Equities

Singapore Stocks Up 7%, Driven by Banks and Dividends

Singapore's Straits Times Index up nearly 7% YTD, driven by bank shares and strong dividend expectations.

By Max Weldon

7/10, 19:53 EDT
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Key Takeaway

  • Singapore's Straits Times Index (STI) has surged nearly 7% this year, driven by strong bank shares and dividend expectations.
  • DBS Group, OCBC, and UOB are key drivers with record highs due to robust dividends and higher interest rates.
  • Lower borrowing costs boost REITs' attractiveness; geopolitical risks remain a concern for Singaporean stocks.

Singapore Stocks Rally

Singapore stocks have experienced their best rally in years, driven by growing confidence that US interest rates have peaked. The Straits Times Index (STI) has risen nearly 7% this year, buoyed by gains in bank shares amid strong dividend expectations. Brokerages such as UBS Group AG and JPMorgan Chase & Co. have recently upgraded Singapore’s equities to neutral, citing less stretched valuations and solid earnings momentum in index heavyweights.

“The attractiveness of the Singapore equity market is the currency and dividend yield,” said Paul Chew, head of research at Phillip Securities Pte. The STI offers yields of more than 5%, higher than most regional markets, according to Bloomberg-compiled data. The gauge is trading at 10.9 times forward earnings, below its five-year average of 12.3 times, indicating reasonable valuations even after the recent rally.

Bank Shares Performance

Bank shares have been a significant driver of the market's performance. DBS Group Holdings Ltd., Oversea-Chinese Banking Corp., and United Overseas Bank Ltd. are expected to report strong second-quarter results in early August. These banks have touched record highs recently, thanks to strong dividend expectations and higher interest rates.

John Foo, founder of Valverde Investment Partners Pte, noted, “The bank shares will continue to take the market higher in the short term due to their positive fundamentals including return on equity and payouts.” However, analysts caution that banks may face a reversal in fortunes once the Federal Reserve begins policy easing, which investors are betting will start in September.

Zhikai Chen, head of Asian equities at BNP Paribas Asset Management, mentioned that “visibility that the net interest margin is at least going to hold until the end of the year” makes dividend payouts by Singapore banks look sustainable. Lenders are also “sitting on excess capital,” which could further support their performance.

Real Estate Investment Trusts (REITs)

Lower borrowing costs are expected to benefit Singapore’s real estate sector. The slump in Singapore’s REITs over the past few years has made them more attractive to investors. The high-yielding nature of these investments is drawing attention, especially in an environment where US interest rates are expected to decline.

“The yield angle is still working out quite well” for Singapore stocks, said BNP Paribas’ Chen. “Singapore is one of the countries seen as a stable proxy to the region” and some international funds are looking to expand their exposure in this market. However, geopolitical tensions and potential changes in US leadership could pose risks to Singaporean REITs and manufacturing firms that derive revenue from China.

Street Views

  • Paul Chew, Phillip Securities Pte (Cautiously Optimistic on Singapore equity market):

    "The attractiveness of the Singapore equity market is the currency and dividend yield. Slowing global growth and potential for interest-rate cuts will see investors rotate to a lower-beta country such as Singapore."

  • Zhikai Chen, BNP Paribas Asset Management (Bullish on Singapore banks):

    "Given visibility that the net interest margin is at least going to hold until the end of the year, dividend payouts by Singapore banks look sustainable. Lenders are also sitting on excess capital."
    "Singapore is one of the countries seen as a stable proxy to the region and some international funds are looking to expand their exposure in this market."