The Amazing Singapore Economy

Yujun Lin, CEO Interactive Brokers Singapore and Geoff Howie, Market Strategist Singapore Exchange.

The island economy of Singapore benefits from its geographical location and proximity to the far east. Despite its small size, the local economy, and by extension, its stock market has thrived thanks to participation of companies from around the region. This episode takes a deep dive into the machinations of the Singapore economy and locally-listed stocks with market strategist Geoff Howie of the Singapore Stock Exchange.

Summary – IBKR Podcasts Ep. 116

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.

Yujun Lin

Hello everybody. My name is Yujun Lin. I am the CEO of Interactive Brokers Singapore. And with me today is Geoff Howie, whom I’ve actually worked with back in the day in the Singapore Exchange. Geoff, would you give us a brief introduction of yourself, please?

Geoff Howie

Yeah, Yujun, it’s great to be with you. I have 25 years of experience in financial markets. I’ve had the last 12 1/2 years, so half of that career now, at Singapore Exchange and I guess my role does parallel a lot of what IBKR campus does look to achieve, in that I work with investors every day really in helping to improve their understanding of our markets and obviously keep on top of all the current events that are impacting our markets. And it’s an incredibly diverse stock market, very dynamic and I look forward to sharing more with you tonight.

Yujun Lin

Thank you very much for that. So, some of you may not know Geoff is actually, you know borderline celebrity in Singapore. He does a lot of radio shows. He gets his view on the news media. So, yeah, you know he does have a very respected and very informed opinion of the market. So, I guess my first question today to Geoff would be that, you know some of our listeners may not be familiar with the Singapore stock market, the Singapore economy, or even as a country so for their benefit, what do you think are the main sectors, perhaps and the main forces that drive the Singapore stock market.

Geoff Howie

Well, I guess the foundation that this stock market is built on is very important because a lot of the day-to-day economic forces that really drive the Singapore economy do extend into our stock market. So, for instance, our GDP is I think 400 billion U.S. dollars. We are a very trade centered economy that maintains firstly, a very stable political framework an international financial hub, efficient infrastructure as well as a whole host of commercial attributes that really rank very highly in global business efficiency surveys and rankings and so forth. So, what we have is a stock market with a primary listing size of in total around 500 billion U.S. dollars. And then we have another 140 billion U.S. dollars of value in secondary listings. And the majority, I guess, of our GDP here in Singapore is generated through services; around 70% of the GDP is through services. And that obviously has a really big impact on our stock market too. We have a number of companies that are involved in all different consumer services, financial services, industrial services, health, gas, technology and so forth. So, one, I guess, the key first thread is that you have that service-orientated stock market. Manufacturing is also a very important part, and by coincidence manufacturing makes up 20% of our GDP. It makes up 20% of our day-to-day turnover. In terms of the manufacturing sector of stocks, but at the moment in terms of what is impacting both these sectors, is those familiar fronts that we’re seeing, those familiar headwinds of weaker external outlook and tighter financial conditions. So, what we’ve seen in our stock market is they have been increasingly or determinedly looking towards next year, and thankfully by the IMF, maintained at both Singapore and our region of Southeast Asia, will actually see growth acceleration next year. In fact, we are expected to grow in Singapore, our GDP is expected to grow 1% this year and then more than double, up to above 2% next year. And it really is in line with the region, which is expected to grow at 4.5% next year as well. However, obviously, you have the bigger, broader picture and that is obviously, China and Japan, the United States expected to see some growth deceleration. So, all in all, we have seen the STI relatively flat because of the outlook for 2024, while Singapore is looking to see growth acceleration, you still have these external headwinds and thus the STI, while it was the second-best performing stock market last year, has generated more flat returns, I think a 2% total return as of the close of business today, for the year to date. And that brings its total return since the end of 2019 to 15%. But that still beats the APAC region, which is up 5%.

