Singapore’s GDP to soar by 4% in 2024, here’s how to capitalise on this

·       We expect Singapore's GDP to soar by 4% next year on the back of an exports-led economic recovery.

·       Driven by several factors like production adjustments, government incentives, base effects, and the rapid adoption of artificial intelligence (AI), we anticipate a significant 40% year-on-year (yoy) surge in global semiconductor sales by 2Q2025. Given the reliance on electronics exports for growth, Singapore’s economy would benefit from this upturn.

·       The nation with its political stability, prime geographical location, bilingual population, and well-educated workforce, serves as a key bridge between the East and the West.

·       As more companies adopt the China-Plus-One strategy, we have witnessed semiconductor giants such as Taiwan Semiconductor Manufacturing Corporation’s affiliate, Vanguard International Semiconductor Corporation and GlobalFoundries embarking on expansion plans in Singapore.

·       We have upgraded the Singapore equity market to 4.0 Stars "Very Attractive" rating, projecting a 31.0% upside potential for the STI by the end of 2025 and a forward dividend yield of 5.8%.

According to the Ministry of Trade and Industry, Singapore’s GDP has expanded 1.1% year-on-year (yoy) in 3Q2023, above advance estimates of 0.7% previously, largely due to the expansion of the information & communication sector.

Earlier in July, we pointed out that the global electronics demand is bottoming and hence, is expected to recover. On 22 November 2023, the Ministry of Trade and Industry shared similar views and expressed that a recovery for the global electronics demand is underway. It was also cited that this would lead to the recovery of the manufacturing and trade-related sectors in Singapore.

Related article: Singapore’s economy is set to bottom, here’s how you can play the rebound

With the improving market conditions, the ministry has forecasted full-year 2024 GDP growth to be between 1% and 3%. Taking a more bullish stance than the government, we project GDP to soar by 4% due to the following drivers.

Rebound in Global Semiconductor Sales

A significant portion of Singapore’s economic growth stems from its exports, with a notable focus on electronics. This underscores the importance of closely examining its manufacturing sector, particularly the semiconductor industry.

We anticipate a pivotal moment in the global semiconductors space, projecting a 40% yoy growth in chip sales by 2Q2025. This forecast is underpinned by the expectation that chipmakers will experience a structural surge in demand as the world becomes increasingly digitalised, potentially resulting in increased semiconductor applications and higher silicon content.

Despite the prevailing sales downturn, we anticipate that adjustments in production levels, government incentives, and base effects will also contribute to heightened future sales growth. These factors are further accelerated by the adoption of artificial intelligence (AI).

Riding on this trend, we expect higher manufacturing output in Singapore which could in turn, lead to greater electronics exports. We also expect Singapore’s GDP to soar by 4% in 2024 as a result.

Figure 1: Singapore’s GDP Growth and Global Semiconductor Sales Growth

Related article: Chip sales to top 40% year-on-year by 2Q25. Here’s how you can capitalise on this opportunity

The bridge between the East and the West

Known for its political stability, prime geographical location and bilingual population, Singapore is a key bridge between the East and the West. Another driver is the China-Plus-One strategy adopted by companies to promote greater geographical supply chain diversification beyond China.

Semiconductor giants like Taiwan Semiconductor Manufacturing Company Limited’s affiliate, Vanguard International Semiconductor Corporation, and GlobalFoundries, are actively pursuing expansions plans within Singapore. The nation is becoming an attractive hub for global semiconductor giants, reinforcing its success in capitalising on the industry’s growth.

Another competitive advantage raised by the nation’s Deputy Prime Minister Lawrence Wong (DPM Wong) is its well-educated and skilled workforce as it could further drive innovation and research capabilities. Moreover, Singapore has obtained a niche in specialty chip production, thereby, aligning with trends in 5G, automotive, and the Internet of Things.

Also, did you know that Singapore is the 4^th largest buyer of NVIDIA chips by country this year?

Singapore secured the fourth position in NVIDIA’s 3QFY2024 revenue rankings, reaffirming its status as a prominent tech hub in the era of digital advancements and AI (Table 1).

Table 1: NVIDIA’s Revenue by Geographical Region

(in USD millions)	3QFY2024	3QFY2023	9MFY2024	9MFY2023
United States	6,302	2,148	14,730	6,069
Taiwan	4,333	1,153	8,968	5,134
China (including Hong Kong)	4,030	1,148	8,360	4,831
Singapore	2,702	536	4,506	1,963
Other countries	753	946	2,255	2,926
Total revenue	18,120	5,931	38,819	20,923
Source: NVIDIA Corporation. Data as of 29 Oct 2023

However, it is worth noting that this does not equate to the nation’s demand. Being a key bridge between the East and the West as well as being known for its tax incentives, many tech giants like Meta and Google have regional headquarters here. Hence, a large proportion is billed to Singapore. This could suggest that companies view Singapore as a strategic gateway to Southeast Asia markets.

