Singapore stocks have been on a tear since the Monetary Authority of Singapore (MAS) announced plans to form a review group to strengthen the equities market in August 2024. The market rallied further when MAS and the Financial Sector Development Fund announced, in February, that it would launch a $5 billion Equity Market Development Programme (EQDP).
In an interview with The Edge Singapore, Chew rues that the rally was a long time coming, given that it has been 17 years since the benchmark Straits Times Index (STI) last saw new highs. As at Sept 22, the STI is trading at around 14 times, but in a bull scenario such as the one last seen from 2023 to 2027, the market’s valuation could go up as high as 20 times in general, says Chew.
He notes that the market has already surpassed his target price estimates for the stocks he mentioned in his 2Q2025 outlook strategy report, dated April 1, such as Wee Hur Holdings and PropNex. Yet, he hesitates to increase his targets based on bullishness alone. “It’s a bit of a fine line … because [you have to ask whether] it’s the stock that’s driving your target price or the fundamentals?” Chew asks.
Traditionally, based on historical estimates, all of Chew’s picks would have been downgraded. But with more liquidity anticipated to come in, estimates would probably have to be a bit more bullish and valuation multiples raised accordingly, he says.
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Chew points out that the market has already re-rated when the EQDP money has yet to be deployed. He also believes that valuations could rise further if the market is vibrant enough to raise a second round of financing after the first phase of the EQDP funds.
Still, investors ought to remember that the fundamentals and earnings growth will have to follow, which is why there may be some disparity in share price performances during results season.
Next 50
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On Sept 22, the Singapore Exchange (SGX) launched the iEdge Singapore Next 50 Indices, which, as the name suggests, is to track the next 50 largest companies outside of the 30-stock Straits Times Index. There are two variants for the Next 50: one weighted by market capitalisation and the other by liquidity.
Evidently, the STI may have hit a record high but year to date, the smaller companies have done better and have drawn more investors’ interest. Year to date, the iEdge Next 50 has gained 24.07%, according to SGX; the iEdge Singapore Next 50 Liquidity Weighted Index gained 24.54%. In contrast, the STI was up 18.64%.
Despite the overall optimism, there are still some laggards, such as China-related names and commodities.
Among the sectors, Chew remains cautious over building materials counters as the volumes aren’t coming in so far despite the heightened demand for infrastructure. While the sector’s earnings may not reflect the boom yet, he believes its longer-term trajectory remains strong, as the first phase of any construction work is usually land clearing, he says.
For the rest of this year, the analyst likes construction, property, and semiconductors. Semiconductors, in particular, are likely to benefit from higher capital expenditures (capex) from companies like Alphabet, which have guided for major plans in artificial intelligence (AI), which will cascade down to the industry.
REITs will also have a chance to see a rally at the end of this year or early next year, when their results start to reflect the impact of lower interest rates, as announced by the US Federal Reserve last week.
On the other hand, sectors to avoid at the moment include anything that’s trade- and transportation-related. That said, many companies listed here do not have a high direct exposure to the slowdown in US imports in the first place. If there is to be any impact, it would be secondary, says Chew, as he cites commentary from port operators who have noted that Chinese exporters are diverting shipments to Europe while seeking out new markets.
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Sound fundamentals
Back on SGX, Chew is looking at micro-caps with sound fundamentals. To him, these are counters that have market capitalisations of less than $100 million, like Zixin Group, which sells sweet potato-based foodstuffs and has a clear growth path ahead. With most of the $1 billion and above counters already re-rated to P/Es of 20 times and higher, Chew sees micro-caps as the potential beneficiaries of the next leg of the rally.
To him, any stock that is trading at under 10 times P/E is undervalued in Singapore, because most of the larger-cap stocks now trade at 20 to 25 times, with the market average at 15 times in July.
Micro-caps, however, come with a different profile. “When you have a stock like that, the upside needs to at least double, because of the lack of liquidity,” says Chew. “So this is where you get the multi-bagger opportunity [which means] it can double or triple [in valuation].”
Chew observes that the current rally is unlike previous ones, which were concentrated in specific segments, such as dot-com stocks, property, or semiconductors. “It’s very broad-based now, that’s one big difference compared to the previous rallies. It’s a good thing because it’s not being carried [by a particular sector]. If it’s all reliant on one sector, should any issue happen, the market will fall,” he says.
On the possibility of a bubble happening, Chew says there will be signs, such as when penny stocks with no fundamentals begin to see a “huge churn” and become the top-traded stocks. “That’s when you know investors have nothing else to trade on.”
Along with a more active market, the number of new listings has picked up as well, with SGX officials suggesting as many as 30 in the pipeline. Chew notes that the market remains selective and is only looking to buy into new initial public offerings with “really attractive valuations” such as Lum Chang Creations, whose offering was priced at around five times P/E. “That’s why there’s no mania,” he says.
What happens next remains to be seen, but Chew remains bullish. At this point, the MAS has announced that it will be placing $1.1 billion in the first batch of asset managers, Avanda Investment Management, Fullerton Fund Management and JP Morgan Asset Management. Another $3.9 billion remains from the $5 billion fund, and subsequent allocations are reportedly to be announced soon.
Chew points out that EQDP fund managers are required to raise additional third-party capital. By doing so, they can help set in motion a virtuous cycle of performance and liquidity, attracting even more inflows, including hedge funds and passive flows.
With rates already cut by the Fed, inspiring other central banks to follow or do so already, there will be greater momentum for the markets, as investors are compelled to put their otherwise interest-earning bank balances into investments that can hopefully generate better returns. The new inflow can then help nudge valuation levels higher. Furthermore, the easing of monetary conditions means companies incur lower financing costs and therefore earnings can enjoy some support.
Favourite sectors
With this backdrop, he favours stocks in sectors such as construction, which is seeing a record order book from mega projects. The property sector is also seeing strong momentum with 80% to 90% sell-through rates for new recent launches.
Other sectors include defensive stocks, given the elevated defence spending, especially in Europe. “Any truce in Ukraine may dent sentiment, but it is positive for European assets due to the massive investments required to rebuild,” he says.
Chew singles out Stoneweg European REIT, with its portfolio of assets across the continent in countries such as Germany, Poland and Italy, to be a “key beneficiary” as the REIT will be able to provide warehousing needs and general stimulus to the economy.
Finally, Chew sees the energy and oil & gas sectors to benefit too as demand for energy could only increase with more power-guzzling data centres getting built, while the transition to meet a bigger proportion of demand via renewable energy sectors struggle.
