MAS Tightens Again – What’s Next? [IOTW: 12 Oct 18]

Tan Chu Ren
Tan Chu Ren12 Oct 2018 0 Views
MAS Tightens Again – What’s Next? [IOTW: 12 Oct 18]

The Monetary Authority of Singapore (MAS) tightened monetary policy for the second time this year to maintain price stability in the coming quarters. In a move that was anticipated by 12 of 21 economists surveyed by Bloomberg, MAS “decided to increase slightly the slope of the S$NEER policy band” while leaving the width and the level at which it is centred at unchanged.

Chart 1: SGD NEER Index

Inflation

As maintaining medium-term price stability is the core monetary policy objective of the MAS, an appreciating SGD would ease pressure on imported inflation. MAS Core Inflation, which excludes the costs of accommodation and private road transport, is expected to rise to around 2% in the remaining months of 2018 and “come in within the forecast range of 1.5 – 2%” for 2018.

For 2019, the Singapore economy is expected to grow above potential thus adding on domestic inflationary pressure through higher labour costs. Meanwhile, imported inflation is likely to increase due to higher global oil and food prices. MAS forecasts core inflation to average 1.5 – 2.5% in 2019.

Economic Growth

Along with the policy update by MAS, Singapore’s Ministry of Trade & Industry (MTI) also released preliminary GDP estimates for the third quarter.

Table 1: GDP at 2010 Prices

Based on advance estimates, Singapore’s year-on-year GDP growth for third quarter of 2018 came in at 2.6% and beat the consensus forecast of 2.4%. Part of the reason why growth came in lower could be attributed to high growth in last year’s third quarter. On a quarter-on-quarter basis, GDP growth looks positive.

MAS expects GDP growth “to come in within the upper half of the 2.5 – 3.5% forecast range in 2018” and GDP growth in 2019 to moderate due to trade friction and lower growth in the manufacturing sector due to the “maturing of the global electronics cycle”. Furthermore, with the Singapore economy operating slightly above its potential, it will subsequently enjoy lower growth in the future.

We forecasted GDP growth to come in at 3.5 – 3.8% for 2018 and 3.0% for 2019 in our previous article on Singapore’s economy.

SGD-Hedges Remain Relevant

With the tightening of monetary policy by MAS, SGD-hedges still remain relevant. Furthermore, as the emerging market contagion fears continue to ease, we are likely to see more downward pressure on the USD.

We continue to advocate for SGD-hedged share classes for the fixed income portion of one’s portfolio to reduce the impact of volatility on your more defensive asset. Furthermore, as central banks continue to normalise, we can expect times of higher volatility across assets ahead.

STI Looks More Compelling

After quite a tumultuous start to the month of October which was compounded by a stocks sell-off, the Singapore market looks even more attractive as corporate earnings have yet to reflect a change that warrants such a sell-off.

Chart 3: Corporate Earnings

As of 11 October, the Straits Times Index trades at PE ratios of 12.5 and 11.6 for 2018 and 2019 respectively, comparing favourably to its fair PE ratio of 15.0. In August, we made a case for the Straits Times Index (STI). Prices have fallen heavily due to concerns of the trade war, however, MAS seems to be optimistic on Singapore’s growth and with a stronger SGD, the STI looks even more compelling.

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