Singapore in 2018/19: Better times
- We expect GDP growth to hover around 3% in the next two years, thanks to a broad-based recovery
- Inflation will rise; the central bank will likely return to a path of policy normalisation
- We expect USD/SGD to rise to 1.39 in 2018 before falling back to 1.35 in 2019
- SGD rates are likely to head higher as the Fed normalisation continues
- The STI could attempt to hit 3,688 by end-2018, representing around 10% total return
Overall growth momentum is strengthening and will likely be sustained in the coming quarters. We expect GDP growth to register 3.0% in 2018 and 2.7% in 2019, from 3.2% in 2017.
The exuberance in the manufacturing sector may ease in the coming quarters. While it currently appears that holiday demand for electronics this year is more buoyant than in the past two years, global semiconductor billing and shipments indices are suggesting that the current pace of growth could moderate. We expect some degree of slowdown in electronics demand heading into 2018, which will lead to slightly slower manufacturing growth.
The main story behind the growth numbers is that the recovery is broadening. Services is likely to become the main driver of Singapore’s economic expansion over the next year or so, boding well for employment.
Inflation is expected to register 1.0% in 2018, up from 0.6% in 2017. For 2019, inflation will likely return to its long-term trend growth of 1.8%. The medium-term expectation is that the stable outlook for global food and commodity prices and a broadly benign inflationary environment globally should keep a lid on imported inflation.
While expectation is for monetary policy to return to a gradual appreciation of the SGD NEER in 2018, the exact timing of the shift will hinge on developments in inflation and the labour market. Any upside on either front will bring a policy response sooner, rather than later.
Meanwhile, USD/SGD is set to stay within the 1.33-1.45 range established since 2015. This is unlikely to change in 2018-19. Having fallen towards the floor of this range in 2017, the risk/reward now favours a recovery in USD/SGD back towards 1.40 in 2018 before it moves back down to 1.35 in 2019.
The outlook for Singapore government bonds/bills is mixed. Due to tighter liquidity conditions, short-term bills (1M and 3M) look very cheap compared to Sibors/SORs. USD-based investors can gain an after-swap pickup of 56bps buying 3M bills. Further out the curve, SGSs look rich compared to their UST counterparts. 5Y USTs now yield 50bps more than 5Y SGSs. Notably, this spread has widened by more than 30bps since September as SGSs outperformed. We think that the 2Y-7Y segment of the SGS curve is unattractive and is more vulnerable to a selloff if the Fed delivers on rate hikes as we expect.
Singapore remains one of the few regional markets where the benchmark – Strait Times Index (STI) – is still trading below its all-time high. We believe there is potential in the year ahead for the index to challenge its previous high. After declining for two years in 2015 and 2016, corporate earnings in Singapore rebounded in 2017, and the recovery is set to be sustainable into 2018/19 as a global synchronised recovery gains further momentum. Better earnings growth should also be seen across all sectors to support further upside in the index as the economic recovery becomes more broad-based.
We believe the STI could hit 3,688 by end-2018, representing around 10% total return inclusive of dividends. The Singapore strategy team favours banks, property, consumer goods, and offshore & marine sectors to ride the broad-based recovery as well as rising oil prices.
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