Macro & Markets Guide: Singapore

Country Overview

In a nutshell, Singapore's economy stands as a remarkable example of successful free-market principles in action, punching above its weight on the global stage. Despite its lack of natural resources, Singapore has carved out a pivotal role in global finance, manufacturing, and trade.

The country is a global hub for banking, finance, and insurance, thanks to its strategic geographic location, robust legal framework, and skilled workforce. Its bustling port connects to over 600 ports in more than 120 countries, making Singapore a crucial linchpin in global trade. Manufacturing, particularly electronics and semiconductors, and growing sectors like information and communications, and biomedical sciences, also bolster the economy.

Other key strengths include its ability to attract foreign investment, a highly educated workforce, and major government-linked corporations that contribute significantly to the economy. On the flipside, a dependence on imports and a rapidly aging population pose challenges to this economic dynamo.

Economic Update

The economy’s likely to remain weak, but is improving

Singapore's economy is playing a game of two halves. On the one hand, the Lion City grew by a modest 0.4% in the first quarter of 2023 (compared to the same time last year), which was a step down from the previous quarter's 2.1% expansion. The manufacturing sector, usually a key player, dropped the ball with a 5.6% contraction. And the financial sector, the other big driver of growth over the past three years, is also expected to remain in the doldrums amid the weaker external outlook.

But on the other hand, the construction sector is on a winning streak, and the tourism and aviation sectors are also making a comeback thanks to the rebound in international travel. And the medium-term outlook for the manufacturing sector is encouraging, thanks to technological advancements like 5G and “Industry 4.0”, new investments in biomedical manufacturing, and Singapore's position as an important supply chain hub for high-value electronics.

And while this year might look lackluster with the total economy forecasted to grow by just 1.4%, economists are braced for a comeback in the first quarter of 2024, predicting over 3% growth compared to the same quarter in 2023.

The economy’s likely to remain weak, but is improving

Inflation has peaked but remains stubbornly high

Singapore's inflation party is beginning to wind down. After peaking above 7% last summer, it declined to 5.1% in May 2023. Encouragingly, the price growth of most components of “core inflation” – which strips volatile items like food and energy – have also been slowing.

As the year rolls on, expect the inflation descent to continue, driven by three main factors: “imported inflation” – that’s inflation brought into the country through goods purchased from abroad – turning negative, the labor market cooling (read: wage growth slowing and unemployment rising), and weakening demand for goods and services making it tougher for firms to continue to hike prices. Investors expect inflation to be between 3.5% and 4% in the last quarter of this year, before falling to around 3% in the first quarter of next year. But it’s worth pointing out that investors have adjusted their inflation expectations upwards compared to three months ago.

Inflation has peaked but remains stubbornly high

Interest rates and the exchange rate remain high but there’s hope on the horizon

Unlike most other countries, which use interest rates as their main tool to control inflation, Singapore uniquely manages inflation through its currency exchange rate. This approach (tailored to its small economy with significant openness to trade and capital flows) involves adjusting the value of the Singapore dollar against a basket of currencies, letting it float within a “policy band”, and making changes to that band based on the anticipated inflation and growth of its economy.

The Monetary Authority of Singapore (MAS) has been both proactive and progressive with its policies. Starting quite early back in October 2021, MAS adjusted its currency five times in a year, which helped curtail price increases and foster a gradual decline in inflation. The Singapore dollar has seen an 8.3% appreciation versus other currencies since then, toning down imported inflation and domestic cost pressures. But the inflation battle isn't won yet: the MAS hasn’t shifted gears from “inflation fighting” to “growth supporting”, so could look to take further action if inflation starts to pick up again.

As for interest rates – which are indirectly linked to the exchange rate – they're still parked above 3% and likely to stay high for a while, although they're expected to fall slowly over the next few quarters. And with short-term interest rates outpacing longer ones, it's clear investors are feeling a tad jittery about the future growth outlook.

Interest rates and the exchange rate remain high but there’s hope on the horizon

Stock Market Overview

The Straits Times Index (STI) is the most globally-recognised benchmark index and market barometer for Singapore. It tracks the performance of the top 30 largest and most liquid companies listed on the Singapore Exchange.

The main exchange-traded fund (ETF) is the iShares MSCI Singapore ETF (ticker: EWS, expense ratio: 0.50%). Its portfolio is stuffed with financial, real estate, and industrial firms, making it overweight in these sectors compared to the S&P 500 and lean on tech and healthcare.

The ETF’s top ten holdings include domestic champions Singapore Airlines, Singapore Telecommunication, and Singapore Exchange, ecommerce firm Sea Limited, banks DBS, Oversea–Chinese, and United Overseas, real estate firm Capitaland Ascendas REIT, and industrial company Keppel. With the top 10 stocks representing 70% of the index, it leans on the concentrated side.

The iShares MSCI Singapore ETF is stuffed with financial, real estate, and industrial firms

Fundamentals suggest Singaporean shares are high-yielding, trading on reasonable valuations but aren’t particularly profitable for their shareholders

At least partly due to the difference in sector exposures, Singaporean stocks are cheaper and higher-yielding than their US counterparts: they’re serving up a dividend yield of 4.3%, and benefit from relatively attractive valuations with a price-to-earnings (P/E) of 14.7 and price-to-book (P/B) of 1.3 . They’re however less profitable, with a return on common equity of only 8.7% – half that of US stocks.

Fundamentals suggest Singaporean shares are high-yielding, trading on reasonable valuations but aren’t particularly profitable for their shareholders

Singaporean stocks have resumed their underperformance this year

Singaporean stocks haven't been setting the world on fire in recent years. Sure, they managed to dodge a slump last year, meaning they had a leg up on US stocks in the grand scheme of things. But when it comes to the rebound, they're stuck in the slow lane compared to their American counterparts. The biggest reason is their minimal exposure to the tech sector, which has been the belle of the ball in this year's market rally.

Singaporean stocks have resumed their underperformance this year