National Day Special : Singapore Sectors worth Investing August 5, 2021

As Singapore marks her 56th birthday, let us remember our past struggles and rally together as a nation and overcome the seismic changes that continue to disrupt our lives and economy since the pandemic broke out in 2020.

Singapore market performance

The FTSE STI might have underperformed US stock indices in the first half of the year but against the region, it has done pretty well. It has fared better than the Nikkei 225, Shanghai Composite Index and Hang Seng Index.

[Calculated based on Index prices of 30 June 2021 vs 31 Dec 2020]

Singapore government have been active in supporting the economy recovery through various stimulus packages. In the recent heightened alert phases, attention was also given to stallholders for food and markets which were affected due to the clusters.

Though the pandemic is lingering on with repeated resurgences in the country and the region and the virus continues to mutate, the impact on economies should get progressively milder as vaccination rates increase and countries learn to contain the spread.

Dividend yields attractive

In the current environment of low interest rates, bond yields are generally lackluster. This compels investors to seek out alternative asset classes or investment sectors for yields. Compared to unpredictable capital gains, dividend yields are more stable and predictable in certain industries.

Some Singapore sectors are still able to generate attractive returns for investors through dividend yields.

With no capital-gain or dividend tax for retail investors in Singapore, dividends are a preferred way of securing a steady stream of income and cash flow from investments. Dividend yields from overseas investments might be subject to withholding taxes or fees.

The following formula can help you calculate the annual returns of equities, derived from both dividends and capital gains.

Sectors to look out for

In Singapore, the finance and real-estate sectors, particularly real-estate investment trusts or REITs, are known to reward investors with stable and relatively high yields.

Banks

Since last July, local banks have been observing a dividend cap implemented by the MAS. This limited their dividends in FY20 to 60% of their 2019 payouts. The purpose was to ensure that the banks had sufficient capital buffers for lending and absorbing further economic shocks during the pandemic.

On 30 June this year, the MAS said it was assessing the possibility of lifting this cap in the near future. It is currently running financial stress tests on banks. If the cap is lifted, the dividend yields of bank stocks could rise.

Banks are usually negatively affected by low interest rates, as lower interest rates mean lower net interest margins which in turn reduces their earnings from net interest income segment.

However, with the Singapore and regional economies slowly on the mend, banks are expected to report better earnings in the coming quarters, from higher loan growth, wealth management fees, and trading income.

Banks’ stock performances are usually correlated with the FTSE STI. This is because the financial sector forms more than 45% of the index, with the three local banks alone making up more than 42% as of 30 June 2021. Given the index’s high exposure to banks, banks are usually regarded as a proxy for the STI.

REITs

Another sector which is holding its ground is REITs. Firstly, though the pandemic has affected sub-sectors such as hospitality and retail REITs, REITs typically pay higher dividends yields and are sought after by investors. Secondly, current low interest rates benefit the REITS, through lower debt-servicing. REITs tend to borrow heavily to finance and operate their properties. Lower interest rates reduce their cost of operations and debt-financing.

With the pandemic triggering a growth spurt in e-commerce, a particular sub-sector of REITs is having its moment in the sun. Logistics and warehousing REITs have been benefitting from higher demand for warehousing facilities. Their rental performance and occupancy rates have been stronger than those of retail REITs.

Meanwhile, industry consolidation could possibly eliminate or lead to delisting for the weaker firms such as, Perennial Real Estate Holdings and LCT Holdings in 2020. This year, Fragrance group limit also has an offer to bring the company private as well. This might in turn leave a larger piece of the pie for the investors to select the remaining firms with the fundamental strength to ride through the storm. After the pandemic, the real-estate sector is expected to recover strongly. As the sector contributes more than 20% to the STI, this makes it another good proxy for the index.

Below is a breakdown by sector of the STI, based on the STI ETF (ES3), which tracks the index by component and exposure.

Source: https://www.ssga.com/library-content/products/factsheets/etfs/apac/factsheet-sg-en-es3.pdf

To wrap it up

The Singapore market does not normally excite investors, as can be seen in more news coverage given to overseas markets such as the US tech sector.
However, it still has sectors that could provide a strong foundation for a diversified portfolio for Singapore investors.

For those of you who prefer not to manage individual stocks, there are ETFs that track the STI’s performance. There are also unit trusts which invest in dividend-yielding stocks in the Singapore market that you can consider.

Chat with your trading representative or financial advisor today to find out more.

We wish Singapore a Happy Birthday!