Yujun Lin

OK. So, that’s very interesting. Anyway, just a point of clarification for our listeners, the STI is the Straits Times Index, so this is the benchmark for Singapore equities and it comprises 28-30 blue chip stocks, or the largest Singaporean companies. They are listed on the Singapore Exchange. OK, there’s a lot to unpack here. Maybe, we can look at it at the broadest level, which is, you mentioned that Singapore will be affected to a certain extent by what’s happening around the world given, the relative size of its economy, you said about 400 billion U.S. dollars as annual GDP and also about 500 billion U.S. dollars of stock market capitalization. So, not too small in the grand scheme of things, but you know, compared with the major economies, the G10s around the world, obviously not of the same scale, right. So, how would you say Singapore would be affected by things in the larger economy such as FOMC policy, do you think that any changes in the US Fed funds rate will impact the Singapore economy?

Geoff Howie

Yeah, it does. In fact, there’s a trio of banks that make up 45% of our STI, and these are among Southeast Asia’s five biggest stocks as well. DBS Group Holdings, Oversea Chinese Banking Corporation as well as United Overseas Bank. And they make up 45% of the STI and they also make up about $0.25 in every dollar that goes to work in our stock market every day. They’re soon going to be providing their third quarter earnings reports. But what’s interesting is that interest rates really matter because the net interest income that this trio of banks basically generate makes up more than 2/3 of their total income, and the net interest income is of course, that net difference between what banks pay on their liabilities to the rates they actually receive on assets and the higher the overnight rates, policy rates, they’re generally higher, is that net difference, and this has been the main force as to why these companies are making record profits. The trio reported combined net interest income of 8.26 billion Singapore dollars in the second quarter of this year.

For context, this was the third consecutive quarter that their combined net interest income on a quarterly basis was reported above the $8 billion mark. And the trio broke above the 5 billion dollar mark back in the first quarter of 2018 and that quarterly net interest income ranged between 5 billion and 6 billion, Singapore dollars for just over 4 years right through the first quarter of 2022 before then breaking above the 6 billion [Singapore dollar] mark, in the second quarter of last year and as I said for the last three quarters, they’re above 8 billion, so this is really an important cornerstone for the STI and our broader stock market. Just as our financial services and Singapore operating a very competitive financial hub is super important for the economy.

Yujun Lin

Well, thanks for that. I’m glad you brought up interest rates the really high Fed funds rate has allowed us in Interactive Brokers also to pay 4.83% on U.S. dollars kept with us. So, you know, I see it as this rising tide of interest rates. Yes, it does impact some areas of the economy. Yes, there is some concern that this might cause a recession, but at the same time, for a lot of investors the ability to put cash with a bank or with Interactive Brokers and earn a really good interest rate, I think that has helped to alleviate some of the pain that we feel from higher mortgage and actually higher prices overall. So, that’s for interest rates. You also mentioned earlier that Singapore sits within Asia and ASEAN. What would you think the macroeconomic outlook is in Asia, in particular with what’s going on in China, the emergence of India and the other growth economies in ASEAN? How do you think this will impact the Singapore stock market?

Geoff Howie

It does have an impact; trade and manufacturing or otherwise referred to as industrial production, in Singapore have both been in contraction for the past 12 months, and trade has also been in contraction in South Korea and Taiwan for that matter, because they really do hinge somewhat on demand for electronics and the China slowdown, our non-oil domestic exports that we report monthly was down, I think, 14 percent, 13 to 14% year on year in September and the S&P Global Asian manufacturing PMI for September also tipped below the 50.0 neutral mark for the first time in September, since October of 2021, and the most contractions were seen in Malaysia, Singapore and Thailand. So, there has been this slowdown, and you next asked how does it impact stocks? Well, as I said before, the manufacturing stocks, we have about 110 of them that represent all the different 6 clusters of our industrial production and they make up around $0.21 in every dollar that goes to work in our stock market every day; around 17% of total market capitalization. In the year to date, they’re actually down 5% in total return and that trims their total returns since the end of 2019 to around 15%, but when manufacturing was able to continue its pace in 2020-2021, given the strategic importance of manufacturing and then it wasn’t consumer facing per se, you had gains from the end of 2019 to to April 2021 for our manufacturing stocks, that was something like 40%.

