Why are investors shunning cheap Singapore stocks?

High leverage is a key issue.

Investors have showered attention on ASEAN bourses in previous years, but Singapore’s equity market appears to have been largely left out of the investment party. Singapore's equity market has underperformed key benchmarks AxJ and EAFE since 2010 by ~900 bps and ~1,500 bps, respectively, with the market currently trading close to cyclical troughs on an absolute and relative basis.

Morgan Stanley believes that a lot of the growth negatives are already reflected in the market’s price, and that potential restructuring, particularly in the government-linked companies, facilitated by a strong government mandate, could provide a market trigger.

“We study Singapore's valuation trends during the past two decades and conclude that Singapore's equity market seems to have been ignored over the past 5 years and has capitulated recently. In our view, Singapore equities appear to offer deep value on valuation multiples relative to history,” said Morgan Stanley.

A key concern among investors is the leverage build up during the easy monetary policy of the last few years. Investors are nervous that the unwinding of the leverage cycle with rising rates could potentially be disruptive for the Singapore financials sector, thus causing hard landing. 

However, Morgan Stanley said that Singapore has already worked through its excesses, as illustrated by the soft landing of the property market.

“One potential yardstick to measure the magnitude of financial excesses is using the property sector as a
barometer. It appears that Singapore may have already worked its way through the potential excesses in property thus reducing the probability of tail risk,” the report said.