Can Singapore Keep Its Market Momentum Going?

In this episode, Jose Torres sits down with Geoff Howie of SGX Group to explore why Singapore’s economy and stock market have been outperforming with from strong macro fundamentals to rising AI-driven productivity. They break down the key drivers behind the momentum and the global risks that could determine whether Singapore can keep its global edge.

Summary – IBKR Podcasts Ep. 372

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jose Torres

Hello everyone, and welcome to this edition of Interactive Brokers IBKR Podcast. I’m Jose Torres, your Senior Economist, and with me today I have a very special guest, Geoff Howie, who is the market strategist at SGX Group out in Singapore. He’s been there for 15 years. Prior to that, he was a Senior Vice President and market strategist at MF Global Singapore. And prior to that, he was the Asia Pacific Futures and Options Advisor at McQue Group. Geoff Howie, thanks so much for joining us. 

Geoff Howie

Thanks, Jose. Great to be here. 

Jose Torres

So we’re gonna talk a little bit about Singapore macro, what’s going on over there. Of course, the backdrop has been strong. Singapore, alongside South Korea, have been two of the equity markets that have done pretty remarkably this year on a year-to-date basis. What do you—why is Singapore outperforming? 

Geoff Howie

I guess a combination of cyclical and structural drivers. What I mean by cyclical—we’ve had two consecutive years of back-to-back higher-than-trend growth at 5%. The outlook is expected to be maybe around three and a half percent growth this year, based on the broad-based momentum. We saw strength across construction, air travel, and modern services. That broad-based growth is coming at a time where I think our structural resilience is also receiving quite enough attention from investors. We have highly liquid banks. We have a lot of long-term fiscal planning. We have solid strategic reserves. The country has been making quite a lot of investments into aviation, energy, and climate. And our currency as well has been seeing some, I would say, macro credential-type traits that are seeing the, including the South Korean one, the increase in holdings of non-G4 currencies across central banks work to its favor. And then you also have a low pass-through from U.S. rates on our interest rates. So these structural foundations that we have, combined with the strong cyclicals, are providing a pretty good foundation for the stock market.  And the thing is that we’re a trading port, and you can imagine Singapore—a very efficient city-state that is trying to build the world’s biggest fully automated port. It has a big airport, as you can imagine. The current Terminal 5 that they’re building is gonna be bigger than Terminals 1, 2, 3, and 4 together. So you have a lot of construction build. 

But at the same time, we try and punch above our weight as much as we can just to survive in the world. And if you look at trade, we’re the world’s 15th largest exporter across the world. And if you look at digital services and commercial services, we rank actually quite a bit higher—number seven. So when you’re looking at the makeup of the large-cap stocks that make up our key indices, you’ve got a lot of overlay there with the solid economic foundations, from ICT and digital services to financial services. And of course, we are living in a world where supply chains have become very important out here in this part of the world. The World Trade Organization is seeing digitalization rewire a lot of our RBCs—regional value chains. And Singapore has also been taking the move to AI pretty seriously as well over the last five, six years, as we moved from chat to generative into agentic. So for that reason, I guess we rank really highly in digital engagement agreements, AI readiness, digital infrastructure, cloud infrastructure, and so forth. So the upshot of all of this is that Singapore Business Federation, when it pinged a lot of the SMEs in Singapore coming into this year, saw that they were increasingly optimistic on accelerating overseas expansion, re-engineering their processes, and diversifying their supply chains. So that’s it from the ground. It’s not saying there’s not gonna be challenges. We are obviously expecting to see moderating growth, but this is all coming at a time when we are also looking to re-engineer the economy, look for new growth drivers, particularly in sectors that are benefiting from the widening field of technology and digitalization, and also looking at a whole-of-market approach to revive the interest in the smaller part of the stock market—the SME side. 

So, as Jose, timing is everything in the markets, and I think we’re at a really interesting inflection point. So that’s a lot of the macro, some of the policy—but also there’s the micro as well. And that’s a lot of policy-led initiatives to help companies embrace productivity, turn AI side projects into operating execution layers where they can scale tech to actually help generate results. 

Jose Torres

Yeah, the manufacturing sector has been particularly buoyant. I want to focus in a little more on that. Geoff, artificial intelligence, the PMI recent number almost a four-year high, highest since May of 2022. Conditions on the ground, like you said, remain robust. Inflation low. There are risks to the outlook—we’ll talk about that a little later. And then also labor markets—really tight. But tell me a little bit about the manufacturing buoyancy as it relates to AI, because that’s really what investors have been so excited about—the modern technology’s potential that could really bolster corporate earnings decades from now. 