So, they have off some higher cyclical stronger performances that we saw a couple of years back. The index itself PB [price-to-book] ratio is in line with all the major regional indices. And what’s interesting is not all stocks in that index though have felt the brunt of the pressures that we’re seeing in trade and manufacturing. The index has booked something like 6 million Singapore dollars of net institutional outflow so far in the year to date, and that’s not too much when you consider the overall market in Singapore has seen something like 2 billion Singapore dollars of net institutional outflow. We’ve seen Seatrium lead the net institutional outflow, which is a MOE [Maritime and Offshore Engineering] company that has really been pivoting towards sustainable solutions. You have ST Engineering, a major manufacturing company here in Singapore, UMS which provides integrated services for semiconductors, TianJin Zhongjin Pharmaceutical which actually generates most of its revenue in Chinese medicine. And then you have AM Holdings which provides testing solutions for semiconductor companies. Those stocks have been booking the highest net inflow, while there’s a bunch of stocks also that have been booking outflow and why? Because that status quo of this uneven and I guess overall slowing growth on the back of the tighter financial conditions does continue and we’ve got on the positive side of things, and this is, as I said before, these markets are increasingly looking towards 2024. We had the IMF release its World Economic Outlook last week. We had World Trade Organization also do the same. And the WTO maintained that global merchandise trade volume growth will actually accelerate to 3.3% next year, up from 0.8% this year. Singapore’s total trade, that’s exports plus imports is very high. It’s around three times the global average and four times the average for Asia. So, to highlight the importance of trade, as I said before, we’re a 400 billion U.S. economy that ranks us as the 30th biggest economy in the world. But for merchandise trade, we’re actually the globe’s sixteenth, (ONE-SIX) – sixteenth largest exporter and 16th largest importer by value. And that’s because of the crucial role that Singapore plays in regional supply chains and re-exports. For instance, Singapore imports machinery. It refines and works on the intermediate product, and then it exports that intermediate product to another country before that, equipment eventually reaches its final buyer. UMS Holdings, which I mentioned before, it highlighted back in August that it had successfully renewed its integration system contract with its key customer until the end of 2025.

So, there’s a green shoot and that has been reflected in the price of UMS since. And as the global organization SEMI noted last month, we’ve got the softening chip demand and the elevated inventory of consumer mobile devices contributing to this 15% decline in global fabrication equipment spending for the front-end facilities this year. But it’s expected to rebound by 15% next year. Most associations on the semiconductor stage do project semiconductor sales to keep growing, I think, up into the vicinity of 1 trillion U.S. dollars by 2030 and that’s really Applied Materials, which is listed in the US for instance, had noted in the third quarter that’s on the back of the Internet of Things and the AI era driving this new wave of industrial growth and innovation. So, the challenges have been there, as I said the trade contractions that we’ve seen have impacted orders. You’ve had higher costs as well that do help to reduce those margins for the companies unfortunately. But recently as we said, some green shoots have seen the pendulum move back to the right with a number of our semiconductor companies that [are] basically picking up some momentum that we saw last week.

MAS survey, our Central Bank, has also released an economic survey recently showing that better than expected external growth, more robust growth in China as we saw today, the number was a little higher than expectations and technology cycle recovery do provide the upside risks for the Singapore economy. So, I think that better outlook for global trade and some encouraging news on the tech cycle has been pretty much reflected in recent performance and participation we’ve seen in these key sectors, Yujun that really cover the manufacturing as well as the trade focus. On the trade side I should mention that that STI index that we do have, it is 30 stocks and when you look at all the weights of each of those stocks and then you look at the annual reports and see where in the world those companies are generating their revenue, 49% of the revenue is booked to Singapore. 51 %is booked outside Singapore. The majority is Asia Pacific, in particular those countries where Singapore has its highest, biggest trade partners, such as China, Hong Kong, Thailand, Indonesia and Malaysia.

Yujun Lin

I will say a couple of things. First, if anybody was playing AI Bingo, we have our first hit. So, Geoff mentioned AI and I suppose that is driving some demand for the chips and the semiconductor industry, right?

