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Singapore Remains Stuck in a Bear Market: 3 Things You Need to Know

It’s been more than a month since we wrote on how the local bourse remains mired in a bear market.

During that time, Singapore has reported that its third-quarter GDP has shrunk by 7%, a slower pace than the record 13.3% contraction witnessed in the second quarter.

On a quarter-on-quarter basis and adjusted for seasonality, the local economy actually expanded by 7.9% in the third quarter.

Meanwhile, Singapore’s factory output also logged a sharp rebound of 13.7% year on year in August that surprised economists.

The latest industrial production numbers showed a sharp increase of 24.2% in September compared to the same period last year, chalking up a second consecutive month of growth.

This strength was led by an increase in biomedical output and continued strong demand for pharmaceutical products amid the pandemic.

What we are seeing at the moment is a gradual but sustained recovery in both the economy and industrial output.

However, as at the time of writing, the Straits Times Index (SGX: ^STI) is still down 22% year to date.

A strange disconnect

The question on everyone’s minds is: why aren’t these stronger economic numbers being reflected in earnings and valuations?

For one, there is always a lag effect.

Businesses are still suffering from the continued adverse effects from the pandemic, and may take time to register and demonstrate an improvement in their fortunes.

Secondly, the improvement in economic performance is currently limited to a few niche industries such as biomedical and financial services, and has not been broad-based.

These two reasons probably explain why most of our local-listed companies are still struggling with poor demand and a muted outlook.

Could the banks lift the index?

All eyes are now on the local banks as they are slated to report their third-quarter earnings in the first week of November.

Assuming loan growth remains healthy and non-performing loans are under control, the banks could report a better than expected set of earnings.

With better results and a brighter outlook, investors may feel more sanguine about the banks’ near-term prospects.

As the banks make up 38% of the index, any improvement in their fortunes would significantly lift the index above its current levels.

We may still be mired in a bear market, but we should keep the faith that things can get better.

And this may be a great opportunity to accumulate shares of strong companies on the cheap too, if you have some spare cash to allocate.

Editor’s Note: This article was first published on 15 September and has since been updated with new information.

The COVID-19 pandemic is the single most devastating economic event in the last 11 years.

To put things in perspective, Singapore is seeing its worst GDP contraction since independence in 1965, falling by 13.2% in the second quarter of this year.

Meanwhile, the US has seen a record number of job losses since February, with a staggering 11.5 million people going out of work.

In Singapore, total employment plunged by 103,500 in June alone, the highest level within a single month on record.

The overall unemployment rate here hit 2.8% in June, while the US has seen its unemployment rate settling at 8.4%.

Despite sharing the same economic pain, the stock market in Singapore and the US seen vastly differing fortunes.

The US stock market has recovered its year to date losses and even gone on to achieve new all-time highs.

Our local stock market, on the other hand, is still mired in a punishing bear market amid lacklustre trading interest.

This disconnect has left many investors scratching their heads.

Is this underperformance set to continue? What are the implications for investors?

Here are three things you need to be aware of.

A heavy tilt

The Singapore stock market is represented by the Straits Times Index (SGX: ^STI), or STI.

The STI contains 30 large-cap, blue-chip companies that cover a wide variety of industries.

However, investors should note that the three local banks make up a significant portion of the STI, at 38.5%.

Next up in terms of weightage is Singtel (SGX: Z74), which takes up 7.5% of the index.

Together, the banks and Singtel make up a whopping 46% of the STI.

With this heavy tilt towards banks, it’s no wonder that the index has been struggling.

Banks are sensitive to macroeconomic conditions and will report weaker earnings during tough times.

At the same time, the Monetary Authority of Singapore had recently called on the banks to limit their dividend payments to 60% of the amount declared in the fiscal year 2019.

This prudence limits the dividends that banks can pay out, thus acting as an additional dampener for their share prices.

Growth is present, but outside the Singapore index

Truth be told, our local stocks contain a significant mish-mash of old economy-type businesses.

These would include essential services companies such as Sheng Siong Group Ltd (SGX: OV8) and Micro-Mechanics (SGX: 5DD).

The US indices, however, contain many stocks that have online businesses such as Alphabet (NASDAQ: GOOGL) and Facebook (NASDAQ: FB) that have benefitted from the pandemic’s effects.

Businesses that tap on social media, the internet and have a subscription model are performing well, leaving some of the older economy stocks in the dust.

However, there are pockets of strong growth here too, but they reside mostly outside of the index.

One example is iFAST Corporation Ltd (SGX: AIY) which operates a platform for the buying and selling of unit trusts and equities.

Its share price has more than doubled year to date as the group reports a record level of assets under administration from fund inflows.

Dividend yields are attractive

With share prices coming down, many businesses now sport attractive dividend yields.

For income-driven investors, they can still find companies with robust prospects that offer an attractive dividend yield.

These companies can continue to pay out a decent level of dividends, and may even increase their dividends over the years if the business continues to perform well.

Venture Corporation Limited (SGX: V03), a global provider of technology products and solutions, just hiked its interim dividend from S$0.20 to S$0.25.

Its shares offer a trailing 12-month yield of close to 4%.

Get Smart: Bargain-hunters, listen up!

From the observations above, it’s clear that opportunities do exist for great returns.

Bargain hunters should carefully scour through the few quality names that have remained resilient in the face of the downturn.

Although the STI has not performed well, that should not stop you from looking beyond the index to uncover gems that can continue to shine.

In years to come, you may even look back at this period and tell yourself that it was a golden opportunity to accumulate shares of strong companies.

With share prices battered to multi-year lows, many attractive investment opportunities have emerged.

In the FREE report, “4 Dividend Blue Chips from 2020”, we cover some of Singapore’s favourite blue chips, and four winning dividend blue chips in 2020! Just CLICK HERE to get your free copy.

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Disclaimer: Royston Yang owns shares iFAST Corporation Limited, Alphabet and Facebook.