7 May 2014

Page | 1 MCI (P) 034/11/2013 Ref. No.: SG2014_0069

Singapore Weathering Economic Challenges

MACRO | ECONOMY | EQUITY MARKET

Macro Research Team

Rating: Overweight

Maintain Overweight

Key takeaways

Possible spike in inflation (cost-push) – but is likely to be contained amid tight monetary policy, curbs on property market, easing transportation costs growth alongside subdued imported inflation.

Headwinds – capacity constraints (rising rental costs and labour shortage); cost-push inflation; uncertainties arising from geo-political events and China’s slowdown.

Moderate growth – barring a significant external shock, economy is expected to grow at a moderate pace on the back of optimistic global economic outlook, supported by cyclical uplift in the industrialized economies.

Fair-valuations – Valuations remains fair. Less stretched relative to US market. May see short term market weakness which investors can take opportunities on.

Mutual Funds that proxy Singapore

DWS Singapore Small/Mid Cap Fund

Amundi Singapore Dividend Growth Fund

Aberdeen Singapore Equity Fund

ETFs that proxy Singapore

SPDR STI ETF (ES3)

Nikko AM STI ETF (G3B) Key Market and Macro Data

FY11 FY12 FY13 FY14F Avg

EPS %y-y 37.70 -15.80 -12.90 -0.75 18.50

P/E , year avg 8.99 10.71 13.19 14.19 12.19

USD:Local Currency, year avg 1.26 1.25 1.25 1.28 1.44

Real GDP %y-y 6.00 1.90 4.07 3.85 6.14

Inflation %y-y 5.25 4.58 2.36 2.70 2.84

Pol icy Rate, year avg 0.41 0.38 0.40 - 1.30

Budget % GDP 1.38 2.25 1.46 0.00 -

C % GDP 34.59 35.32 34.84 - 37.71

G % GDP 9.60 9.24 9.87 - 10.12

GFCF % GDP 23.94 25.54 23.89 - 23.86

X % GDP 223.19 222.09 221.09 - 226.47

M % GDP -191.04 -194.89 -192.86 - -198.06

CA % GDP 26.01 19.79 20.97 18.00 21.86

Gross Govt. Debt % GDP* 115.67 123.44 120.28 - 105.73

Officia l Reserve Assets % GDP 87.18 91.12 92.29 - -

External Debt % GDP 483.70 477.00 501.30 - 496.20

Total Debt % GDP - - - - -

(2) Singapore's Budget i s based on the primary surplus/defici t, i .e. surplus/defici t before

Specia l Transfers and Net Investment Returns Contribution

Source: Bloomberg, CEIC, PSR est.

* “-“ impl ies no information avai lable

Remarks :

(1) Budget % GDP are ca lculated based on ca lendar year, not fi sca l year of respective country

(3) Based on Net Investment Returns Contribution, the Singapore government i s in a net

financia l assets pos i tion.

Straits Times Index

Bond Yields (10 Yr Yield and 2 Yr Yield)

Gross Domestic Product

Foreign Exchange

Inflation and Policy Rate

Singapore – Macro 7 May 2014

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Table of Contents

Executive Summary ..................................................................................................................................................................... 3

Equity Market & Credit Market ................................................................................................................................................... 4

Equity Market .......................................................................................................................................................................... 4

Credit Market .......................................................................................................................................................................... 5

Overview ..................................................................................................................................................................................... 6

APPENDIX: Economic Fundamentals ........................................................................................................................................... 8

Economic Activities ................................................................................................................................................................. 8

Cyclical Indicator ..................................................................................................................................................................... 8

Inflation ................................................................................................................................................................................. 10

Interest Rate and Exchange Rate .......................................................................................................................................... 10

Balance of Payment............................................................................................................................................................... 12

Labour Market ....................................................................................................................................................................... 12

