Singapore Exchange Ltd (SGX)

Singapore Exchange is Asia’s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.

With about 40% of listed companies and over 80% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.

As Asia’s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities, and was one of the first globally to adopt the Principles for Financial Market Infrastructure.

Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

Asia’s leading multi-asset exchange

SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Equity Bottom-Up

Ascendas Hospitality Trust / Equity Bottom-Up

<ul>
<li>This week (30-31 July) the Fed Reserve is expected to deliver a cut in the Fed Funds Rate with the possibility of a dovish outlook and room for more cuts, in addition to ending the preceding course of balance sheet reduction/ quantitative tightening ahead of September.</li>
<li>A key motivation for this potential rate cut are weaker global numbers particularly in the manufacturing and trade-related sectors. The same weak reports, with the trade impasses &amp; consequential outlooks, have impacted the region as noted in recent earnings reports. </li>
</ul>
<ul>
<li>The Singapore stock market has kept resilient with the recent global challenges. While the most traded manufacturing &amp; real estate stocks outpaced the STI in 2019 YTD, trade-related economic uncertainty has seen the manufacturing stocks twice as volatile as the real estate stocks. </li>
</ul>
Global Anticipation of a Fed Funds Rate Cut
By Thursday (31 July) 2am Singapore time, the Federal Reserve is expected to deliver a 25 basis points (‘bps”) cut in the Federal Funds Rate. Should the majority consensus prove correct, this would be the first US Federal Funds Rate cut since December 2008. The current rate target range for the Federal Funds Rate is 2.25% to 2.50%.
The last time the Federal Reserve moved interest rates back towards 2.00% was in April 2008, citing that in the United States economic growth had remained weak, labour market conditions had deteriorated further, and manufacturing activity was soft. This time around, the expected rate cut has been cited by Fed officials for some insurance against a sharper US slowdown (similar to 1995-1996). Beyond the expected 25 bps rate cut, markets will also be on the watch for a dovish tone statement by the Federal Reserve, with room for more cuts. In addition, the market will be looking to see if the Federal Reserve ends its agenda of balance sheet reduction/ quantitative tightening ahead of September.
Reasons for a Dovish Federal Reserve Highly Relevant to Singapore Economy
The particularly good news for Singapore’s trade-orientated sectors is that the current economic uncertainty faced by the changed trade climate is a large part of the Federal Reserve’s reasoning for their more dovish outlook.
As noted mid-July (click <a href="https://www2.sgx.com/research-education/market-updates/20190712-us-rate-speculation-fuelled-weeks-swing-singapore-stocks" target="_blank" rel="noopener">here</a>) the rationale for the dovish stance taken by the Federal Reserve Chair at the Semi-annual Monetary Policy Report to Congress, was weak global numbers “particularly in the manufacturing and trade-related sectors”. Some of that economic uncertainty was communicated in the record 2QFY19 results reported by DBS Group Holdings yesterday (click <a href="https://links.sgx.com/1.0.0/corporate-announcements/CTK2YWJHT81P7ZZD/c01e17d21c8731077faf9078e7e92419f49979244654d99ab3f44b15b6c27004" target="_blank" rel="noopener">here</a>). This was through moderate increases in the group's provisions, through increased expected credit losses on the back of “heightened economic uncertainty and geopolitical tensions”.
The same economic uncertainty faced by the group, and indeed the region, is a key motivator for the expected cut in the Fed Funds Rate.
Singapore Policies Aimed at Boosting Growth while Promoting Great Equity
The highly eventful month of July also saw the International Monetary Fund (“IMF”) release its annual report of its bilateral discussion with Singapore. The report (click <a href="https://www.imf.org/en/Publications/CR/Issues/2019/07/15/Singapore-2019-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-47119" target="_blank" rel="noopener">here</a>) highlighted that:
<ul>
<li>Singapore’s GDP per capita more than doubled in the last twenty years and income equality has been advancing since 2008/2009;</li>
