Head of FX Strategy
Summary: Singapore’s 2023 budget announcement encompassed more support measures to fight price pressures but also brought back a focus on long-term goals of innovation and productivity. This means retail stocks and REITs could benefit, as could companies with high R&D. Higher taxes for the wealthy may do little to dampen demand and rents could continue to run higher. SGD could come under more pressure as the greenback remains in favor.
Singapore announced the 2023 budget on 14 February, aiming to narrow the deficit to 0.1% of GDP in the year starting April from a revised 0.3% deficit this year. Revenues are expected to get a lift from the increase in GST and higher taxes on high-value property as well as increased taxes for multinational companies, while the expenditure will be lowered as Covid-era stimulus measures are relaxed.
Still, focus remained on supporting Singaporeans amid a high inflation environment and the increase in GST. Subsidies for low-income families increased by S$3 billion but the budget also brought back a long term focus with measures to enhance competitiveness of companies and supporting family planning.
Let’s assess what this can mean for Singapore stocks:
Increasing the handouts to citizens by S$3 billion in the year starting April will support private demand despite high inflation pressures. This could be positive for value grocers like Sheng Siong (OV8) and restaurants like Kimly (1D0) or Jumbo Group (42R) . This could in turn benefit retail REITs like Frasers Centrepoint Trust (J69U) or Suntec REIT (T82U) which have a large part of their malls dedicated to food courts and restaurants.
Keeping a long-term focus, Singapore announced measures to promote innovation by topping up the national productivity fund by S$4 billion. Businesses will enjoy tax deductions of up to 400% (previous 250%) of qualifying innovation expenditure under the new Enterprise Innovation Scheme. This brings positives for companies that invest in R&D, for instance AEM Holdings (AWX), Venture (V03), UMS (558), ISDN (I07) and Nanofilm (MZH).
Singapore also announced a focus on developing labor-market intermediaries who can go through industry training and employment facilitation to fast pace job opportunities for Singaporeans. This brings staffing-solutions providers such as HRnetgroup Ltd (CHZ) in focus.
On the flip side, higher CPF contributions would potentially add to manpower costs for companies, and weigh on long-term earnings. But the measure is to be implemented in a progressive manner over 4 years, so the effect will be gradual. On watch will be companies with a high labor cost including ST Engineering (S63) and Singapore Airlines (C6L). Moreover, higher foreign company taxes could divert some foreign flows away. Singapore intends to set its effective tax rate for multinational enterprises at 15% starting 2025, in line with a global agreement to increase the floor rate.
To boost revenues, Singapore will raise taxes for higher-value properties. Residential properties in excess of S$1.5 million and up to S$3 million will be taxed one percentage point higher at 5%. Properties in excess of S$3 million will be taxed at 6% from 4% earlier. This is a negative for City Developers (C09), UOL (U14), Capitaland Investment Ltd (9CI) and Keppel Corp (BN4). However, the measure appears modest for the wealthy individuals and is unlikely to deter demand.
USDSGD rose higher following the budget announcement to test the 50DMA at 1.3338. Singapore dollar is down over 2% since the highs of early February. A break above opens the door to 1.3400 and 1.3600. Disappointing growth prompted the Monetary Authority to say that cumulative tightening measures could help to slow growth, suggesting further tightening measures will remain cautious. Meanwhile, US inflation remains sticky and the potential for US yields and the US dollar to go higher means more pain could come for the Singapore dollar.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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