Weak Singapore Outlook Likely to Spur MAS to Ease

Weak Singapore Outlook Likely to Spur MAS to Ease

Singapore has an eventful week.  It reports advance Q3 GDP Wednesday.  At the same time, the MAS will hold its semi-annual policy meeting and is likely to ease policy.  We think Singapore fundamentals are excellent, but the deteriorating regional growth outlook has hurt its equity market performance and may continue to weigh on investor sentiment.

POLITICAL OUTLOOK

The ruling People’s Action Party (PAP) won an overwhelming victory in the September elections (called early), winning 83 of 89 parliamentary seats.  The main opposition Worker’ Party of Singapore (WP) won the other 6 seats, losing one seat back to the PAP.  The PAP won 70% of the vote, the highest since 2001 and up nearly 10 percentage points from the 2011 elections.  The WP won 12.5% of the popular vote, with the remaining seven parties winning less than 4% each.

Perhaps it was the March death of Senior Minister Lee Kwan Yew.  Or perhaps it was the 50th anniversary of independence celebrations.  Either way, a patriotic wave appears to have returned Prime Minister Lee Hsien Loong to power with a strong mandate.  With the economy slowing, voters appeared to favor continuity over change.  The next elections won’t be due until 2020.

ECONOMIC OUTLOOK

Advance Q3 GDP will be reported Wednesday and is expected to show 1.3% y/y growth, down from 1.8% in Q2.  If so, this would be the lowest since Q2 2009.  On a seasonally adjusted basis, Q3 GDP is expected to contract -0.1% vs. -4.0% in Q2.  The Chinese slowdown is having an impact on regional growth, with Singapore expected by the IMF to grow about 2% this year and 3% next year.  These forecasts seem too optimistic.

Forward-looking indicators are weak.  The headline PMI was weaker than expected at 48.6 in September, and was the third straight sub-50 reading and the lowest since December 2012.  New export orders came in at 48.2, the eighth straight sub-50 reading and also the lowest since December 2012.  IP and exports continue to contract, while retail sales are one of the few bright spots in the economy.

Deflation risks persist, with CPI down a greater than expected -0.8% y/y in August.  This was the tenth straight month of deflation, as well as the deepest deflationary reading so far in this cycle.  There are no wage pressures to speak of, while low commodity prices have continued to put downside pressure on prices.

The MAS will announce its policy decision on the same day as advance Q3 GDP data.  After the surprise intra-meeting easing taken back in January, the MAS kept policy steady at its April meeting.  Since then, the economic outlook has deteriorated and supports our view that the MAS will loosen policy again with an adjustment to its S$NEER trading band.  Given how far EM currencies have weakened, we suspect that the MAS will re-center the trading band to reflect current exchange rate levels.

INVESTMENT OUTLOOK

The Singapore dollar is performing in the middle of the EM pack, -5% YTD against the dollar.  We expect SGD to continue trading with the rest of EM, but some outperformance ahead is likely given its strong external position.  USD/SGD made a new high for this cycle this month near 1.44, the highest since 2009, before falling back to test the 38% retracement objective from the May-October rise near 1.39.  Other levels to watch for are 1.3765 (50%) and 1.3625 (62%).

Singaporean equities are also performing similarly to the wider EM class.  MSCI Singapore is -12.2% YTD, and compares to -11.0% YTD for MSCI EM.  Strong fundamentals have been offset by a weaker growth outlook, but further stimulus measures could help boost the equity market in the coming months.

Singaporean bonds have held up fairly well.  The yield on 10-year local currency government bonds has risen 16 bp YTD.  This is in the middle of the pack in EM.  Compare this to the worst performing group that includes Brazil (+353 bp), Turkey (+234 bp), and Peru (+203 bp).  The best performing group includes Russia (-249 bp), China (-50 bp), and Korea (-49 bp).  With deflation persisting and the MAS likely to continue its easing cycle, we think Singaporean bonds are likely to start outperforming.