Geoff Howie

Yeah, a hundred percent, you’re right. The thing is—and this has really started over the last 12 months or so—we’ve seen a lot of what I call industrial and engineering services, which is a core foundation of the manufacturing sector, obviously start embracing technology into their operations. One example is a construction company—so, okay, this is still within the field of capital goods, but obviously not clear manufacturing. A company in the concrete foundation business used AI to produce a record 35-hour consistent concrete pour that’s going to build the foundations for what’s gonna be our tallest building soon. And it was able to do that using AI logistics, so to speak. 

So this part of the world, I think, is very interesting because for the manufacturing side—and I think for the consumer side as well—there’s been a lot of promise of what we could achieve across Southeast Asia as a bloc. When you look at those PMI and so forth, you’ll always notice there’s a lot of really good inter-regional connections and economics.  However, sometimes we do have to compete with some pretty competitive forces from outside Southeast Asia. The interesting thing for the companies that are involved in manufacturing is that they are looking at having businesses that obviously can instill more technology and also expand around the region. And it’s not just for Singapore and Southeast Asia—much of the world is banking on tech to be a large enabler for growth. When you look at some of the academic work from the World Bank, ADB, or IMF, the medium-term growth outlooks for the next three to five years aren’t as hot as they used to be. Over the past few decades, growth is coming down, and the ability to integrate technology into your manufacturing or consumer market to really achieve scale and expand over large populations is providing a lot of promise. 

In manufacturing itself, there’s a lot of verticals that we have. Active pharmaceutical ingredients have been pretty important for the biopharma growth we’ve seen here in Singapore. Transportation manufacturing is something that we’ve excelled in and has been a very resilient component of our manufacturing growth. 

Shipbuilding has also been quite important, and we have companies and segments in our stock market where shipbuilders have made those tilts to cleaner, greener shipping more than five years ago. And I think general manufacturing is looking to tap into some of the support we’ve got here that enables companies to really embrace the technology that the government is looking to support, so companies aren’t left to their own devices. We’ve got this IMDA association here in Singapore that’s actually, as part of the fiscal or federal budget at the beginning of the year—well, last month, I should say; it just feels like it’s been a long month—they’re basically targeting a good 10,000 SMEs to help support their AI journey. Our largest stock—okay, it’s not manufacturing, but our largest stock is a bank—and it basically last year had something like 2,000 AI models, which evolved into 400–430 use cases and produced 1 billion Singapore dollars in economic value for the company. 

So when we look in our market and all our stocks, we look at sort of the top end and then look to see the top end showing that leadership in markets, and investors then assess the breadth of the market as well and see. 

Jose Torres

Well, Geoff, talk to me a little bit about foreign capital inflows. Of course, a lot of tourists go to Singapore. A lot of individuals choose to move there for good, and also corporates go there. They invest. How is that aspect of the economy going? 

Geoff Howie

That aspect of the economy has been pretty strong. When you look at, I guess, the amount of liabilities on our banks’ sheets here—so assets of non-Singaporean banks and the deposits that they put in here—that’s up something like 100 billion Singapore dollars over the last 12 months. So it’s about 14–15%, thereabouts. The direct investment is structurally very sound and very resilient. The portfolio inflows are a little more cyclical. If you want to then kind of delve into where portfolio inflows have been the strongest, it’s pretty much exactly like you said, Jose—very much into those industrial manufacturing stocks, materials and resources, as well as the semiconductor servicing technology sector. 

So when you’re looking across our broad stock market, your net institutional inflows are generally following the macro tailwinds or following, I guess, from a factor perspective, those stocks that generally have the higher-quality factors. 

Jose Torres: Now, one thing, Geoff—shifting gears here to the fiscal side—Singapore has done great with the fiscal budget. Talk to me a little bit about that. 

Geoff Howie

Oh, that’s a really interesting one—that for a small city-state with a population of 6 million, it takes at least a good 90 minutes to go through the annual budget every year. It’s very lever-driven. Everything’s very intentional. 

Case in point is the amount of contracts that were given to the construction sector last year was actually pretty high—quite significantly higher than the previous year. As I talked about before, there’s a lot going on at the airport, to the port, which is on the other side of the island. Then there’s a big cross-island metro line that’s also gonna, I guess, link both sides up. And a lot of this—it actually has the strongest multiplier effect, so the government is acutely aware of this. I think there’s a 1.9 multiplier impact for the 50 billion Singapore dollars that have been spent on construction projects. So the government knows that it is getting that return. 

The fiscal planning—Singapore has its challenges. It has quite a bit of an aging population that we have to care for, and it also has, obviously, a lot of sensitivity to global trade across the world and global inflation. There’s not much resting on laurels, if you will—very cautiously optimistic approaches when it comes to these types of policies and planning. 

I guess what makes it interesting, and what the IMF likes about it most in the annual country reports, is that so much of the fiscal planning is long-term rather than episodic. 