Geoff Howie

Well, it’s not enough yet to provide an overall bid tone to global technology stocks. We had the 5G provide the big global bid tone back in 2019, but we do have an element of fragmentation now in the market. So, what you see in the US, China as well as Southeast Asia, there’s a little bit more dispersion in the performances and the potential for 5G is yet to offset that full weighing of the market that’s come with the heavy inventories that the companies have been carrying.

Yujun Lin

Yeah, I think some of this is probably a holdover from the production capacity that has been built up over COVID and over the digital asset craze back in the day. Market is a lot more quiet now for this for digital assets which I suppose would be part of the reason why we got a whole bunch of chips sitting around waiting for new applications. And new users to come in the next couple of years.

Geoff Howie

Yeah. Yeah, I think so. It’s definitely an incredible industry to watch right now and that doubling up of the amount of sales associated with semiconductors basically going from, I think it was in the vicinity of $570 billion last year and then up to $1 trillion by 2030, you and I have worked at SGX. We saw the massive growth of ETF’s, for instance. So, when you’re looking at products and you’re looking at upstream and industries that are looking to basically grow their businesses in line with this overall demand, it’s really exciting and quite compelling to follow and obviously have to keep on top of what happening.

Yujun Lin

So, Geoff, we got pretty deep into this idea of technology and semiconductors. I want at this point to take a little step back and talk about manufacturing again. But I just wanted to get your take on this. When you talk about manufacturing, people think manufacturing, especially in certain parts of Asia, you’re talking about shoes, clothes, bags, basic stuff like that. But I guess the Singapore economy is a little bit different like you had spoken briefly about, we take in complex machinery, we make it even more complex to add value to that and then we export that. So, would you say that the manufacturing sector in the Singapore stock market represents, I suppose a little bit of a gradient? You have really high-tech stuff and then you have the more basic necessities types of things.

Geoff Howie

The Chinese medicine provider that I was talking about before TianJin, [Da Ren Tang], the Tianjin Pharma, [Da Ren Tang], is the company and I’m going off memory here. But it closed last year at $1.13, and is up in the vicinity of 70% so far this year, up close to $1.80. That company’s net profit for the first half of this year was up 49%. And it has been basically on the right side of reforms in the mainland to basically not clean up, but basically to make sure that Chinese medicines sold over the counter are the appropriately regulated ones per se. So, it’s an example of more of a consumer healthcare product, but something that has seen the stock basically, its trading turnover has grown more than fourfold this year because it’s come into a lot of relevance based on basically China, economic policy, China economic cycles, it’s reported net profit growth and it’s ticked many boxes for investors to participate and thus is now I guess what is it a top-80 stock by turnover on the stock market.

So, it’s yeah, that’s an example of just how unique some of the manufacturing companies that we have listed can be. And sometimes it’s great to be able to look beyond the benchmark with an index and delve into these names. I did say this is an iEdge index and the iEdge is an index business owned by SGX and what we are able to do is basically provide all the customers with the full listing of the 110 names, break it up into sectors. Anyone who wants to know what these 110 stocks that make up 20% of our turnover, what they are, what their businesses are, where their target prices are for instance, if they are covered by enough research analysts, we’ve got all that information.

And I think that is really, really super important to help. As I said before, like IBKR campus to help the investors understand our markets and just how relevant; OK, Biotech’s an important part of manufacturing. Chinese medicine is not necessarily a biotech, but it is obviously very relevant to it and just being able to help investors connect the dots from what’s happening from a manufacturing perspective in Singapore or in China or Southeast Asia, and connect those dots to the actual businesses that are also enshrined in those industries is super important and having a manufacturing index and being able to show, as we said, all the valuations and the trading turnover associated with those stocks and is what we do here.

Yujun Lin

Yeah,  I completely agree. It is important to get as much transparency on the data as you possibly can out there. Some of this comes right down to, I think, what you mentioned very briefly earlier, which is about ESG. And since we’re on the topic of manufacturing, would you say that there is an increasing slant towards making manufacturing more sustainable?

