To The Moon

Singapore Market 2025 Outlook: 3 Investment Themes to Ride the Volatility

STI Hits Record High, Boosted by the Big Three Bank Stocks

As we approach 2025, it's the perfect moment to look back at how the Singapore stock market performed in 2024. The year was a strong one for Singapore's equities, with the $Straits Times Index(STI.SI)$   surging by 16.9% up to December 31, 2024, hitting its highest level since 2007.

The STI, being a market-capitalization-weighted index that tracks the top 30 companies listed on the Singapore Exchange (SGX), saw its gains largely driven by the performance of Singapore's Big Three banks: $DBS Group Holdings(D05.SI)$  , $UOB(U11.SI)$   , and $ocbc bank(O39.SI)$   .

These three banking giants collectively make up over half of the STI's weight and have seen their shares climb by 52%, 36%, and 35%, respectively, this year. The U.S. Federal Reserve's slower-than-expected interest rate cuts were key to this success, which helped maintain healthier net interest margins for local banks.

Beyond the major banks, other notable performers included Yangzijiang Shipbuilding ( $YZJ Shipbldg SGD (BS6.SG)$ ), SINGAPORE TECH ENGINEERING ( $ST Engineering (S63.SG)$ ), and Singtel ( $Singtel (Z74.SG)$ ), all of which delivered impressive returns to investors.

Will 2025 Be the Year of New Milestones for the STI?

Historical data shows a strong positive correlation between STI returns and Singapore’s GDP growth.DBS projects that the STI's overall earnings growth will slow from 12.4% in 2024 to 3.4% in 2025, with the banking sector—a major index component—expected to see flat earnings growth.

Amidst bullish sentiment, investors are likely pondering whether the index will break its historical peak next year. To gauge the likelihood of such an occurrence, let's dissect the index into its major components. As of September 2024, the financial sector accounted for 53% of the STI, with real estate contributing another 17%. Consequently, the performance of these two sectors will significantly influence the overall trajectory of the STI.

1. Banking Sector

Given the importance of banks within the STI, the timing and magnitude of Federal Reserve rate cuts, alongside global economic growth expectations, will be pivotal factors affecting Singapore’s stock market. The recent Fed's dot plot suggests two 25-basis-point rate cuts in 2025, projecting a median target range for the policy rate at the end of 2025 of 3.9%.

In this context of a Fed easing cycle, banks face pressure on net interest margins; however, interest rates are expected to structurally remain higher than pre-2022 levels when the Fed began hiking rates. Factors such as loan growth, improved wealth management activities, and alleviated asset quality pressures could mitigate the stress on net interest margins, allowing bank earnings to maintain their current levels. Moreover, bank stocks continue to offer attractive dividend yields (above 5%) with potential for further dividend hikes.

2. S-REITs (Singapore Real Estate Investment Trusts)

The S-REIT sector experienced a lackluster 2024, affected by higher financing costs and inflationary pressures. Historically, S-REIT share prices have shown a strong negative correlation with risk-free rates, especially sensitive during turning points in the economic cycle. When interest rates decline, S-REITs tend to see substantial price appreciation.

Over the past two years, S-REITs faced competition from other yield products like T-bills, which offered rates around 4% to 3%. However, this has now reversed with growth returning for S-REITs with S-REIT yields at ~6.2% comfortably trade above Singapore bank yields, at ~5.6% according to JPM.

Therefore, we anticipate that S-REITs will outperform in 2025 compared to 2024, as interest rates have begun to fall from their highs. Lower borrowing costs, coupled with a return to normal demand following the post-COVID-19 recovery in 2020/2021, should lead to moderate improvements in rental returns across retail, office, and industrial segments, benefiting S-REITs. However, given more cautious expectations regarding Fed rate cuts by the end of 2025, investors should steer clear of highly leveraged REITs or those with weak profit outlooks or lacking profit catalysts.

Thriving Amid Turbulence: Three Key Themes to Navigate 2025

Theme 1. Trump Trade

Financial Impact:

Republicans' control helps Trump implement policies. High-interest-rate environment benefits banks. Singapore's rates link to US ones. Trump's policies may keep rates high, favoring banks like DBS.