<li>Policies have been aimed at boosting growth while promoting greater equity; and</li>
<li>As a highly open economy and an important financial center, Singapore is strongly influenced by developments in the region and the rest of the world.</li>
</ul>
Singapore’s economic growth is projected by the IMF to decline to 2.0% in 2019, below potential which is estimated at 2.5% in the medium term, with modern services becoming an increasingly important driver.
On the risks front, the report reiterated that as a financial and trading hub, Singapore is particularly exposed to a tightening of global financial conditions, escalation of sustained trade tensions, and deceleration of global growth. 
And as discussed above, the key trio of assessed external risks of a sharp tightening of global financial conditions, rising protectionism and retreat from multilateralism, and weaker than expected global growth overlap with the motivators for the expected dovish stance to be taken by the Federal Reserve at the imminent meeting.
Meanwhile on the domestic front, the IMF assessed the risk of a disorderly correction in Singapore property prices was a low likelihood, which compared to a low-to-medium likelihood for Australia, and a medium likelihood for Hong Kong, based on similar reports earlier in the year.
Diversified Stock Markets Provides for More Choice in Risk to Return 
Singapore’s stock market is highly diversified with the 200 most active stocks by turnover this year representing more than 20 different sectors or industries. The two sectors with the greatest representation by the number of stocks amongst the 200 stocks have been real estate stocks( or trusts) and manufacturing-related stocks. Together these two stock sectors accounted for more than two-fifths (40%) of the 200 most active stocks by turnover in 1H19.
In both instances, the average year-to-date total return of the stocks that make up those sectors has outpaced the STI’s 11.8% 2019 year-to-date total return. However economic uncertainty resulting from ongoing global trade discussions, in addition to expectations that the next move by the Federal Reserve will be an interest rate cut (following nine successive hikes) has seen the manufacturing stocks average twice the volatility of the real estate stocks.
&nbsp;
Both sectors have stocks well diversified by exposures to Singapore, the region and globally. However, the two distinct stock genres maintain different risk profiles, for instance:
<ul>
<li>Both in the July month-to-date and 2019 year-to-date, the manufacturing stocks have seen much greater swings and less consistency in the returns across the 24 relevant stocks than the 59 counterparts in Real Estate; &nbsp;</li>
<li>At the same time the best performing manufacturing stock in the July month-to-date, AEM Holdings, with its 16.5% total return doubled the month-to-date return of the best performing real estate stock over the period, OUE Commercial REIT (which was up 7.9%); &nbsp;</li>
<li>A similar observation was made in the 2019 year-to-date with&nbsp;manufacturing’s best performer Frencken Group generating a 79.7% total return compared to real estate’s Ascendas Hospitality Trust generating a 41.2% total return. &nbsp;</li>
<li>The average 12 month historical volatility of the 24 manufacturing stocks was 48% compared to 19% for the 59 Real Estate Stocks.</li>
</ul>
The 59 Real Estate stocks averaged a 17.9% total return in the 2019 year-to-date, with just two decliners amidst the 59 stocks.&nbsp;The Real Estate Investment Trusts (“REITs”) have been a key driver of the performance of the real estate stocks with the&nbsp;<a href="https://www2.sgx.com/indices/products/sreit" target="_blank" rel="noopener">iEdge S-REIT Index</a>&nbsp;generating a 21.9% total return in the 2019 year-to-date. Analysts attributed the strength to defensive flows into REITs in a risk-off environment (due to trade tensions) and growing expectations for a cut in the Federal Funds Rate. The REIT segment has also continued to expand and recently saw the debut of the third US office REIT (Prime US REIT) to list on SGX – click&nbsp;<a href="https://www2.sgx.com/research-education/market-updates/20190719-prime-us-reit-sgxs-3rd-pure-play-us-office-reit-makes" target="_blank" rel="noopener">here</a>&nbsp;for more.
By contrast, the 24 Manufacturing stocks averaged a 20.8% total return in the 2019 year-to-date, with five decliners amidst the 24 stocks. The below tables are sort by total returns for the 2019 year-to-date.


