What makes S’pore one of the most resilient markets in region

Source : Business Times - 9 Aug 2008

ALMOST exactly 10 years ago in September/October 1998, the Singapore stock market suffered its worst-ever beating in the wake of a region-wide sell-off that subsequently entered the history books as the notorious Asian financial crisis.

That crash, which took the Straits Times Index down to an all-time low of 800, capped several months of selling that had started with the devaluation of the Thai baht in July 1997. It also coincided with the collapse of Clob International, after the Malaysian government declared Clob an illegal market for Malaysian shares.

During that darkest of periods in local market history, the Straits Times Index lost about 58 per cent between July 1997 and October 1998, a loss many observers at the time felt was unfair given Singapore’s ‘defensive’ reputation, which held that Singapore companies were financially stronger and better governed than others in the region.

But of course, when investors are determined to sell there is no stopping them. So Singapore stocks took a beating in tandem with all others in the region. A decade later, however, Singapore’s ‘defensive’ reputation looks finally to have come good. From its all-time high of 3,831 reached last October to its intervening low of 2,792 in March, the STI has only lost 27 per cent - less than half the fall 10 years ago. In comparison, Hong Kong’s Hang Seng Index has lost the equivalent of 38 per cent.

Also, as at Aug 4, the STI’s year-to-date drop was 18 per cent, less than most markets in the region - China, for example, is down more than 50 per cent despite all the hype surrounding the Olympics - and leaving Singapore among the more resilient markets this year.

Brokers have been quick to latch on to this theme of relative outperformance. In a Singapore Strategy Outlook report at the end of June, for instance, Citi Investment Research described the local market as a ‘Beacon in a Sea of Troubles’, saying that ‘as many of Asia’s economies come unglued due to the current oil shock, Singapore looks surprisingly resilient’.

It added: ‘Singapore’s relative resilience comes from low oil intensity, large fiscal and current account surpluses and a lack of fuel subsidies.’

DBS Bank’s Q3 Regional Equity Strategy said that although investors are expected to focus on rising inflation and interest rates, Singapore will emerge more defensive than other regional markets, backed by strong reserves and lower policy risks in managing these challenges.

‘While high inflation could slow domestic spending, Singapore’s strong reserves and fiscal balance will provide the safety net to pump prime the economy,’ said DBS.

Apart from a strong economy, one factor behind the market’s resilience has been increased dividend payouts. According to Bloomberg’s financial analysis, the STI at 2,850 offers a dividend yield of 4.2 per cent, a figure that compares very favourably with Hong Kong’s 3.2 per cent and is by itself a decent enough figure in a world where low yields prevail.

Contrast this to the practice 10 years ago, when companies preferred to plough back profits to expand their businesses instead of pay dividends, a practice that probably led to Singapore being classified as an ‘emerging market’ with all others in the region.

Another big factor has been the relative strength of the banks, thanks to their solid capital bases and diversified income streams. Recent preference share issues by DBS and OCBC, for example, have brought their tier-1 capital adequacy ratios to an estimated 10 and 14 per cent respectively, providing strong buffers against future headwinds. As a result, OCBC has actually risen marginally for the year to date, while DBS and UOB’s losses are only 10 and 2 per cent respectively.

Last but not least, the efforts of the government and regulatory authorities to install a governance framework that emphasises the caveat emptor maxim yet provides sufficient safeguards to instil investor confidence.

The Singapore Exchange is now viewed as a preferred listing destination for many foreign firms from India to Korea, and its reputation as one of the best-run and best-governed exchanges in the region has helped immeasurably in ensuring the Singapore market’s resilience during these testing times.