Banks are poised to benefit from a narrative of prolonged higher rates or a gradual rate reduction, alongside a less stringent regulatory environment. A stable economic outlook for 2025, with Singapore’s GDP projected to grow steadily, combined with sector yields exceeding 5%, should provide solid support for the banking sector.

In a similar vein, considering that economic growth is expected to moderate in 2025, the Monetary Authority of Singapore (MAS) may consider easing monetary policy by reducing the slope of the Singapore Dollar Nominal Effective Exchange Rate (SGD NEER). This shift towards a more accommodative stance could help alleviate liquidity conditions and cushion the impact of a slowdown in economic growth, particularly one driven by weaker global trade. However, like the U.S. scenario, the effectiveness of such measures will depend on broader economic conditions and external factors.

Trade Effects:

Overall, although Singapore relies heavily on global trade, it may be less affected than other Asian countries. Firstly, Singapore has a relatively small bilateral trade deficit with the United States (as a net importer of US goods and services), meaning it has a lower probability of being affected by additional tariffs. Secondly, Singapore can continue to benefit from trade diversification and the trend of supply chain relocation as multinational companies seek to diversify outside of China.

If Trump imposes a 60% tariff on Chinese imports and pursues other mercantilist policies, the "China + 1" trade diversification strategy will attract more attention. The ASEAN region, as an attractive alternative destination, will bring good news for companies such as Venture $Venture (V03.SG)$ , Frencken $Frencken (E28.SG)$ , and Grand Venture $Grand Venture (JLB.SG)$ , which have factories in Malaysia and Singapore. Meanwhile, the trend of onshoring and the return of manufacturing in the United States will also benefit ST Engineering $ST Engineering (S63.SG)$ through its subsidiary Transcore.

Oil & Transport:

Trump's promise to boost domestic oil production in the United States is expected to cap oil prices. This will reduce the energy/fuel costs for companies like ComfortDelGro ( $ComfortDelGro (C52.SG)$ ) and SIA ( $SIA (C6L.SG)$ ). Seatrium ( $Seatrium Ltd (5E2.SG)$ ), an oilfield services provider that is turning its earnings around, can also benefit from increased oil and gas capital expenditure activities at its US facilities.

Theme 2. Resilient Earnings Stocks

Given the expected market volatility and uncertainty in 2025, investors can seek refuge in stocks with resilient earnings. It is advisable to prefer stocks that offer greater earnings resilience and visibility, such as those with solid order books, stable domestic spending, and that are largely insulated from rising trade tensions.

Earnings growth can also stem from moderating costs due to lower input costs and/or deleveraging efforts. Stocks with a positive sector outlook, attractive dividend yields, and earnings growth higher than the 3.4% growth forecast for the Straits Times Index (STI) in FY2025 are more favorable.

Theme 3. Beneficiaries of MAS Equity Market Review

The Monetary Authority of Singapore (MAS) has formed a review group to recommend measures to strengthen equities market development in Singapore in 2024.Any constructive measures taken by the Monetary Authority of Singapore (MAS) in its ongoing equity market review to enhance market liquidity, trading volumes, and/or valuations will be seen as a positive outcome.

The Singapore Exchange (SGX) will be the primary beneficiary. The three broad areas of the review, which include encouraging quality listings, improving liquidity, and re-evaluating the regulatory structure, may be the much-needed steps to address the perennial concern of low trading valuations.

Against the backdrop of improving valuations and/or positive investor sentiment, companies may be willing to pursue potential value unlocking initiatives. Stocks trading at undemanding valuations, and with potential value unlocking initiatives may benefit from this theme such as ThaiBev $ThaiBev (Y92.SG)$ (IPO of Beer Co and/or F&B Co), CityDev $CityDev (C09.SG)$ and UOL $UOL (U14.SG)$ (divestment, restructuring), and Singtel $Singtel (Z74.SG)$ (divestment, consolidation).

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