Singapore – Macro 7 May 2014

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Executive Summary We see Singapore’s economy growth moderate slightly to 5.1% on-year in the quarter ended March from 5.5% in the previous quarter. The goods producing industries (manufacturing and construction sectors) gained momentum while services producing industries grew at a slower rate last month. The trade-reliant economy is expected to grow at a moderate pace in 2014, supported by the cyclical uplift in the industrialized economies. Singapore's manufacturing activities continue to gain traction in April, as the Singapore Institute of Purchasing & Materials Management's (SIPMM) Purchasing Managers' index (PMI) stayed in expansionary territory for four straight months. The PMI has reached its highest level in seven months at 51.1, up from 50.8 in March as manufacturers reported more new domestic and export orders, as well as growth in production and inventory. In addition, PMIs of key export markets (e.g. China, US, Europe) have generally indicated expansionary, albeit easing marginally in recent months. With the US labour market recovery expected to continue, and the Eurozone showing signs of emergence from recession, offsetting China’s slowing growth, trade-related sectors should grow at a moderate pace. Exports continue to outpace imports, 4.7%y-y versus 2.4%y-y on a 12mma basis. Meanwhile, domestic-oriented activities are expected to remain resilient, supported by construction of transportation, housing and social infrastructure. The domestic manpower crunch and escalating business costs are set to erode performances of several sectors which are more tied to the local resources, in particular, the services sector and the SMEs, in the coming months. Nonetheless, expanding overseas is a necessity for Singapore companies grappling with rising rental costs and a labour shortage at home amid a government clampdown on overseas workers willing to accept lower wages. Firms will have to restructure their businesses by improving productivity, reconfiguring their businesses or entering new markets. In addition, domestic market is small in Singapore, local businesses would always look forward to seek opportunities overseas. Singapore has therefore outlined the Quality Growth Program to adapt and reposition itself. The reform program includes tightening migrant worker policies, a three-year wage-credit scheme for job retraining, and incentives for new growth industries targeting the services sector, investments in technology research and development, and further positioning Singapore as a financial centre in the region. More specifically, the program is targeted at improving economic productivity while maintaining strong domestic demand. In addition to the reform program, Singapore has also positioned itself as Asia-Pacific region’s infrastructure hub to capitalize on the S$10 trillion need for infrastructure investments as the region march towards economic growth and urbanization. This will create opportunities for local companies, stretching from banks to construction firms, to play a part across the entire value chain (design, construction, operation, management as well as finance) in projects ranging from transport, power, water and telecommunications. Overall, growth is expected to stay on a broad upward trajectory and but capped by supply constraints, particularly in the labour market. The Singapore economy is projected to expand by 2–4% in 2014 with the unemployment rate likely to remain low amid tight labour market.

Fig 1: Gross Domestic Product

Fig 2: GDP: Goods Producing Industries vs Services Industries

Fig 3: Purchasing Manager Index: Manufacturing

Fig 4: Mfg PMI: Finished Goods Inventory and Supplier Deliveries

Singapore – Macro 7 May 2014

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Fig 5: Non-Oil Domestic Exports

Monetary Authority of Singapore (MAS) is expected stand pat on its exchange rate policy of a gradual appreciation of the S$NEER. Inflation is expected to pick up in the coming months due to wage pressure and firms to pass on accumulated cost increases to consumer prices. Nevertheless, according MAS and Ministry of Trade and Industry Singapore (MTI), imported inflation is expected to remain generally subdued as a result of spare production capacity in the advanced economies and ample supply buffers in the commodity markets. Hence, core inflation is expected to rise over the next few quarters and average 2-3% in 2014. To get inflation expectations anchored and hence lead to a more sustainable medium term and healthy pace of economy growth, MAS has slightly revised downward its 2014 headline inflation forecast 1.5-2.5% from 2-3% previously, amid tightening bias on monetary policy. The Straits Times Index remains resilient despite US correction (pulled by technology stocks), buoyed by gains from cyclical stocks, e.g. property, financial and plantations stocks. In addition, valuation is less stretched relative to the US market. Therefore, we maintain our stance to overweight on Singapore. Equity Market & Credit Market Equity Market

Resilient stock market despite US correction (S&P and Nasdaq fell on the back of technology stocks)

Earnings season starting to kick in – Higher gains from cyclical stocks, in particular, property stocks, financial shares & plantations, buoyed STI. We see any significant profit taking as an opportunity to accumulate.