Geoff Howie

This has been a really important part of our market this year and I’m not talking about the major companies that are all reporting their sustainability metrics and reducing their footprints and so forth. But the companies that are actually involved in the infrastructure build, and the infrastructure build has been a really important part in fact, probably 15 cents in the dollar that goes to work in our stock market this year has been in companies that are pivoting towards providing sustainable solutions. You know to achieve 2030 sustainable development goals, or net zero emissions by 2050, I think the UNEP they estimate that significant investment that has to go into infrastructure is a pretty, high bill. I think OECD estimated at $7 trillion a year for infrastructure to meet the development goals. And what we’ve seen in the corporate world in Singapore is multiple Singapore listed stocks pursuing these strategic pivots to providing sustainable infrastructure and more fuel efficient transportation and offshore solutions. Seatrium has ranked our sixth most-traded stock this year. It has a net order book in its MOE [Maritime and Offshore Engineering] business of close to 20 billion Singapore dollars. Projects lined up all the way through to 2030. And 40% of that order book is in renewables or cleaner green solutions. And I think new order wins in the first half of this year, it actually included Seatrium’s largest offshore renewable project yet. Yangzijiang shipbuilding. These are STI stocks.

Yangzijiang Shipbuilding has been our eighth most traded stock this year and it made a breakthrough into clean energy vessels. I think last year and that really, in addition to, I should say this, this dual fuel vessel demand being in play as well, those two factors really did drive its high order wins last year. So, it’s total outstanding order book it’s around $15 billion, around 180 vessels, about half of which are container ships. But importantly, the clean energy vessel orders have seen a significant increase so, they now represent 56% of Yangzijiang shipbuilding contract order book and that compares to something like 23% back at the end of June last year. So that’s really picked up. And one thing of course is being on the right side of the regulations where IMO the group have put out increased clarity on the whole green transition for the shipping industry. So, therefore the company has looked to strengthen its green technologies and so forth. So, they’re obviously looking at sustainable solutions and there are another two STI stocks that are actually looking into providing sustainable power.

Keppel Corporation has ranked our 11th most traded stock this year and its infrastructure division makes up 2/3 of its revenue, which consists of an integrated power business, a decarbonization, and a sustainable solutions business. Now, for the first half of the year, the renewable energy portfolio had grown to three gigawatts and that made-up around 60% of its total energy portfolio. Close to two gigawatts of solar wind was close to one GW, hydropower was a little bit. That’s the total energy portfolio 4.9 gigawatts on a gross basis. So, it includes what’s under development as well as what’s also up and running. I think 36% is under development for Keppel. And then you’ve got the next one, which is Sembcorp Industries and that’s ranked our 13th most traded stock this year. So, these four stocks in total, as I said, make up around close to 15% of our day-to-day turnover. They added two gigawatts of renewable projects in the first half, so it’s gross renewables capacity, i.e. under development as well as operational total is around 11.9 gigawatts for the renewables capacity and you’ve got 8.6 gigawatts which is already installed of those 11.9. So, that makes up around 60% of its total energy portfolio, which is a bit above 19 gigawatts. So, for the 8.6 gigawatts of installed gross capacity that Sembcorp has 5.4 gigawatts is in China, 2.3 gigawatts is in India. This is part of this big strategic transformation as touted a few years ago.

Sembcorp wanted to grow its net profit contribution from sustainable solutions to 70% by 2025. OK. That is really want to kind of qualify though, because I’m talking gigawatts and Back to the Future was my generation, Yujun, maybe not yours. So, when it comes to renewable energy, it’s not like conventional energy. Renewables doesn’t not have base loads. So, it doesn’t always generate electricity 24/7. You’ve also got a plant load factor as well, and the power generation for renewable energy asset, particularly for, let’s say, solar, it has these irradiance levels that you have to contend with. So, an indicative guide for plant load factor for a solar asset could be, you know, around 12 to 15% thereabouts for a solar asset here in Singapore. Singapore has one of the highest home ownership rates in the world because of the HDB program and the HDB flat is good enough for a family, usually four-bedroom, two-bathroom and some of them are amazing flats in terms of the way they’re built these days and this is all part of ensuring Singaporeans have their own home. Now, for one of those flats if you can take one of those flats and you want to work out, OK, how much of these solar gigawatts can actually power flats? 1.0 gigawatts of power could power over 270 four-room HDB flats in a year. So, you know, as I said, Sembcorp’s solar is obviously more in China and basically it’s got some renewables in India, but just for context, if you’re looking to see how much one GW of solar power could power, you’re looking at around something like around quarter of a million, little over 1/4 of a million four-bedroom units in a year.

