Morgan Stanley analysts Deyi Tan, Malcolm Wood, Andy Xie explain their rationale for overweighting Singapore in their regional model portfolio:
First, we expect strong economic growth, led by robust, above trend global growth (Morgan Stanley is forecasting 4.1% real global GDP growth in 2006, following 4.3% in 2005), fiscal stimulus (equal to 1.3% of GDP), and a recovery in the construction industry (property policy measures and tourism construction). This should translate into strong earnings growth — our analysts’ forecast of market earnings growth of 8.7% in 2006 seems very achievable.
Second, we find valuation to be reasonable, though not cheap given a P/E of 14.5 times on 2006 Morgan Stanley earnings estimates.
Third, short-term interest rates have already risen significantly, with 3-month SIBOR rising from 0.75% in mid-2004 to 3.4%. Although Singapore has tightened at a slower rate than the US Federal Reserve, its low inflation (1.3% YoY in December, versus the US at 3.4% YoY) and appreciating currency mean that rates are already around neutral levels and should remain lower than in the US.
Fourth, we expect the corporate performance of Singapore companies to continue its secular improvement, with further capital returns to add to the 3.4% historic dividend yield.
Singapore is covered by one CEF and one ETF. Daiwa Securities' Singapore Fund (SGF) was trading on February 23rd at a discount of 8.2%, with a current market yield of 1.52%. IShares' Singapore Index Fund (EWS) provided a market yield of 3.38% as of February 27th. Note the annual comparison of the two funds below: