETF (symbol EWS) is the ideal instrument to accumulate a strategic stake in one of the world’s finest, most transparent and well managed economies. The crony capitalism, political horror stories and ethnic issues between the bumiputras, Chinese and Indians in Malaysia are only a contrast with Singapore’s rational model of development and role as an emergent Asian financial hub.