Fair-valuation relative to US market – STI sees a consensus earnings forecast growth to contract slightly at -0.75% y-y which translates to a forward 14.19x P/E. However, it is less stretched relative to the US market, which have rallied for 5 years, trading at around 17x earnings. Hence, we think that forward P/E remains attractive despite earnings expected to be pressured by local constraints.

Singapore – Macro 7 May 2014

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Credit Market

MAS maintain its policy of a modest and gradual appreciation of the S$NEER policy band in view of possible spike in inflation. Meanwhile, interest rate hike in US will continue to send ripples effect to Singapore’s interest rate.

The Singapore Government Securities (SGS) are fully backed by liquid financial assets as (1) 50% of net investment income – investment income less interest payment averages S$8b/yr, and (2) debt is raised not for expenditure, and the proceeds fully invested. With its triple A credit rating, investors may leverage on government bonds to capitalize on the gradual SGD appreciation.

With US’ interest rate hike expectation (earliest by 2015) anchored, corporates can better assess and plan their borrowing costs. Investors’ risk appetite for higher yield bonds in a stable and pro-business environment remains elevated. However, supply for bonds is expected to remain low in near term, which will lend support to the bond price.

Fig 6: Exchange Rate against USD

Fig 7: Inflation

Fig 8: Labour Market vs Wage Growth

Fig 10: Straits Times Index

Fig 11: SGS Yield 2Yr & 10Yr

Singapore – Macro 7 May 2014

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Overview

S/N Topic Sub-Topic Current Forecast/ Direction + / Neutral / -

Outlook

1 Singapore economy overview

Gross Domestic Product

Grew 5.1% on-year in 1Q2014, from 4Q2013’s 5.5%

Goods producing industries improved from 4Q2013 - expansion in construction sector was mainly due to stronger expansion in public sector construction activities

Services producing industries grew at a slower rate (5.9% to 4.7%)

Domestic-oriented activities to stay resilient, supported by construction of transportation, housing and social infrastructure

Moderate pace this year supported by the cyclical uplift in the industrialised economies but capped by supply constraints

+

Cyclical Indicators

PMI stayed in expansionary territory for four straight months. The PMI has reached its highest level in seven months at 51.1 last month, up from 50.8 in March as manufacturers reported more new domestic and export orders, as well as growth in production and inventory.

Retail sales declined due to higher base last February (Chinese New Year), but on a seasonally adjusted monthly basis, retail sales rose 3%

Industrial production growth continue to accelerate at 12.1%

PMIs of key export markets (e.g. China, US, Europe) have generally indicated expansionary.

Improving manufacturing activities is in line with regional expansion in the sector – HSBC PMIs for South Korea (50.2), Taiwan (60.2), India (51.3), and Indonesia (51.1).

Expected to remain resilient with the US labour market recovery expected to continue, lending support to consumer spending and the Eurozone showing signs of emergence from recession

+

Inflation March’s inflation rebound to 1.2% from February’s 4-yr low at 0.4%

New private home sales fell

Core inflation accelerated from 1.6% to 2%

Likely to rise in coming months (lower base due to lower COE premiums the same period last year), but will ease in the second half of 2014

Car prices expected to rise at a slower pace while rentals to stabilize on higher supply

Imported inflation remain benign

Domestic cost pressures (tight labour market)

Headline inflation forecast: 1.5%-2.5% (revised downward from 2-3%)

Core inflation forecast: 2-3%

- (near term) + (medium term)

Interest Rate and Exchange Rate

Global liquidity conditions remained highly accommodative

Maintain its policy of allowing a "modest and gradual" appreciation of the SGD, with no changes to the slope, width or centre of the policy band

A tight-bias monetary policy and a hopeful improvement on trade balance (on the back of optimistic economic outlook) will lend support to SGD

+

Singapore – Macro 7 May 2014

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Labour Market

Unemployment rate remained low at 2.1% amid tight labour market

Curbs on foreign worker growth will push up wages and hence add challenges to several sectors, e.g. services sectors and SMEs

