Time to cash in those Singapore stocks: BNP Paribas

The brokerage has set its STI target to 3,300 citing concerns that the government is likely to continue introducing measures to cool down the property market as well as the Monetary Authority of Singapore focusing on limiting growth in unit labour costs via a faster appreciation of the exchange rate.

“The property market in Singapore is a key factor driving market performance as the combined weight of the real estate and banks industry group is almost 50% of MSCI Singapore. Private housing prices in Singapore in the 3Q were up 23% over the past twelve months, with public housing prices/HDB rising 16%. The pace of increase in the latter sector, while of limited interest to foreign investors, is of crucial importance to the average Singaporean as 80% of the population lives in HDB housing. As such the premium of Cash Over Valuation (COV) that purchasers pay for an HDB property is as important an indicator of pricing as the actual property transaction price. During the 3Q, the COV reached an average of SGD30,000, surpassing the high of SGD22,000 reached in the previous cycle high in 2Q07,” noted the report.

The report further noted: “ As both Singapore and Hong Kong have introduced measures to cool over-heating property markets, it is reasonable to ask why we are downgrading Singapore to Underweight, related in part to these measures, yet upgraded Hong Kong to Overweight. The answer to this conundrum centres on the way we assess measures introduced by policy makers to target undesirable developments in specific sectors. If policies target the root cause of the undesirable development – in this case surging property prices – then there is a high likelihood of success. However, if the policies target the symptoms, then the probability of success is low. Singapore is targeting the cause, Hong Kong the symptoms.

The policies that Singapore is implementing targeting the causes of excessive increases in property prices centre on a combination of administrative measures – similar to Hong Kong – including reducing the loan to value ratio, and in Singapore’s case, introducing a stamp duty on the sale of a property within three years. What differentiates Singapore is its use of hard measures, specifically, appreciating the exchange rate with a view to reducing the build up in excess liquidity, and driving away high cost manufacturing which encourages companies to substitute labour for capital. This contrasts with Hong Kong where an undervalued exchange rate attracts liquidity and results in the corporate sector investing in the non-traded goods sector, including property.”

Headline inflation in Singapore at 3.7% in September, up from 3.3% in the previous month – high by local standards. However, the real target of Monetary Authority of Singapore’s (MAS) policy is the upward pressure on unit labour costs (ULC). During the 3Q ULC actually declined 7%, thanks to a 15% increase in productivity amidst a 6% increases in wages to SGD3,819/USD3,000 a month. While ULC’s were clearly under control in the 3Q, MAS is looking ahead to 2011, when a tight supply of labour could lead to a spike in ULC’s. This can already be seen in the services sector, and in particular hotel and restaurants, where ULC rose 5% in the 3Q as productivity growth was lower and wage rises larger than the aggregate for the economy. Anecdotal evidence suggests the new Integrated Resorts has resulted in a severe squeeze for hotel and restaurant staff, forcing businesses to raise wages and room/menu prices.