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Brokers agree 2017 will be grim for Singapore

Deutsche Bank says the Republic's economic outlook is 'marked with material downside risks'

It would be fair to say that many in the stock market have been wrong-footed by the rally that followed the Nov 8 US presidential election in which Mr Donald Trump triumphed.

Similarly, the all-time highs on Wall Street and the 156 points or 5.6 per cent gain posted by the Straits Times Index from Nov 8 to the start of this week had not been foreseen by the majority.

It would also be fair to say that many privately wonder if the markets have over-reacted in their bid to embrace the Trump reflation story.

Last week, Mr Nobuyuki Hirano, chairman of Bank of Tokyo Mitsubishi, put it best when he said market moves had been "based on no tangible fact" and that markets had "moved ahead of reality'' as no one knew what president-elect Trump would do.

Similarly, despite the strong run enjoyed by equities here, significant doubts remain - not least because of the grim outlook facing the local economy.

It's not often you find everyone agreeing in financial markets but this is one such occasion - without exception, brokers and investment houses are united in their view that next year will be challenging, to say the least, for Singapore.

Deutsche Bank, for example, said the Republic faced "a multitude of external headwinds" in its "Adapting to Insularity" report - the title a reference to the inward-looking world that could evolve in the wake of a Trump presidency - adding that with the threat of de-globalisation, "Singapore's economic outlook is marked with material downside risks".

GROWTH

It did, however, say growth here could rise slightly in 2017 and 2018 to 2 per cent to 3 per cent due to marginal improvement in exports.

Nomura bank was less encouraging. In its Asia Economic Outlook released last week, it said it found it hard to share the Government's optimism on the growth outlook.

Nomura cut its 2017 gross domestic product (GDP) forecast from 1 per cent to 0.7 per cent.

The residential property market is likely to remain on a gradual downward trajectory Nomura on the US interest rate hike’s impact on Singapore

It said: "The high levels of household and corporate leverage also imply vulnerability to a likely faster pace of interest rate hikes in the US in response to Mr Trump's policies... the residential property market is likely to remain on a gradual downward trajectory."

It added that firms would likely struggle to focus on improving productivity growth which had thus far proven disappointing.

Bank of America-Merrill Lynch, in the meantime, has forecast GDP growth of 1.4 per cent next year and 1.8 per cent in 2018.

The same message runs through all other forecasts - a small, open economy like Singapore's that depends on free trade and exports is likely to be hurt by rising protectionism.

Even before Mr Trump's win, the economy was struggling with structural change, labour constraints and productivity challenges, so a difficult transition has been made harder by the anti-globalisation threat that an "America First'' policy poses.

One saving factor, however, as far as stocks are concerned, is that the market is sometimes divorced from the economy, as it is made up of companies which may not be directly exposed to a domestic slowdown.

This temporary decoupling, very likely driven by short-term, speculative liquidity flows, has enabled STI to benefit from the post-Trump, reflationary rally on Wall Street over the past month.

It has also pushed the STI into black for this year and there appears to be just about sufficient momentum to keep it there.

After a dismal last year and weak first 11 months this year, and with the prospect of year-end padding of the index to look forward to, this should provide some consolation to brokers and investors.

However, as 2017 rolls around, it is very likely that the challenging economic outlook will make its presence felt as reality starts to bite.

Some houses already recognise this.

Macquarie Equities Research (MER), in a soberingly realistic assessment, said last week it was not overly optimistic of the market's prospects next year as it thought prices would remain caught between a stagflationary and disinflationary backdrop with only a 20 per cent chance of a reflationary outcome materialising.

It said STI earnings were flirting with a 10 per cent contraction for this year and its own top-down model signalled a 1 per cent fall next year.

MER therefore recommended an "underweight" on Singapore and it surely can't be long before other houses follow suit.

A survey of Professional Forecasters released by the Monetary Authority of Singapore on Wednesday shows that analysts have slashed their growth forecasts for 2016 and 2017.

This article first appeared in The Business Times yesterday.

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