To remain low amid tight labour market (employment creation remained high, mainly driven by locals amid curbs on foreign worker)

Reform to increase productivity (to increase economic output per unit labour)

+

2 Balance of Payment review and outlook

Trade balance

Total trade jumped to 11.4% from 9%

Trade balance remains positive, exports grew 7.9% and imports rose 15.3%

NODX to grow 1-3%

Brighter outlook for global economy – trade-related sectors to grow at moderate pace

+

3 Equity Market and Credit Market outlook

Equity Market

Resilient stock market despite US correction (S&P and Nasdaq fell on the back of technology stocks)

Earnings season starting to kick in – Higher gains from cyclical stocks, in particular, property stocks, financial shares & plantations, buoyed STI. Hence, we may see market weakness in near term due to profit taking.

Fair-valuation relative to US market – STI sees a consensus earnings forecast growth to contract slightly at -0.75% y-y which translates to a forward 14.19x P/E. However, it is less stretched relative to the US market, which have rallied for 5 years, trading at around 17x earnings. Hence, we think that forward P/E remains attractive despite earnings expected to be pressured by local constraints.

+

Credit Market

MAS maintain its policy of a modest and gradual appreciation of the S$NEER policy band in view of possible spike in inflation. Meanwhile, interest rate hike in US will continue to send ripples effect to Singapore’s interest rate.

With Singapore Government Securities (SGS)’s triple A credit rating, investors may leverage on government bonds to capitalize on the gradual SGD appreciation

Supply for corporate bonds is expected to remain low in near term, which will lend support to the bond price

+

Singapore – Macro 7 May 2014

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APPENDIX: Economic Fundamentals Economic Activities

Singapore’s economy grew 5.1%y-y in 1Q14, slightly lower than the 5.5%

growth in the previous quarter.

Goods producing industries (manufacturing and construction sectors)

improved from the last quarter of 2013, as output from these two

sectors grew 8.0% and 6.5% respectively. Expansion in construction

sector was mainly due to stronger expansion in public sector

construction activities.

However, services producing industries grew at a slower rate in March

at 4.7% on-year, compared to the 5.9% expansion in the previous

quarter.

On a seasonally adjusted annualized basis, the economy expanded 0.1% on-

quarter, a sharp fall from the 6.1% growth in the final quarter of 2013.

Manufacturing sector grew at an annualised rate of 4.5% following a growth

of 10.4% in the previous quarter, while construction sector expanded at an

annualised rate of 10.7% after growing 1.4% in the preceding quarter. On the

other hand, services producing industries contracted at an annualised rate of

1.8%, a reversal from the 6.1% expansion in the previous quarter.

Singapore economy is expected to grow at a moderate pace in 2014,

supported by the cyclical uplift in the industrialised economies, said the MAS.

In addition, the outlook for the global economy has brightened, especially

with the US recovery in the labour market expected to continue, lending

support to consumer spending and the Eurozone forecast to emerge from

two consecutive years of economic contraction. Against this backdrop, the

MAS said Singapore’s trade-related sectors should grow at a moderate pace.

Domestic-oriented activities are expected to stay resilient, supported by

construction of transportation, housing and social infrastructure. Overall

growth will be capped by supply constraints, particularly in the labour market.

Cyclical Indicator

Singapore's manufacturing activities expanded for the fourth straight month

in April, as the Singapore Institute of Purchasing & Materials Management's

(SIPMM) Purchasing Managers' index (PMI) rose to its highest level in seven

months at 51.1, up from 50.8 in March buoyed by stronger new orders and

higher output.

Overall new exports orders rose to 52.5 from 51.7 while production

ticked up to 52.3 from 51.5.

The electronics sector remained above the 50-mark that separates

expansion and contraction for a 15th month, albeit weakened to 50.4

in April from 51.6 in the previous month.

Singapore retail sales declined 9.5% on year in February, partly due to the

Chinese New Year falling in February last year but in end-January this year.

However, on a seasonally adjusted monthly basis, retail sales rose 3% in

February, buoyed by higher sales of motor vehicles. Excluding motor vehicles,

retail sales increased a seasonally adjusted 1%.

