News Analysis: Singapore equity market expected to be weak in early 2016: analysts

With 2015 coming to a close, analysts expect Singapore's equity market to remain lackluster in 2016, or at least in the first half of next year, given the weak corporate earnings outlook and the volatile external environment.

2015 was a challenging year of two halves for Singapore's bourse. The first half benefited from spillover optimism from 2014, but this quickly evaporated as the market entered into the second half of the year. Sentiment was dragged down by several key events, including the Chinese yuan's fall, the sharp drop in Chinese equities in June, slower growth from emerging markets and weakness in commodities.

OCBC Investment Research said heading into 2016, the cut in economic growth projections and the impact of the global economic slowdown upon corporate earnings will weigh on Singapore stocks' performance. In addition, U.S. equities' valuations have also become more expensive, and higher interest rates could mean higher financing charges for corporations and could also impact property market and mortgages.

With the hazy outlook and impending higher rates, OCBC expects the market to stay volatile in 2016, but also pointed out that higher interest rates may not necessarily be negative for equities as funds could move out of bonds, properties or other high yielding assets and into equities.

While there is the possible risk of further earnings downward revisions given the weakening economic outlook, OCBC believes that most of the negatives have already been priced into stock prices as valuations are reasonable at current levels. Singapore's benchmark Straits Times Index is currently trading at 11.9 times of earnings, 1.1 times of book value and with an average projected dividend yield of 4.3 percent for financial year 2016. These levels are close to the levels seen in the previous two crises in 2008 and 2011.

CIMB Research said Singapore's corporate earnings outlook is not looking good next year. A property-building binge three to four years ago has contributed to over supply. Rents are weak and occupancy is falling. The offshore and marine sector is suffering the aftermath of weak oil prices, with orders getting canceled. Both oil and gas and property-related non-performing bank loans are on the rise, with the weakness in neighboring Southeast Asian countries spilling over.

The Malaysia-based research house added that Singapore stocks can stay cheap for a long time as there is no catalyst, and as such investors may have to focus on the outlook beyond 2016, which could turn out to be favorable for Singapore.

According to CIMB, these favorable factors include Singapore's edge as a hub in the Association of Southeast Asian Nations (ASEAN), which will enable Singaporean companies to play pivotal roles in ASEAN's commitment to move towards a common market. Second, China's Belt and Road initiative, which will see China fund an infrastructure build-out of countries along the Maritime Silk Road, will provide Singapore's banks with many opportunities for facilitating that spending across developing ASEAN.

The third notable trend is the recent headway towards forging the U.S.-led Trans-Pacific Partnership (TPP). Internationally, the TPP will open up opportunities for companies to enter new markets. In the context of ASEAN, the progressive opening up of markets under TPP may attract more U.S. multinational companies to this region in search of Asia's new low-cost manufacturing centers.

Singapore is a useful hub from which U.S. companies can manage supply chains and offices, warehouses, logistics and banks in the city-state will stand to be beneficiaries, said the research house. Endit