These economic problems will nag Singapore in 2013

Not a very pretty picture.

According to CIMB, Singapore faces domestic challenges that are different from the west.

Here's more from CIMB:

It is not about the need for austerity, nor the process of deleveraging.

It is about inflation and cost pressures. Local liquidity is abundant. Negative domestic real rates have caused bubbly property prices; they are not the sole culprit.

The bees of global liquidity have zeroed-in on assets in Singapore’s honey pot, amid: 1) never-ending QEs in the developed world; 2) an ever-strengthening S$; and 3) its gold-plated AAA-sovereign rating.

Compounding its asset-inflationary pressures are spiralling labour costs from its current restructuring initiatives.

Unemployment rates remain low and efforts to wean the country off its dependence on cheap foreign labour are causing obvious pain. Labour constraints will likely hurt corporate earnings now and hurt GDP growth further ahead via less foreign direct investments.

What are 2013’s big risks? Our recommendation to step out of the comfort zone is clearly at risk if Europe falls apart or if rising protectionism, nationalism and uncontrollable social unrest is triggered as a backlash to austerity.

If these do not materialise, the more likely outcome in 1H13 is weak global growth (possibly, a technical recession in Singapore), more money-printing in the western world and an eventual threat of inflation or rather, stagflation.

In such an environment, NAV plays should serve investors well. Companies will have to manage rising business costs and earnings risks are still on the downside.

Sold-down cyclicals might start to perform as liquidity overflow and earnings disappointments taper off. Lastly, no one is expecting interest rates to rise but if they somehow do, the over-owned REIT sector stands at risk.