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Singapore economy ‘drifting sideways’, says PhillipCapital

Douglas Toh
Douglas Toh • 5 min read
Singapore economy ‘drifting sideways’, says PhillipCapital
The only domestic sectors with momentum for the year are construction and tourism. Photo: Samuel Issac Chua/ The Edge Singapore
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PhillipCapital’s head of research, Paul Chew, sees the Singaporean economy “drifting sideways” with recovering exports although the figures stem from a low base thanks to a collapse in 2023.

“Retail sales are stable, supported by rising wages and the availability of jobs,” he writes in his April 1 report.

Base case of two rate cuts unchanged

In the US, economic indicators point to an economy that is “flatlining”, with retail spending, purchasing managers index (PMI), industrial production, employment, and capital expenditure (capex) all sluggish, despite aggressive fiscal deficits to prop up the American economy.

“The Congressional Budget Office forecasts another US$1.56 trillion ($7.57 trillion) or 5.6% of gross domestic product (GDP) deficit stimulus to the US economy in 2024,” writes Chew.

He adds: “The huge deficit spending will cap the downside to economic growth.”

See also: Singapore economy expected to grow by 2.7% y-o-y in 2Q2024

On the end of consumer spending, the situation is slightly more bullish, to which Chew attributes to higher borrowings and the wealth effect, despite weakening disposable income in the US.

“The lagged impact of higher interest rates, diminishing pandemic savings, and repayment of student loans will persist as a drag on the economy,” writes the analyst.

Meanwhile, on interest rates, Chew notes that inflation is becoming “stickier than expected”. 

See also: MBS operator Las Vegas Sands plans entertainment-focused expansion in Singapore

He explains: “The deflation in goods prices has started to stall, and services are not turning down quickly enough. Inflation becomes a challenge in 2HFY2024 as base effects will cap the downside. Another worry is creeping oil prices from supply cuts.”

Following this, Chew’s base case of two rate cuts in 2HFY2024 remains unchanged. 

Singapore equity outlook

With the lack of economic momentum and an unclear path to rate cuts, Chew remains cautious about Singapore equities with dividends remaining the primary source of return for investors.

While the nation’s equity market rose a modest 0.5% in 1QFY2024, most sectors were down during the quarter, except banks and telecommunications, Chew writes.

The former in particular recovered strongly in March, thanks to attractive yields and extended expectations of rate cuts.

Conversely, Singapore’s consumer sector was a drag due to the high cost of living and weak economic growth, while REITs suffered as expectations in the number of interest rate cuts by the US Federal Reserve (US Fed) were lowered and delayed. REITs suffered in 1QFY2024 from interest rate expectations, which climbed by 90 basis points (bps) since December 2023. 

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“Markets are now rolling back their expectations towards two rate cuts in 2024. Despite interest rate cuts, REITs will still face sluggish dividends this year. Interest rate pressure will persist due to the unwinding of interest rate hedges,” expands Chew.

Meanwhile, the domestic sectors with momentum for the year are construction and tourism, with the former riding on record-high and stable construction contracts, and the latter surging again with a 50% increase in foreign arrivals in January and February, following a stagnant 4QFY2023. 

In his view, the key strength of Singaporean equities is the dividend yield of 5.6%, which is a steadfast currency.

He adds that the Singapore dollar is supported by its rising foreign reserves and persistent current account surplus. It is also the only AAA-rated sovereign in Asia. 

PhilipCapital's model portfolio

Notably, Chew has replaced Oversea-Chinese Banking Corporation (OCBC) with DBS Group Holdings in Phillip’s model portfolio for its dividend visibility, due to DBS’s aggressive dividend plans and a committed yield of 6.7% for the FY2024. DBS’s dividends are paid quarterly. 

“The debate will be about DBS's ability to sustain earnings as interest rates peak. Net interest margins will be supported by the higher proportion of fixed deposits, rolling over their fixed rate assets at higher yield and increasing the duration of their book,” he says.

Other earnings drivers for DBS will be its fee income, which will benefit from the return of risk appetite in wealth management and modest loan growth. 

He adds: “DBS is also well capitalised with the recapitalisation for new Basel rules plus management overlay in general provisions.”

Another stock the analyst has added to his portfolio is Cromwell European REIT (CEREIT)

Presently, the REIT has a stable portfolio occupancy, rental reversions of 6% and trades at an attractive yield of 10%, having also managed to dispose of its assets at a 15% premium.

“We still expect dividends to soften this year but remain attractive. An added positive is the prospect of a rate cut by the European Central Bank ahead of the US Fed. CEREIT will replace Frasers Centrepoint Trust J69U -

(FCT), which has already rallied with the inclusion into the Straits Times Index (STI) to replace Emperador,” continues Chew. 

Conversely, the weakest names in his model portfolio were CapitaLand Investment (CLI) and Thai Beverage Y92 -


Chew concludes: “CLI is building a valuable fund management franchise with the intention of doubling the fund size in five years. For ThaiBev, we expect the economy to revive, led by a US$14 billion cash handout and export recovery.”

As at 12.57pm, the STI is trading 12.01 points higher or 0.37% up at 3,246.90 points.

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