Chart 1: Singapore GDP growth

Chart 2: consensus earnings estimates for ftse sti

Chart 3: estimated valuations for the sti

Key Points

• Official advance GDP estimates show 14.9% q-o-q annualised growth in 3Q 09
• First y-o-y GDP growth since 2Q 08
• Manufacturing posted strong gains; services sector improved
• Economic recovery trend established
• Corporate earnings to assume primary importance, ahead of economic growth data
• Forward 2011 PE of 11.8X (as of 14 October 2009) is undemanding

Singapore’s open economy posted another sharp spike in output for 3Q 09, with official advance estimates showing annualised quarter-on-quarter growth of 14.9%, bettering consensus estimates of 14.5%. Also, 2Q 09 economic growth which was initially reported at 20.4% annualised quarter-on-quarter (ending four consecutive quarters of decline), was revised upwards to 22% quarter-on-quarter annualised growth (see Chart 1). The Ministry of Trade and Industry has also revised up 2009 GDP growth to between -2.5 per cent and -2 per cent (previously between -4 per cent and -6 percent).

Strength in manufacturing, but services improve as well

Part of the strong rebound in GDP was attributed to the strength in the manufacturing sector. The sector, which represents about a quarter of the overall Singapore economy, posted a sharp 35% quarter-on-quarter annualised gain in 3Q 09, following a 59% spike in 2Q 09. While manufacturing may have been boosted by restocking activities in the electronics sector as well as a spike in pharmaceutical production, it is comforting to note that the services industries expanded by an annualised 9.5% quarter-on-quarter in 3Q 09. This suggests that a recovery for the Singapore economy is widespread, rather than limited to cyclical manufacturing.

Recovery view reinforced, focus now on corporate profits

We believe this latest data point is sufficient evidence of improving economic conditions, reinforcing our view that a recovery is on track. While the GDP growth figures have been highly positive, we are less interested in the accuracy of 4Q 09 or even 2010 GDP growth forecasts at this juncture. Singapore’s economic growth figures are too easily swayed by cyclical industries like the electronics and pharmaceuticals, and attempting to accurately forecast such detail is clearly a difficult task. Moreover, with a recovery uptrend established with 3Q 09’s figures, we believe that the impact of future GDP growth numbers will be of secondary importance to the stock market. What is of primary concern now is the recovery in corporate profitability, which will ultimately drive the stock market going forward.

Corporate earnings revised upwards

We had earlier suggested that consensus earnings estimates will be revised upwards as economic data and quarterly earnings improve. Chart 2 shows the trend in earnings revisions for 2009, 2010 and 2011 by the Bloomberg consensus for the FTSE STI. Earnings estimates have been revised upwards from their lows in March/April 2009, bringing the 2009 EPS consensus estimate close to our own estimates (as of 30 September 2009). However, our 2010 and 2011 EPS estimates for the Singapore benchmark index remain more bullish than consensus estimates at this point in time. We believe that the consensus is still slow to recognise the positive implications of a broad-based global recovery on Singapore corporate earnings, and will likely revise up 2010 and 2011 earnings estimates in due course.

Forward valuations are undemanding

In our earlier coverage on the Singapore market, we suggested that investors should be focused on recovery upside rather than to harp on pessimistic economic data. However, it is unfortunate that investors who have waited for “skies to clear” have now missed out on a significant market rally, which has spanned a good six months (since early March). But investors who are staying on the sidelines should not fret yet; the market still possesses significant upside as earnings growth resumes an uptrend.

Based on our forward earnings estimates and the 2708.48 point close of the STI on 14 October 2009, the Singapore market trades at an estimated PE ratio of just 11.8X based on 2011 earnings (see Chart 3). If one uses the consensus estimates, valuations of 13.5X are also undemanding. We maintain a 4.5 star “very attractive” rating on the Singapore equity market.

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