This week (30-31 July) the Fed Reserve is expected to deliver a cut in the Fed Funds Rate with the possibility of a dovish outlook and room for more cuts, in addition to ending the preceding course of balance sheet reduction/ quantitative tightening ahead of September.
A key motivation for this potential rate cut are weaker global numbers particularly in the manufacturing and trade-related sectors. The same weak reports, with the trade impasses &amp; consequential outlooks, have impacted the region as noted in recent earnings reports. 


The Singapore stock market has kept resilient with the recent global challenges. While the most traded manufacturing &amp; real estate stocks outpaced the STI in 2019 YTD, trade-related economic uncertainty has seen the manufacturing stocks twice as volatile as the real estate stocks. 

Global Anticipation of a Fed Funds Rate Cut
By Thursday (31 July) 2am Singapore time, the Federal Reserve is expected to deliver a 25 basis points (‘bps”) cut in the Federal Funds Rate. Should the majority consensus prove correct, this would be the first US Federal Funds Rate cut since December 2008. The current rate target range for the Federal Funds Rate is 2.25% to 2.50%.
The last time the Federal Reserve moved interest rates back towards 2.00% was in April 2008, citing that in the United States economic growth had remained weak, labour market conditions had deteriorated further, and manufacturing activity was soft. This time around, the expected rate cut has been cited by Fed officials for some insurance against a sharper US slowdown (similar to 1995-1996). Beyond the expected 25 bps rate cut, markets will also be on the watch for a dovish tone statement by the Federal Reserve, with room for more cuts. In addition, the market will be looking to see if the Federal Reserve ends its agenda of balance sheet reduction/ quantitative tightening ahead of September.
Reasons for a Dovish Federal Reserve Highly Relevant to Singapore Economy
The particularly good news for Singapore’s trade-orientated sectors is that the current economic uncertainty faced by the changed trade climate is a large part of the Federal Reserve’s reasoning for their more dovish outlook.
As noted mid-July (click here) the rationale for the dovish stance taken by the Federal Reserve Chair at the Semi-annual Monetary Policy Report to Congress, was weak global numbers “particularly in the manufacturing and trade-related sectors”. Some of that economic uncertainty was communicated in the record 2QFY19 results reported by DBS Group Holdings yesterday (click here). This was through moderate increases in the group's provisions, through increased expected credit losses on the back of “heightened economic uncertainty and geopolitical tensions”.
The same economic uncertainty faced by the group, and indeed the region, is a key motivator for the expected cut in the Fed Funds Rate.
Singapore Policies Aimed at Boosting Growth while Promoting Great Equity
The highly eventful month of July also saw the International Monetary Fund (“IMF”) release its annual report of its bilateral discussion with Singapore. The report (click here) highlighted that:

Singapore’s GDP per capita more than doubled in the last twenty years and income equality has been advancing since 2008/2009;
Policies have been aimed at boosting growth while promoting greater equity; and
As a highly open economy and an important financial center, Singapore is strongly influenced by developments in the region and the rest of the world.

Singapore’s economic growth is projected by the IMF to decline to 2.0% in 2019, below potential which is estimated at 2.5% in the medium term, with modern services becoming an increasingly important driver.
On the risks front, the report reiterated that as a financial and trading hub, Singapore is particularly exposed to a tightening of global financial conditions, escalation of sustained trade tensions, and deceleration of global growth. 
And as discussed above, the key trio of assessed external risks of a sharp tightening of global financial conditions, rising protectionism and retreat from multilateralism, and weaker than expected global growth overlap with the motivators for the expected dovish stance to be taken by the Federal Reserve at the imminent meeting.
Meanwhile on the domestic front, the IMF assessed the risk of a disorderly correction in Singapore property prices was a low likelihood, which compared to a low-to-medium likelihood for Australia, and a medium likelihood for Hong Kong, based on similar reports earlier in the year.
Diversified Stock Markets Provides for More Choice in Risk to Return 
Singapore’s stock market is highly diversified with the 200 most active stocks by turnover this year representing more than 20 different sectors or industries. The two sectors with the greatest representation by the number of stocks amongst the 200 stocks have been real estate stocks( or trusts) and manufacturing-related stocks. Together these two stock sectors accounted for more than two-fifths (40%) of the 200 most active stocks by turnover in 1H19.
In both instances, the average year-to-date total return of the stocks that make up those sectors has outpaced the STI’s 11.8% 2019 year-to-date total return. However economic uncertainty resulting from ongoing global trade discussions, in addition to expectations that the next move by the Federal Reserve will be an interest rate cut (following nine successive hikes) has seen the manufacturing stocks average twice the volatility of the real estate stocks.
&nbsp;
Both sectors have stocks well diversified by exposures to Singapore, the region and globally. However, the two distinct stock genres maintain different risk profiles, for instance:

Both in the July month-to-date and 2019 year-to-date, the manufacturing stocks have seen much greater swings and less consistency in the returns across the 24 relevant stocks than the 59 counterparts in Real Estate; &nbsp;
At the same time the best performing manufacturing stock in the July month-to-date, AEM Holdings, with its 16.5% total return doubled the month-to-date return of the best performing real estate stock over the period, OUE Commercial REIT (which was up 7.9%); &nbsp;
A similar observation was made in the 2019 year-to-date with&nbsp;manufacturing’s best performer Frencken Group generating a 79.7% total return compared to real estate’s Ascendas Hospitality Trust generating a 41.2% total return. &nbsp;
The average 12 month historical volatility of the 24 manufacturing stocks was 48% compared to 19% for the 59 Real Estate Stocks.

The 59 Real Estate stocks averaged a 17.9% total return in the 2019 year-to-date, with just two decliners amidst the 59 stocks.&nbsp;The Real Estate Investment Trusts (“REITs”) have been a key driver of the performance of the real estate stocks with the&nbsp;iEdge S-REIT Index&nbsp;generating a 21.9% total return in the 2019 year-to-date. Analysts attributed the strength to defensive flows into REITs in a risk-off environment (due to trade tensions) and growing expectations for a cut in the Federal Funds Rate. The REIT segment has also continued to expand and recently saw the debut of the third US office REIT (Prime US REIT) to list on SGX – click&nbsp;here&nbsp;for more.
By contrast, the 24 Manufacturing stocks averaged a 20.8% total return in the 2019 year-to-date, with five decliners amidst the 24 stocks. The below tables are sort by total returns for the 2019 year-to-date.

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Market Update - Potential Rate Cut to Support Global Manufacturers & Region 