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Analysts upbeat on Singapore recovery, while predicting a slowdown in growth momentum in 4Q

Felicia Tan
Felicia Tan11/25/2020 05:54 PM GMT+08  • 6 min read
Analysts upbeat on Singapore recovery, while predicting a slowdown in growth momentum in 4Q
The economists have mainly maintained their GDP forecasts for the FY2020 and FY2021.
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As Singapore’s economy show signs of a strong turnaround in 3Q2020, economists from CGS-CIMB Research and DBS Group Research say the republic is on track to recovery and to meet its full-year GDP forecasts.

The buoyant outlook comes as Singapore’s Ministry of Trade and Industry (MTI) revealed on Nov 23, that the nation’s GDP for the 3Q2020 contracted by 5.8% y-o-y, compared to the 7% contraction predicted in advance estimates.

See also: Singapore's Oct inflation drops by 0.2%

The latest quarterly showing also marks an improvement from the 13.2% y-o-y plunge registered for the 2Q2020, amid the circuit breaker measures imposed from April to June.

The figures, say DBS’s senior economist Irvin Seah, came in within the brokerage’s expectations, with a “significant upward revision from the advance estimates”.

“The strong turnaround came largely on the back of the phased reopening of the economy, after the Circuit Breaker (CB) was lifted in June,” he says.

Seah says he also foresees a slower growth momentum in 4Q2020 as the sharp rebound in economic activities in 3Q2020 that came after the lifting of the circuit breaker measures in June is unlikely to be sustained.

“While output growth in the manufacturing sector is likely to remain positive, the pace of expansion is expected to slow, given the flattening in trajectory in the PMIs and the manufacturing output growth in some key markets,” he notes. “Moreover, sectors that have been the worst impacted by the pandemic, the hospitality and the aviation sectors, have also continued to struggle as the borders have generally remained shut to tourists.”

Nevertheless, he says the economy is on the mend, identifying growth momentum to be “tepid and uneven in this K-shaped recovery”.

See also: September cheer for manufacturers but MAS warns of slow, uneven recovery

On this, he has maintained his full year GDP growth forecast for the FY2020 at -6.0%.

Seah’s forecast is echoed by Oxford Economics’ economist Sung Eun Jung, who also expects growth momentum to slow in 4Q2020 due to a resurgence in the number of Covid-19 cases in some of Singapore’s key trading partners.

“Barring a flare-up of local coronavirus cases, we also expect further easing of restrictions to support a growth rebound in 2021. Overall, we forecast real GDP to contract 6% this year before growing by 5.7% in 2021,” says Sung.

“That said, given that Singapore has been able to contain the local Covid-19 situation, it remains on track to enter Phase 3 of its reopening by end-2020, which will provide a boost to domestic demand going into 2021,” she adds.

CGS-CIMB economists Michelle Chia and Lim Yee Ping have also given their estimates for the FY2020 at -5.7%, which is slightly more optimistic than the MTI’s revised range of -6.5% to -6.0% from -7.0% to -5.0% previously.

“We continue to project sustained improvement next year at +5.3% in 2021 (vs. MTI’s forecast of +4.0% to +6.0%). With the economy advancing largely within the expected range, policymakers are likely to keep to their respective policy paths with monetary policy expected to remain on hold until end-2021 and the expansionary fiscal stance to persist when Budget 2021 is tabled in Feb 2021,” they say.

RHB’s Singapore Research economist team has also maintained its GDP growth forecast at -5.3% y-o-y for FY2020, which is more optimistic than Bloomberg consensus’ estimates at -6.0% y-o-y.

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The team has also given its FY2021 estimate to be at +5.9% y-o-y, slightly above consensus’ estimates of +5.8% y-o-y.

The forecasts for FY2020 and FY2021 are, however, currently under review. “We note that the still subdued external demand and the slower-than-expected resumption of economic recovery will result in uneven recovery across economic sectors,” says the team.

On the strong showings in the biomedical and electronics segments, Chia and Lim estimate that the biomedical sector will remain “well supported” amid a resurgence of Covid-19 cases globally in 4Q2020 while new product cycles may extend the uptrend for electronics despite the US’s ban on suppliers to Huawei.

The construction sector, which was a key drag to the economy in the 2Q2020 and 3Q2020, will see continued improvements in the coming quarters amid the existing backlogs and strong pipeline of residential and infrastructure projects, says DBS’s Seah.

The services sector, which took a big hit during the pandemic, is also expected to see a gradual improvement heading into 2021, adds Seah, although he cautions that the pace of recovery across the various segments will be uneven.

Going into 4Q2020, RHB predicts that consumer-oriented sectors are likely to remain below pre-pandemic levels. Sectors related to trade and tourism are also expected to remain tepid due to the weak external demand conditions and ongoing travel restrictions.

The team adds that it maintains its policy stance for the S$NEER at zero percent per annum rate of appreciation for 2021. “This neutral position is expected to allow fiscal policy efforts to prop up growth as well as ensure price stability over the medium term,” it says.

For OCBC’s Carmen Lee, Christmas seems to have come early, as the Straits Times Index (STI) surpassed the rest of the region with gains of 17.5% as at Nov 23.

See also: DBS upgrades OCBC to 'buy', ups TP to $11 on inexpensive valuation

The gains, says Lee, were largely driven by optimism about Covid-19 vaccines as cyclical and value stocks came back into focus.

“Our call in September to rotate into value stocks is panning out well as under-valued, cyclical and defensive stocks showed strong gains in November. Value stocks tend to be in play during early stages of economic recovery,” she notes.

“With lingering uncertainties in the market, we prefer to adopt a stock pick strategy,” she adds. “Some of our preferred picks include Ascendas REIT, Ascott Residence Trust, CapitaLand Integrated Commercial Trust, CapitaLand Ltd, Frasers Centrepoint Trust, Frasers Logistics & Comm, Manulife US REIT (USD), Mapletree Industrial Trust, Mapletree North Asia Com Trust, NetLink NBN Trust, Sheng Siong Group, Singapore Telecommunications, UOL Group, Venture Corp and Wilmar International.”

Lee also views that a long-term recovery is in place, but near-term headwinds remain.

“We expect the global economic recovery theme to give a lift to the badly hurt sectors which were severely impacted by the pandemic,” she says.

While the recent news on the Covid-19 vaccine has helped to fuel market optimism, Lee sees the recent rising number of infections as a “significant risk” as it increases the possibility of another round of lock-downs.

“While the discovery of vaccines is positive, a quick return to normalcy is unlikely. In terms of valuations, the STI is currently trading at 14.0x FY21 earnings and at a price-to-book of 0.96x (which is below the 10-year historical PB of 1.25x). As we head into the year-end, there could be profit taking and more infections,” she says.

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