Published December 13, 2008

Singapore could lead rebound in region

Once the global economy picks up towards the end of 2009, the export sector will feel the recovery first: UBS


SINGAPORE may be the only Asian economy to show negative growth next year given its small and very open economy but it could also be the first in the region to recover, according to UBS Wealth Management Research.

UBS senior economist Thomas Kaegi pegs a 'neutral' rating to Singapore's equity market. Other Asian countries at risk of a recession include Hong Kong, Taiwan, South Korea and Thailand but their economies are not expected to post negative growth next year. 'For Singapore, we are most negative due to the high export exposure that the economy has despite the fact that the government has been trying to diversify its industry portfolio from IT-related industries to biomedical sector or even tourist industry,' he said in a media briefing yesterday. 'But once the global economy picks up again towards the end of 2009, the export sector in Singapore will feel the recovery first.'

Mr Kaegi expects Singapore's gross domestic product (GDP) to contract 0.5 per cent next year from a projected 1.5 per cent growth this year. In tandem, the jobs market will deteriorate, and consumer and investment spending will weaken next year.

A new report by UBS Wealth Management Research projects a further sharp slowdown in the global economy next year, with the US entering its deepest recession in 25 years, translating to US dollar weakness in 2009.

Mr Kaegi said that the UK will likely post a sharper decline in GDP of 2.2 per cent next year, compared with a projected 1.3 per cent GDP contraction in the US, because the UK housing bubble is bigger and may take a longer time to recover.

A moderate recovery is expected in the second half of next year, when the impact of the huge fiscal stimuli and interest rate cuts by governments around the world trickles in, he said.

Until economic conditions turn the corner in the second half of next year, real estate and commodity assets will likely stay pressured. Mr Kaegi advises investors to keep to a reduced commodity exposure in 2009, as a recovery in prices will only take off towards the end of that year.

Most asset classes are expected to turn in below average returns next year, except for corporate bonds and developed market equities, he said. He recommends that investors keep to a diversified portfolio and build up their positions selectively in corporate bonds and equities.

'We focus on the very defensive sectors,' he said. 'Those that shouldn't be affected so much by the cyclical downturn would be healthcare, consumer staples and utilities, and we shy away from the very cyclical sectors such as consumer discretionary and IT.' But he favours corporate bonds to equities as he eyes limited upside to bond prices at the current low interest rate levels.

Developed market equities are expected to outperform emerging market equities, he said. He has an 'underweight' view on Asian equities, is 'neutral' on US equities, and 'overweight' on European equities due to their very low valuations.