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August 11, 2000
Singapore To Grow At A Strong Pace This Year
by Schroders Q2 Moneyline
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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.
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