Market Performance and Outlook
Singapore equities have demonstrated robust performance, posting their fourth consecutive quarter of gains with a 5.8% rise in 2Q26. The market reached record highs on 25th June and was up 11.3% for the first half of 2026. The ceasefire in the Middle East has particularly benefited transportation stocks, whilst increased volatility supported exchanges and banking shares. Expectations of bottoming interest rates have further rallied banking stocks, though energy-related equities have faced pressure from sluggish oil and gas capital expenditure and falling energy prices.
AI Investment Cycle: Booming Not Bubbling
Phillip Securities Research maintains that current market conditions do not constitute an AI bubble. The firm identifies several key factors supporting this view. Massive AI and data centre capital expenditure by hyperscalers, including Oracle and Meta, is expected to rise 73% in 2026 and 22% in 2027, cascading into substantial semiconductor purchases with billings rising 86% year-to-date to reach an annualised US$1 trillion . Wafer fabrication capital expenditure is projected to jump 40% year-on-year to US$175 billion.
The driving force behind this spending stems from frontier AI models, particularly Anthropic and OpenAI, whose combined revenue could total US$85 billion this year. Under an S-curve growth trajectory, revenue is expected to reach US$300 billion by 2030, justifying the capital expenditure spike. Current technology sector valuations remain significantly below dot-com bubble levels, with Nvidia trading at 24 times price-to-earnings compared to Cisco’s peak of 150 times forward price-to-earnings in 2000.
Investment Strategy and Sector Preferences
The research house favours banks, semiconductors, building materials, power, and higher-yielding REITs. Banking stocks benefit from resilient dividend yields of around 4% and loan growth surging towards 8% year-on-year, a four-year high. A major spike in deposits following the Middle East conflict, with March recording a S$66 billion jump compared to the prior five-year monthly average of S$9 billion , should help lower funding costs.
Semiconductor stocks are expected to register the fastest growth, fuelled by record demand from key equipment customers including ASML, Applied Materials, and Lam Research. In construction, whilst order momentum has slowed, activity has increased, supporting a 29% rise in ready-mixed concrete demand.
Frequently Asked Questions
Q: What has driven Singapore's recent equity market performance?
A: Singapore equities posted their fourth consecutive quarter of gains with a 5.8% rise in 2Q26, hitting record highs on 25th June. The market was up 11.3% in the first half of 2026, supported by the Middle East ceasefire benefiting transportation stocks and increased volatility helping exchanges and banks.
Q: Why does Phillip Securities not believe we're in an AI bubble?
A: The firm cites four reasons: massive AI capex growth is justified by frontier AI model revenue potential reaching US$300 billion by 2030; current technology valuations remain far below 2000 dot-com levels; there's an absence of speculative froth in asset markets; and the US economy is gaining strength, supported by improving retail sales and job growth.
Q: Which sectors does Phillip Securities favour and why?
A: The firm favours banks, supported by resilient dividend yields of around 4% and loan growth of around 8%, semiconductors, driven by record equipment demand, building materials, supported by a 29% rise in concrete demand, power, and higher-yielding REITs.
Q: What changes were made to the Absolute 10 model portfolio?
A: Prime US REIT was removed and replaced with ST Engineering. This reflects caution that higher inflation and interest rate expectations may limit REIT performance, whilst defence spending is rising structurally, could benefit ST Engineering through increased export sales.
Q: How has the banking sector benefited from recent events?
A: Banks experienced a major deposit spike following the Middle East conflict, with March recording a S$66 billion jump compared to the prior five-year monthly average of S$9 billion. This increased liquidity should help lower banks' funding costs whilst loan growth reaches four-year highs.
Q: What's driving semiconductor sector optimism?
A: Semiconductor stocks are expected to show the fastest growth due to record demand from key equipment customers, including ASML, Applied Materials, and Lam Research, supported by the broader AI and data centre investment cycle.
Q: Which sectors are facing challenges?
A: Energy-related stocks are under pressure from sluggish oil and gas capital expenditure and falling energy prices. In healthcare, there's pricing pressure from insurers and medical tourism is losing competitiveness.
Q: What's the outlook for US interest rates?
A: Whilst the market expects one rate hike from the Fed this year, likely in September, Phillip Securities expects no hikes, believing inflation has peaked and further increases are politically untenable.
This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.
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