In May last year, we forecast Singapore’s gross domestic product growth for the full- year 2017 to come in at 3.2% above the government’s forecast of a 2%-3% growth and consensus estimate of a 2.5% growth.
Since then, the consensus estimate has been rerated upward to above 3%, while official government forecast has been revised to the 3%-3.5% range.
We continue to be positive on the island republic’s bank earnings over the coming quarters.
On the revenue side, both domestic and external loan demand is likely to improve amid better than expected domestic economic growth and a continued pickup in the global economy.
Rising interest rates, albeit at a measured pace, would result in increasing net interest margins which would be favourable for the sector.
On the expenses side, improving domestic and regional economic growth is likely to translate to the improved profitability of corporations, thus resulting in stronger debt servicing capacities.
Exceptions remain. The marine and offshore engineering sector in Singapore will continue to face uncertainties in the energy market.
The banking sector’s overall non-performing loan ratios should improve over the coming quarters as banks here are poised to see stronger earnings growth.
There are also encouraging signs in the property sector. The notable participation of property developers in the city’s en bloc sales, as well as government land dales suggest improved business sentiment among developers on the outlook of the Singapore property market.
This also signals a greater volume of completed home units over the medium term (2021 and beyond).
Within the office-property space, the market could bot- tom out over the coming quarters. Prices and rents of office properties in the third quarter of 2017 ticked up for the first time since early 2015.
The supply pipeline of office space could be smaller in 2018 and in 2019 compared to 2017, while the demand is poised to benefit from continued economic momentum.
Taking into consideration the dynamics of supply and demand in the private residential and office property market over the coming quarters, the property segments are poised to see continued improvement in their supply and demand imbalances which bodes well for the earnings of real estate companies.
External oriented companies in the industrial goods and services sector are likely to benefit from the continued pickup in global growth and trade activities.
The consumer-related sectors such as travel and leisure, and food and beverage are likely to see earnings support amid continued improvement in the city’s inbound tourist arrivals and consumption appetites.
The telecommunications sector may face intensified competition amid the entry of Singapore’s fourth telecommunications company.
We think the current consensus earnings growth for corporate Singapore of 11% and 7% for 2018 and 2019 respectively is conservative, and believe earnings are poised to grow 16% and 9% in 2018 and 2019 respectively.
We estimate the Straits Times Index (STI) to be trading at price-earnings (PE) multiple of 13.4 times and 12.3 times respectively, based on their 2018 and 2019 earnings (as of Dec 28, 2017) compared to its fair PE of 16 times.
Hence, the STI possesses a potential valuation upside of 28% by end-2019 and is poised to reach 4,400 points by then.