Dec. 26 (Bloomberg) -- Schroders Plc and Baring Asset Management Ltd. are avoiding Singapore stocks, the cheapest in Southeast Asia, as slower economic growth in the region and cuts to Federal Reserve stimulus drive capital outflows.
The fund managers expect property to lead declines in Singapore amid a real-estate slump and the prospect of higher interest rates. The Straits Times Index was the worst-performing developed market in 2013, dropping 9.5 percent since Fed Chairman Ben S. Bernanke said in May that bond purchases may be reduced on signs of sustainable U.S. recovery.
Capital has been fleeing Southeast Asia as investors seek higher returns in North America. The market value of Singapore shares fell 5.6 percent to $567 billion this year as of Dec. 23 as 10-year U.S. bond yields climbed to a two-year high in September, making dividends from the city-state’s real-estate investment trusts less attractive. The Standard & Poor’s 500 Index rose to a record after the Fed announced on Dec. 18 it was cutting stimulus, citing optimism about the labor market.
“Property companies will do badly, particularly in Singapore where there’s a perceived housing bubble,” Lee King Fuei, a Singapore-based fund manager at Schroders, which oversees about $420 billion. “If higher bond yields cause property prices to fall, there’s an immediate impact on earnings. Cost pressure on banks will also increase as bond yields rise.”
The Singapore’s STI traded at 1.38 times book value as of Dec. 24, according to data compiled by Bloomberg. That compares with 2.49 for the Philippine’s PSEi Index, 2.37 for Indonesia’s Jakarta Composite Index, 2.34 for the FTSE Bursa Malaysia KLCI Index, and 2.07 for the Stock Exchange of Thailand, the data showed.
The Federal Open Market Committee said after its Dec. 17-18 meeting it will cut its $85 billion in monthly purchases of Treasuries and mortgage-backed bonds, also known as quantitative easing, to $75 billion in January.
The central bank will reduce asset buying in $10 billion increments over the next seven policy meetings before ending the program in December 2014, according to the median forecast in a Bloomberg survey of economists on Dec. 19. The STI surged 94 percent from when the Fed lowered its benchmark interest rate in December 2008 to this year’s peak in May.
Real estate and financial companies account for 47 percent of the STI, according to data compiled by Bloomberg. Singapore’s biggest property companies were among the worst performers in 2013, with City Developments Ltd. plunging 25 percent and CapitaLand Ltd. falling 18 percent. Jardine Cycle & Carriage Ltd., an automotive distributor that gets about 89 percent of sales from Indonesia, fell 27 percent to lead declines on the benchmark equity gauge.
The International Monetary Fund lowered its growth target for Indonesia, Southeast Asia’s biggest economy, to between 5 percent and 5.5 percent this year and next after 6.2 percent expansion in 2012. Singapore’s GDP is expected to grow 3.9 percent in 2014 after an estimated 3.8 percent rise this year, according to a quarterly survey released by the Monetary Authority of Singapore this month.
“Singapore’s neighbors have not been doing so well, particularly Indonesia, where many of the property buyers in the city come from,” said Khiem Do, Hong Kong-based head of Asian multi-asset strategy at Baring Asset Management Ltd., which oversees about $60 billion. “The Singapore government has also been implementing tough property measures because they don’t want housing prices to go through the roof.”
Singapore home prices increased at the slowest pace in six quarters in the three months ended Sept. 30 after the government introduced new curbs to cool prices in Asia’s second-most expensive property market.
“There’s no driver to spur investor interest in Singapore,” Baring’s Do said. “The recent penny stock crash isn’t really helping the case for investing in Singapore.”
About $6.9 billion was wiped from the market value of three commodity companies over three days in October, prompting an investigation by the monetary authority and Singapore Exchange Ltd. The average value of shares traded daily on SGX in the three months through December fell to S$1 billion ($790 million), compared with S$1.24 billion a year ago, according to data compiled by Bloomberg.
Blumont Group Ltd., which invests in minerals and energy, soared more than 1,000 percent this year through the end of September to lead gains on the FTSE Straits Times All-Share Index. The stock plunged from an all-time closing high of S$2.45 on Sept. 30 to 7.8 Singapore cents on Dec. 24.
Asiasons Capital Ltd., the second-best performer, slumped 96 percent from its record close of S$2.83 on Oct. 1 through Dec. 24. LionGold Corp. tumbled 91 percent from its S$1.725 peak on Aug. 29 after deals to acquire gold assets fell through. The plunge in shares prompted the bourse to seek approval to establish circuit breakers to minimize market volatility.
The world economy is primed for its fastest expansion in four years, with the U.S. driving output gains, economists at Goldman Sachs Group Inc., Deutsche Bank AG and Morgan Stanley said this month. Global growth will accelerate at least 3.4 percent in 2014 from less than 3 percent this year as the euro area recovers from recession and China and other emerging markets stabilize.
“Singapore would be one of the markets that would be favored in Southeast Asia,” said Haren Shah, Singapore-based chief strategist for Asia-Pacific at Citigroup Inc.’s wealth management division, which oversees $210 billion. “Singapore, along with the North Asian markets, is looking cheap and most likely will benefit as we see recovery in the global economy.”
The Straits Times Index is trading at 14.7 times estimated earnings, compared with 16 times for the MSCI World Index, according to data compiled by Bloomberg News.
Even as the external environment is improving, Singapore is exporting less to the West, according to Alan Richardson, whose Samsung Asean Equity Fund outperformed 97 percent of peers tracked by Bloomberg during the past three years. The city-state gets about 22 percent of export revenue from the U.S. and Europe as of November, compared with 37 percent a decade ago, according to data from International Enterprise Singapore.
“Singapore being a very property- and banking-centric country means it hasn’t benefited from global economic recovery because of the government’s tightening policy on the property market,” Richardson said.
--Editors: Jim Powell, Tom Redmond