Singapore’s industrial production grew 12.1% on-year in March, a double-

digit growth similar to the reading in preceding month at 12.8%, boosted by

manufacturing numbers. Excluding biomedical manufacturing, industrial

production grew 10.9% on-year.

Within overall production, output of the electronics cluster,

biomedical engineering and transport engineering cluster grew 8.7%,

16.4% and 29.4% on-year respectively.

On a month-on-month basis, manufacturing output expanded 6.1%.

Fig 12: Gross Domestic Product

Fig 13: GDP: Goods Producing Industries vs Services Industries

Fig 14: Purchasing Manager Index: Manufacturing

Fig 15: Retail Sales

Singapore – Macro 7 May 2014

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Fig 16: Industrial Production

Singapore – Macro 7 May 2014

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Inflation

Singapore's consumer price index (CPI) jumped 1.2% on-year in rebounding

from the previous month’s four-year low of 0.4%, driven by higher prices of

food, recreation, housing, education and healthcare, according to data

released by the Singapore Department of Statistics. However, the costs of

clothing and footwear, transport, and communication were lower in the

period. Inflation is likely to rise in the coming months due to the low base a

year ago when COE premiums fell, but it is expected to ease in the second

half of 2014.

New private home sales fell 83% on-year in March to 480 units. Developers

sold 2,793 units in the same month last year. In month-on-month terms,

sales plunged 35% from 739 units in February. The sharp decrease in home

sales in March implied the effects from government’s cooling measures has

kicked in.

In a nutshell, car prices are expected to rise at a slower pace while imputed

rentals on owner-occupied accommodation to stabilize amid the large supply

of newly-completed housing units. Hence, MAS is revising downward its 2014

headline inflation forecast 1.5-2.5% from 2-3% previously.

Core inflation, which excludes the costs of private road transport and

accommodation, also accelerated from 1.6% to 2% in March.

Looking ahead, according to MAS and MTI, imported inflation is generally

expected to remain benign as a result of spare production capacity in the

advanced economies and ample supply buffers in the commodity markets.

However, domestic cost pressures, particularly stemming from a tight labour

market, could pass through more significantly to prices of consumer services

as firms face rising cost pressures from higher wages, leading to broad-based

price increases across the economy. Therefore, core inflation is expected to

rise over the next few quarters and average 2-3% in 2014.

Interest Rate and Exchange Rate

Global liquidity conditions remained highly accommodative with the 3-month

S$ SIBOR stable at around 0.40%, while the 3-month US$ LIBOR averaged

0.24%.

The central bank stand pat at its policy of allowing a "modest and gradual"

appreciation of the Singapore dollar, with no changes to the slope, width or

centre of the policy band.

A tight-bias monetary policy and a hopeful improvement on trade balance

(on the back of optimistic economic outlook) will lend support to SGD.

Fig 17: Consumer Price Index

Fig 18: CPI: Housing

Fig 19: CPI: Transport

Fig 20: SIBOR (3-mth) vs CPI

Singapore – Macro 7 May 2014

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Fig 21: Exchange rate against USD

Singapore – Macro 7 May 2014

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Balance of Payment Trade Balance

Singapore’s total trade climbed 11.4% on-year in March, after a 9% increase

in February, as total exports grew 7.9%, while total imports rose 15.3% on-

year.

Non-oil domestic exports (NODX) fell 6.6% on-year in March, weighed by the

contraction in electronic and non-electronic, said International Enterprise

Singapore (IE Singapore). The decline followed an 8.9% on-year rebound in

February. NODX to all top 10 NODX markets, except for China (+16.1%) and

Malaysia (+6.1%), contracted in March. On a month-on-month seasonally-

adjusted basis, NODX contracted 8.9% in March on the same reason.

Non-oil re-exports (NORX) rose 18.7% on-year in March, following a 15.5%

expansion in February, buoyed by the increase in electronic and non-

electronic NORX.

Meanwhile, oil domestic exports expanded 6.9% on-year in March, mainly

due to higher sales to China (+74.2%), Indonesia (+38.9%) and Vietnam

(+109.5%).