During the Singapore Conference for AI (SCAI) in December 2023, DPM Wong introduced the updated National AI Strategy 2.0 (NAIS 2.0). Titled "AI for the Public Good for Singapore and the World," it focuses on talent nurturing, fostering a thriving AI industry, and supporting it with leading infrastructure.

NAIS 2.0 outlines initiatives to triple Singapore's AI practitioners to 15,000, investing in reskilling and upskilling the workforce. Also, a collaboration with NVIDIA is underway to develop an AI large language model (LLM) encompassing Southeast Asia's diverse cultures. Simultaneously, NVIDIA's CEO, Jensen Huang, expresses the company's intention to build a larger supercomputer in Singapore, solidifying the nation’s role as a significant purchaser of NVIDIA's chips.

Overall, substantial investments by semiconductor giants alongside Singapore’s competitive advantages would further position it well as a key semiconductor market. Consequently, we anticipate Singapore to remain a prominent tech hub acting as a crucial link connecting the East and the West and serving as a pivotal gateway for companies seeking access to Southeast Asia markets.

Key beneficiaries in the Singapore equity market

Despite concerns that the earnings of banks may have peaked this year while the S-REIT sector remains challenged, we remain positive on Singapore’s equity market.

We acknowledge that the STI is not fully reflective of Singapore’s economy, as the economy is largely dependent on electronic exports while the index is formed largely by banks and real estate companies. Nevertheless, with an anticipated robust recovery in Singapore's GDP, we foresee a potential uptick in investor sentiment. This could lead to an influx of capital into the country's equity market, and in turn, trigger a re-rating and drive valuations upward.

We also see factors driving the long-term growth of Singapore banks.

Firstly, local banks namely DBS (SGX: D05), UOB (SGX:U11) and OCBC (SGX: O39), might continue to venture overseas with its excess capital. By acquiring other banks in the Southeast Asia region, it could broaden its customer base, thereby, achieving greater growth.

Secondly, foreign direct investments and family offices would sustain the recovery of non-interest income and also lead to higher wealth management fees for this sector. Factors such as a stable economy, well-educated human capital, family-office encouraging policies, and strategic geographical location would continue to attract more family offices to set up in Singapore. According to the 2023 Global Family Office Compensation Benchmark Report, more than half of the family offices in Asia are estimated to be located in Singapore.

Related article: Straits Times Index is set to head higher by end of the year

Beyond the STI, we expect several SGX-listed semiconductor companies namely AEM Holdings (SGX: AWX), Venture Corp (SGX: V03) and UMS Holdings (SGX: 558) to benefit, given our expectations of a recovery of the semiconductor cycle and the sector’s long-term growth prospects.

These companies can be categorised into two segments: Automated Test Equipment (ATE) and Outsourced Semiconductor Assembly and Test (OSAT). OSAT firms manage assembly, packaging, and testing, while ATE companies play a pivotal role in automating semiconductor device testing. Both AEM Holdings and Venture Corp fall under OSAT while the UMS Holdings is classified as ATE.

Related article: The 5 semiconductor players in Singapore and Malaysia

Upgrade to 4.0 Stars “Very Attractive” – Soaring growth to be expected in 2024

While Singapore has underperformed its developed counterparts or other equity markets year-to-date, we believe it will deliver a better performance next year due to the exports-led economic recovery (Figure 2).

Figure 2: Singapore underperformed its developed counterparts year-to-date

At current prices, we believe the STI remains undervalued. Our expectations of a robust economic expansion, that could generate a positive sentiment among investors and increase capital inflows into the nation, suggest the potential for a re-rating. Meanwhile, the long-term outlook of banks, the largest sector in the STI, remains supportive.

Based on our fair price-to-earnings (PE) multiple of 14X, we arrived at our target price of 4,070 for the STI by the end of 2025. This implies an upside potential of approximately 31.0%. We are upgrading our current star rating of 3.5 Stars “Attractive” to 4.0 Stars “Very Attractive”.

Moreover, the STI continues to offer an appealing dividend yield of around 5.8% per annum, contributing to the overall return for investors.

For those interested in local market investment opportunities, options such as the Nikko AM Singapore Dividend Equity SGD or the SPDR Straits Times Index ETF (SGX:ES3) can be considered.

Table 2: STI Valuation Table

	2022	2023E	2024E	2025E
PE Ratio (X)	12.9	10.8	10.8	10.7
Earnings Growth (yoy %)	40.5%	13.0%	0.4%	0.7%
Projected Earnings Per Share (EPS)	254.7	287.8	288.9	291.0
Target Price (Based on 14X fair PE Ratio)	-	-	-	4,070
Potential Upside (%)	-	-	-	31.0%
Dividend Yield (%)	4.53%	5.46%	5.72%	5.97%
Source: Bloomberg Finance L.P., iFAST Estimates Data as of 20 Dec 2023

Figure 3: STI Price vs EPS

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.