In the final instalment of our Singapore series to accompany the launch of the United SG Dynamic Income Fund, we ask: when can Singapore’s equity market break out of its trading range?

Lacklustre backdrop

Singapore is known as a defensive market, and indeed over the past year, the Straits Times Index (STI) has managed to resist some of the pressures forcing down, for example, the broad MSCI Asia ex Japan index.

Figure 1: Singapore equities vs Asia ex Japan equities, Oct 2020 – Oct 2023

Source: UOBAM/ Bloomberg

But this offers only limited comfort for investors looking to enter the Singapore equities market. Over the past 12 months, the market has range-traded between 3.40K and a year-to-date low in October of 3.10K. This recent weakness is likely the result of lower-than-expected retail sales growth in September of just 0.6 percent year-on-year, well below August’s 4.2 percent.

As such, going into 2024, a catalyst for change in the equity market will most likely come from improvements in Singapore’s economic backdrop.

Inflation on the way down

While retail sales is faltering, a promising trend so far is the easing of Singapore’s inflationary pressures. In September, core inflation slowed to 3.0 percent, a significant fall from the 14-year high of 5.5 percent seen at the start of the year.

There are strong hopes that this easing trend will continue to gather pace over the next few months. Assuming no oil price spikes resulting from an escalation of hostilities in the Middle East, the Monetary Authority of Singapore (MAS) is forecasting year-on-year core inflation to be 4.0 percent for 2023, and between 2.5 to 3.5 percent for 2024.

This shift towards lower inflation is also taking place in the US. The Fed is expected to hold off on any more rate hikes this year, and for the first rate cuts to start towards the middle of next year, with one or two more in subsequent months.

2024 economic revival

Singapore's GDP for this year is forecast to land somewhere between 0.5 to 1.5 percent. With this timetable in mind, we would expect Singapore’s GDP growth to remain subdued for the first half of 2024.

However, US rate cuts could provide a leg-up for global demand. This would be a boost for trade-dependent economies like Singapore’s. As such, we expect Singapore’s GDP growth to improve gradually in the second half of the year.

At the same time the MAS, in its April 2024 monetary policy statement, is expected to announce a 50-basis-point reduction in the slope of the S$NEER policy band. This again has the potential to provide some counter cyclical effects that is supportive of the economy.

Scope to become less defensive in 2H24

Given the economic uncertainties, we believe that a more defensive positioning is appropriate for Singapore investors as we head into the new year. A multi-asset Singapore portfolio during this time is therefore likely to be weighted towards bonds and lower-risk assets.

However, are we approach mid-year, the equity market is set to gain strength. Travel-related industries is still a favourite on back of continued robust visitor arrivals. Meanwhile select financial services could pick up as interest rates start to soften.

To enjoy higher growth potential, investors may want to stay on the front-foot for these equity opportunities. But it is not easy to time the market, even in the past decade’s low-rate, low-volatility environment. In a new higher-for-longer inflation and interest rate regime that we believe will prevail over the next few years, investors may want to ensure that their assets are even more diversified, and they take more active asset allocation decisions.