Jose Torres

Now, inflation, of course, is on top of everyone’s mind. Here in the US, we’re starting to consider the potential for rate hikes. UK, ECB—similar dynamic. Australia raised twice in a row. Japan raised. What’s the risk? Of course, the monetary policy in Singapore is a little different—it’s managed via currency, of course. That’s something that I’ve had to learn over the years, considering that here at Interactive, we have a strong investor base out in Asia. 

What are the risks, given that Singapore imports its crude oil and natural gas needs? What are the risks here if inflation starts to climb more materially due to the Iran war? 

Geoff Howie

Ultimately, it’s risks to growth. The currency is the preferred measure rather than interest rates because the average Singaporean spends 40 cents in the dollar on direct imports. So if we are going to be importing higher prices, it makes so much more sense to actually lift or appreciate the currency. And we didn’t actually have too much of an inflation issue coming into this year—it was more a risk of overheating. So the MAS monetary policy—four times a year, April, early April, then the next meeting—expectations were already that they would see a modest depreciation. So I think that expectation is pretty much cemented in. 

And that expectation—particularly if, I mean, in two weeks, if this US–Israel–Iran conflict drags on—you can’t expect to have first-order and second-order impacts eventually. I remember we’ve been watching the VWAP of the price of, obviously, May crude and also December crude every day. And you start also looking at the transportation rates, the impact it’s gonna have on insurance rates, and just generally wholesale trade, and of course manufacturing, as you mentioned before. So if that energy-led inflationary outlook leads to global monetary policy tightening—not just in Singapore but across the world—it’s obviously gonna weigh on global growth and weigh on external demand. And as I said, some of the most optimistic expect us to grow at 3.5%, but those outlooks will obviously be trimmed if this continues. 

Jose Torres

Final question from me, Geoff. Against that backdrop, are Singapore stocks poised to outperform? You see that European stocks are down, Chinese stocks are down year to date, Hong Kong is down, US is down—but the Straits Times Index is up 5% this year. 

Geoff Howie

Yeah, I think we underperformed for quite some time. This index is coming up to 60 years old, and its journey in the first 30 years was very strong. It was then branded as an industrial index, making up Singapore’s listed industrial companies as Singapore embarked on this massive export-orientated industrialization in its first 30 years. 

So there were really strong returns, very much aligned with the economy. Then I think after 2007, around then, the GDP continued to grow, but the market did not grow with it. So what we’ve had over the last two years is somewhat of a structural alignment to measures here at home to improve liquidity and to improve valuations, which has given markets that little bit more confidence in the ability for our market to function as competitively on all fronts as the rest of the world. And that’s seen the market reprice, as you said, and outperform peers from a valuation perspective. I mean, we’re a good distance—maybe 25%, thereabouts—higher than the previous all-time high in 2007. But on a price-to-book ratio, I think we’re at 1.6 when we used to be above 2.0. 

One way of gauging institutional engagement into an index is to look at the broadest index, like your S&P 500, and compare it to your M2 money supply. The all-cap of our broadest index is pretty much on par with our money supply. 

Back in 2007, it was two times. So, on all counts, there’s not much overcrowding or being overvalued. So I think the market likes to think that we’ve kind of recalibrated, realigned structurally. You’ve got, therefore, some global allocation tailwinds that come there. 

It is not one of the most volatile indices in the world because half of the index is comprised of three banks—three banks that make two-thirds of their money in net interest income, which has been very stable for the last 13 quarters. So that’s from the end of 2022, the last quarter of 2022, right through the last quarter of last year, with very consistent net interest income. 

They’ve been able to maintain it at levels that are twice what it was 10 years ago, thereabouts. And they’re also growing their non-interest income—wealth management—quite a lot as well. I think the September quarter for them combined was a record. So there’s an element of stability in that index as well. 

And I think what’s worked well is, at the same time, a couple of weeks ago, we’ve actually relaunched futures contracts on the Straits Times Index. And you could kind of look at them as a micro contract because the notional value per contract, I think, is about 10,000 Singapore dollars—so around 8,000 US dollars, thereabouts per contract. 

And if you look at the charts, you can see, as I was explaining there, there’s been a clear kind of structural alignment over the last two years. But then it can actually spend quite a bit of its time range trading between key highs and key lows. 

Jose Torres

All right, Geoff. Well, thanks so much for your time. It was great to have you here, Geoff. 

Geoff Howie

It’s a pleasure. Thank you so much. 

Jose Torres

Ladies and gentlemen, thanks so much for tuning in to this edition of Interactive Brokers IBKR Podcast with Geoff Howie. He’s been here before, and I’m going to invite him again in the near future. Thanks, Geoff. Everyone, download our podcasts—Apple, YouTube, Spotify, et cetera—and I look forward to seeing you soon. Bye for now.