Due to its strong economic fundamentals, Singapore has weathered the Asian crisis well. In fact its recovery has been one of the most vigorous in the region, and this has helped the stockmarket to rebound strongly. The IMF recently praised Singapore for coming out of the crisis unscathed due to the “government’s flexible policy responses and the economy’s strong fundamentals”. These strong fundamentals have also been reflected in Singapore’s strong real GDP growth of 9.1% year-on-year in the first quarter of this year, well above consensus expectations, and poised to do even better. Going forward, we expect the strong macro fundamentals of the Singapore economy, the implementation of pro-market government policies, as well as the on-going corporate restructuring to continue to drive the market.

Strong Macro Fundamentals

Singapore’s economic growth is underpinned by low interest rates, low inflation, a healthy government budget and large foreign reserves. This favourable environment, together with a world-class infrastructure, is conducive to long-term planning for sustained growth.

Pro-Market and Far-Sighted Government Policies

Singapore has a pro-market and far-sighted government that has implemented many policies designed to shape the country into a globally competitive and knowledge-based economy. In doing so, the government has liberalised several industries, including the financial and telecommunications industries, in order to encourage more competition, improve corporate efficiency and promote innovation. It also introduced the concept of a knowledge-based economy (KBE) to build a skilled, educated and productive workforce that can absorb, process and apply knowledge. All these policies should help build world-class companies that can compete globally and spur Singapore’s economic growth. It is thus no wonder that the World Economic Forum ranked Singapore as the world’s most competitive nation in 1999. And more recently, the Economist Intelligence Unit (EIU) also rated Singapore the No. 1 business city in Asia due to its excellent political, macroeconomics, foreign investment environment and superb infrastructure.

Significant Corporate Restructuring

The macro economy is stable. The government is now focusing on micro reforms by strongly encouraging corporate restructuring. Many Singapore companies have embraced significant and visible corporate restructuring. For example, Sembcorp Industries (SCI) announced more than a year ago that it would exit non-core activities. It has since divested its stake in First Capital Corp., Delifrance and Wah Kwong Shipping. Its activities are now organised around core competencies such as logistics, marine and infrastructure engineering. The result is that we will see leaner and more efficient companies which provide goods and services higher up the value chain, thereby producing stronger earnings growth.

Market Valuations are Still Cheap

What makes the Singapore market look even more attractive is the fact that the stockmarket is still cheap, with the overall P/E remaining close to historical lows. As shown in the table above, the P/E for this year is expected to be 19.1x, lower than pre-crisis levels of 32.2x in 1995. Prospective P/Es are still falling, due to expectations of strong earnings growth. (Source: CSFB, excluding Singtel)

In our first quarter review for Singapore, we wrote: “The increasing nervousness of runaway Nasdaq valuations might also lead investors to pay closer attention to more conventional valuation norms. As investors grow more selective, we expect the valuation gap between new economy and old economy stocks to narrow over the coming quarter.” This is indeed what has transpired over the second quarter. The property, banks and conglomerates sectors outperformed, while technology stocks fell in tandem with Nasdaq.

Nasdaq is still plagued by earnings downgrades as it unwinds from over-bullish market forecasts made at the beginning of the year. Conventional valuation yardsticks also continue to suggest better value in non-technology stocks such as banks and property. In addition, M&A deals (such as the one between CDL Hotels and its parent City Developments) are starting to crystallise value for minority shareholders of undervalued stocks. It would seem to us that technology stocks are unlikely to outperform in the coming quarter though they may show some recovery in absolute terms.

Statistics continue to suggest that the economy will grow at a strong pace this year, with a relative absence of inflationary (and therefore currency) pressures. The government appeared to be taking advantage of the macroeconomic stability to accelerate its microeconomic reforms. In addition to banking and telecoms, some liberalisation of the media sector was announced. Going forward, we are likely to see further action in areas such as power generation and waste management, which offer opportunities for listed companies such as Sembcorp Industries and Keppel Corporation.