Published August 12, 2008

Clear skies over Singapore for now: Merrill Lynch

US investment bank expects 2008 GDP to grow 5.2%, Sing dollar to stay strong


THE outlook for the Singapore economy is bright, according to Merrill Lynch. As improbable as the forecast sounds - with the government cutting expectations for GDP and raising them for inflation - Merrill reckons the economy will accelerate and the Sing dollar will remain strong.

In its latest Asian Weather Forecast, the US investment bank ranks Singapore the heaviest overweight in Asia ex-Japan in terms of country asset allocation. In Merrill's last country call in July, Singapore was ranked way down at eighth.

But Merrill now says it expects 2008 GDP growth of 5.2 per cent and 2009 growth of 6 per cent.

Calling Singapore the 'Miami of South-east Asia' and a magnet for regional high net worth individuals, it says: 'Unlike many other structural stories in Asia, Singapore has not faulted in any way, reflecting that Singapore offers First World governance for emerging market growth.'

Merrill qualified its assessment by saying: 'Holes can be poked in each of the large sector stories, if wanted.'

But of these sectors, it says property stocks, for one, already reflect lower land prices, while banks have reported 'good Q208 results with no sign of new non-performing loans'.

It also notes that Singapore's rig builders appear to be proxies for the oil price and 'the breakeven oil price for investment in a rig is well below where it stands today, at about US$60 per barrel'.

On top of this, Merrill expects the local currency to rise a further 4 per cent against the US dollar by the end of the year.

It should be noted that the Asian Weather Forecast 'stress tests' markets using metric foreign currency gains, real GDP growth, forward earnings, Merrill's own earnings revision ratio and valuations.

It should also be noted that the weather can turn quickly.

For instance, in the Asian Weather Forecast on July 3, Thailand was rated the top overweight, followed by China and the Philippines. In the latest report, Thailand has dropped to third position.

But just a month ago, Merrill highlighted Thailand was the only country in the region to show a positive correlation between crude oil prices and equities.

With the crude oil price up more than 30 per cent in Q2, Merrill's analysts markedly raised earning upgrades over downgrades for Thailand. 'As the earnings revision ratio is a key component of our asset allocation model, it contributes to weighing increase,' Merrill said in July.

This month, it says: 'Thailand's weighting would have been larger, but the model was overruled and the country's weighting reduced, due to political risks.'

The Merrill Lynch model for analysis contains no inflation variable. However, it includes an oil sensitivity analysis because 'oil is the most homogenous commodity across Asia Pacific economies, and the most visible representation of the inflation threat'.

In July, it found that markets least affected by rising oil prices were Malaysia, Hong Kong and China, while the most affected were the Philippines, Thailand and India, with Singapore near the mid-point.