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Takeaway: Singapore is a country that looks to reap outsized benefits from our 1Q13 Macro Theme of #GrowthStabilizing.

SUMMARY CONCLUSIONS:

  • Singapore is a country that looks to reap outsized benefits from our 1Q13 Macro Theme of #GrowthStabilizing.
  • From a bottom-up country level, investing in Singapore here is not without its risks. Far and away the most notable risk at the current juncture is the recent round of macroprudential measures levied upon the Singaporean property market.
  • That being said, however, we expect the ever-prudent Singapore economy to eventually overcome any near-term GROWTH headwinds associated with this latest round of measures and continue its cyclical recovery throughout the intermediate term.
  • While it’s rarely ever the right call to be contrarian solely for contrarian’s sake, we are comfortable standing on the other side of consensus here and are comfortable buying Singapore on a pullback(s), provided our TREND line holds. 
  • A breakdown there would  be an explicit signal that the aforementioned measures are indeed a bit more cyclically punitive than we are currently anticipating in the construct of Singapore benefiting from a broader global economic recovery over the intermediate term.

Singapore is a country that looks to reap outsized benefits from our 1Q13 Macro Theme of #GrowthStabilizing. To the extent you weren’t able to join today’s conference call, please click HERE to gain access to the replay materials and podcast. Also, please refer to our 1/9 note titled: “GLOBAL GROWTH STABILIZES SOME MORE” for our latest number-crunching of global GROWTH trends.

In line with our previous work on the country, we typically start off our analysis of Singapore (and Hong Kong) from a top-down perspective at the international level. That’s because:

  • At 209% and 226% of GDP, respectively, Singapore and Hong Kong are far and away the most export-oriented countries in Asia – far more levered to global demand than other noteworthy Asian economies (China: 31.4%; South Korea: 56.2%; Japan: 15.2%; Thailand: 76.9%; and Taiwan: 66.9%);
  • The ratio of Singapore and Hong Kong’s share of world exports to their individual shares of world GDP are 6.5x and 7.1x, respectively – besting the next closest economy in Asia (Malaysia) on this metric by a full 3.7 turns; and
  • Singapore and Hong Kong are home to the world’s second and third-busiest container ports, handling 28,431,100 and 23,669,242 TEUs, respectively, per the latest yearly data from the American Association of Port Authorities.

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From a bottom-up country level, investing in Singapore here is not without its risks. Far and away the most notable risk at the current juncture is the recent round of macroprudential measures levied upon the Singaporean property market. To recap, the following measures were announced on Friday:

  • A +500-700bps increase in the stamp duty for all homebuyers (first home for permanent residents and second home for native Singaporeans), which is to be layered on top of previous levies;
  • Tighter loan-to-value standards for buyers seeking a second mortgage, in which the cash down payment will rise +1,500bps to 25%;
  • A cap on bank loan repayments for public housing to 30% of the buyer’s monthly income;
  • Restrictions barring permanent residents from subletting their entire units if purchased from the government;
  • Income limits and various other restrictions, such as limiting the size of executive condominiums to 160 square meters; and
  • A new 15% stamp duty for sellers of industrial properties if the transaction takes place within a year of the purchase date.

It should be noted that this is the third round of macroprudential measures aimed at Singapore's property market. Prior to last week’s measures, Singaporean policymakers barred interest-only loans for some housing projects, stopped allowing developers to absorb interest payments, imposed an additional tax of 10% on foreigners and companies buying properties and imposed limitations on further development of “shoebox” apartments. This past OCT, they also restricted mortgage maturities to 35 years and required lower LTV ratios for loans exceeding 30 years in duration.

While prices are indeed up +59% off the 2Q09 lows, we are not of the view that the Singaporean property market is in bubble territory. Fueled by record low domestic interest rates and an extremely tight labor market, the Singaporean housing market, at least, is underpinned by real demand that is unlikely to be structurally eroded by the recent tightening measures. To this end, home sales in Singapore climbed to an annual record of 22,699 units in 2012 according to Urban Redevelopment Authority data.

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We cannot, however, reach the same conclusion with regards to Singapore’s industrial property market, where prices have doubled over the past three years. The aforementioned 15% stamp duty on all sales within one year will most likely limit further speculation within this segment of Singaporean property development.

On the announcement of the latest measures, Singapore’s Deputy Prime Minister Tharman Shanmugaratnam issued the following statement:

“The reality we face is that interest rates are extraordinarily low, globally and in Singapore and continue to add fuel to our property market. We have to take this further round of measures now to check recent market trends and avoid a more serious correction in prices further down the road.”

My, do we love POLICY sobriety @Hedgeye. While certainly not as exciting as investing in German equities during the Weimar Republic hyperinflation saga, we like to invest in countries where capital has a history of being both respected and returned to investors (i.e. we don’t like allocating capital to pending blow-ups and/or currency debauchers).

Accordingly, expect the ever-prudent Singapore economy to eventually overcome any near-term GROWTH headwinds associated with this latest round of measures and continue its cyclical recovery throughout the intermediate term.

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Moreover, any economic resilience and/or outright strength will likely come in the face of growing bearish sentiment among sell-side consensus (our paraphrased notes from Bloomberg, following Friday’s announcement):

  • Singapore bank earnings to be off 3-5% – JPM
  • A potential 10-20% decline in mortgage origination – DBS
  • Sales volumes may drop 30% - Barclays
  • Mass market property prices to fall 10% in 2013 – Kim Eng

The Merrill Lynch Singapore Property Equities has plunged -6% in a straight line since these measures were announced. At a point, the bad news becomes priced in. While that point may be a bit further in the future for select Singaporean financials (the MSCI Singapore Financials Index is down -2.1% over the past month vs. a +0.8% gain for the broader MSCI Singapore Index), we think the Singaporean equity market overall is poised to outperform when those headwinds do in fact get fully priced into the associated stocks.

While it’s rarely ever the right call to be contrarian solely for contrarian’s sake, we are comfortable standing on the other side of consensus here and are comfortable buying Singapore on a pullback(s), provided our TREND line holds. A breakdown there would  be an explicit signal that the aforementioned measures are indeed a bit more cyclically punitive than we are currently anticipating in the construct of Singapore benefiting from a broader global economic recovery over the intermediate term.

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Moreover, INFLATION should continue to slow from a 25-month low here in 1H13 on the strength of previously hawkish POLICY (via SGD appreciation) out of the MAS and subdued inflation expectations should help underpin broader market multiples in the near term (via a reduced threat of monetary POLICY tightening).

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Darius Dale

Senior Analyst