Yujun Lin

And just to close that off and again for context for some of our listeners, I would say that there are maybe a million flats built by the government in Singapore; 90% of Singaporeans live in government housing [fact check: it’s actually 80%]. It means something here a little bit different from overseas. The housing here, I think like you said Geoff, is high quality and it’s really to ensure that everybody has a roof over their head.

Geoff Howie

And great, great, great food hawker markets downstairs do best food. So, any anyone wants to come and visit, Yujun and I will join you for a meal.

Yujun Lin

So, basically what you’re saying is that four gigawatts of solar or sustainable electricity can basically power, 90% of the residences in Singapore, right? Something like that.

Geoff Howie

Yeah. And I think this has been a super exciting part of our market. You know I’ve mentioned where these companies rank in terms of day-to-day turnover and they have been ranking more highly this year. Obviously, the risks of a disorderly transition could be gradually building in the marketplace and these stocks Sembcorp industries, Keppelcorp have been our strongest so far in the STI this year in terms of performances, Yangzijiang has performed well and has performed quite well since the end of 2019. Seatrium is more flat, but Seatrium has also ascended to actually join the STI this year as well.

Yujun Lin

Absolutely right, and I think what’s super fascinating to me, is how these things compound and they kind of take some time to compound, right? Like for example, Singapore for the longest time has been a huge LNG, so liquified natural gas, hub. So, that’s a cleaner type of fuel. It’s been a hub in the region for you know coming to 30-years I think. But you’ve never really heard about it until now where it feels like we’ve reached some sort of tipping point with the shipping companies, the ship manufacturers, and the people who create the demand for these big cargo carriers, right? And, you know, suddenly everything is coming together and clicking, basically right?

Geoff Howie

Yeah. And it can take a lot of time for things to happen, but yeah, definitely exciting. But we also have when it does take time for things to click. We do have a string of derivatives, a suite of many derivative type of products and security products here listed on SGX that have a little bit more leverage. So that when things are moving a little bit slower and when you have the investors who know our markets, they can obviously take some portfolio management tools such as daily leverage certificates and expand their returns, but also take on more risk at the same time.

Yujun Lin

While doing so responsibly, I’m very sure.

Geoff Howie

OK. Yeah.

Yujun Lin

OK, so I think we’ve got time for one last quick question, which is what are the developments you have seen in the local stock or capital markets that you want to talk about today?

Geoff Howie

Yeah, productization does continue here, pretty strong. We have 9 and soon to be 10 China focused exchange traded funds. I think the AUM’s around 1.6 billion Singapore dollars. We’ve also launched Thai Singapore Depository Receipts in May. So, our three inaugural Thai SDR’s was at the Airports of Thailand, CP All and PTT Exploration Production. Airports of Thailand is the largest publicly traded company in Thailand. It’s the world’s largest airport operator by market cap as well. So, it operates I think, 6 international airports that account for more than 80% of the air traffic in Thailand. PTTEP is ASEAN’s largest listed petroleum exploration and production upstream company. CP All is the sole operator of 711 convenience stores in Thailand as well. Now, those three are also the three biggest stocks of the MSCI Thailand Index, and that’s the three that we’ve initially launched in May, and we’ll continue to launch more SDR’s as the as we move into 2024.

Yujun Lin

OK. Well, thanks for that. And you know that sounds like a very diverse, not just in terms of sectors, but also in terms of geography and exposure to underlying revenue and business, right? And that I think is really the Singapore story like you said, you know trade. And trade flows is a big part of the economy, whether it comes to services, manufacturing or even the capital markets. All right. Well, thank you very much for your time, Geoff Howie. I hope our listeners have had a good overview and introduction to Singapore and the economy and the stock market. And if there are any topics that we discussed today that you would like to go into more detail on please reach out, let us know and we will be very happy to do another session. OK. Well, thank you very much for your time, Geoff .

Geoff Howie

Absolute pleasure. Thank you very much.