IE Singapore forecasts non-oil domestic exports will rise 1-3% in 2014, after

falling 6% last year. The Southeast Asian nation’s economy expanded more

than economists estimated in the fourth quarter of 2013 after a pick-up in

manufacturing, a sign the economy is recovering after exports fell 10 months

out of the year in 2013.

Trans-Pacific Partnership (TPP)

US is facing headwinds, in particular, from Japan and Malaysia, to finalize on

the deal. However, if finalized, it will be a gateway for Singapore to assess the

multi-lateral free trade between the other 11 members, which the 12

countries together, contribute 40% of the world’s GDP and account for one-

third of its trade.

Foreign Direct Investment

Potential Rising FDI – initiatives within six economies in the Asia-Pacific

region, namely Singapore, Australia, Korea, New Zealand, the Philippines and

Thailand, on regional funds scheme that will make it easier for fund

management products to be offered between their countries. The proposed

Asia Region Funds Passport will allow fund managers operating in one of the

member economies to offer their funds in other member economies “under

a streamlined authorization process” and is still in the midst of discussion. If

successful, the passport scheme will promote funds inflow.

Labour Market

Singapore's seasonally-adjusted overall unemployment rate rose to 2.1% in

the 1Q2014 from 1.8% in 4Q2013, according to the Ministry of Manpower.

However, despite marking the highest since December 2011, Singapore's

jobless rate remained one of the lowest in the world, and we expect

unemployment to remain low amid the tight labour market, while

employment creation to remain high, mainly driven by locals as foreign

employment continued to moderate.

Curbs on foreign worker growth will exert upward pressure on wages and

hence add challenges to several sectors, particularly the services sector and

the small and medium enterprises (SMEs).

One of the reform under Quality Growth Program is to increase productivity.

The Singaporean government has set a goal of sustaining productivity

(increasing economic output per unit of labour) growth between 2010-2020

around 2-3% (an increase over the 1% achieved in the prior decade).

Fig 22: Trade Balance

Fig 23: Exports vs Imports

Fig 24: Non-Oil Domestic Exports (NODX)

Fig 25: Total Foreign Direct Investment

Fig 26: Unemployment vs Unit Labour Cost

Singapore – Macro 7 May 2014

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Singapore – Macro 7 May 2014

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11/F United Centre 95 Queensway Hong Kong

Tel +852 2277 6600 Fax +852 2868 5307

Websites: www.phillip.com.hk

JAPAN

Phillip Securities Japan, Ltd. 4-2 Nihonbashi Kabuto-cho Chuo-ku,

Tokyo 103-0026 Tel +81-3 3666 2101 Fax +81-3 3666 6090

Website:www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A Jakarta 10220 – Indonesia

Tel +62-21 5790 0800 Fax +62-21 5790 0809

Website: www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co Ltd

No 550 Yan An East Road, Ocean Tower Unit 2318,

Postal code 200001 Tel +86-21 5169 9200 Fax +86-21 6351 2940

Website: www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak,

Bangkok 10500 Thailand Tel +66-2 6351700 / 22680999

Fax +66-2 22680921 Website www.phillip.co.th

FRANCE King & Shaxson Capital Limited

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel +33-1 45633100 Fax +33-1 45636017

Website: www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Capital Limited

6th Floor, Candlewick House, 120 Cannon Street, London, EC4N 6AS

Tel +44-20 7426 5950 Fax +44-20 7626 1757

Website: www.kingandshaxson.com

UNITED STATES Phillip Futures Inc

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel +1-312 356 9000 Fax +1-312 356 9005

AUSTRALIA PhillipCapital

Level 12, 15 William Street, Melbourne, Victoria 3000, Australia

Tel +61-03 9629 8288 Fax +61-03 9629 8882

Website: www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

No 10, Prince Alfred Tower, Alfred House Gardens, Colombo 3, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 Website: www.ashaphillip.net/home.htm

INDIA

PhillipCapital (India) Private Limited No. 1, C-Block, 2nd Floor, Modern Center , Jacob

Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955

Website: www.phillipcapital.in