To The Moon

Following a strong run, Singapore equities have come under pressure amid a broader global market pullback. With Singapore bank stocks leading the decline, investors are asking whether this is a healthy correction or the start of a more prolonged downturn. We sat down with our portfolio manager to discuss what's behind the recent pullback and what investors should watch next.

1. What is driving the recent sell-off in Singapore equities?

We view the recent sell-off primarily as part of a broader global risk-off move rather than a reflection of deteriorating Singapore fundamentals.

Rising US Treasury yields and higher oil prices have renewed inflation concerns, prompting investors globally to reduce risk exposure. In Singapore, the pullback has been amplified by the STI’s heavy weighting towards banks as well as investor profit-taking following a strong year-to-date performance.

In our view, the correction is driven more by positioning and sentiment than by any meaningful deterioration in the macroeconomic or earnings outlook.

2. Why was the Singapore market vulnerable to a pullback?

Singapore equities entered the month of October from a position of strength, but also with elevated expectations.

Prior to the correction, the STI was trading near the upper end of its five-year valuation range at around 19.3x forward earnings. Over the past year, valuation expansion outpaced earnings growth, with forward P/E rising approximately 15 percent versus earnings-per-share growth of 9 percent.

Much of the market's re-rating was concentrated in the banking sector, which accounts for more than half of the STI. Investors had increasingly crowded into banks because of their attractive dividends, earnings resilience and capital return story. While fundamentals remain sound, stretched valuations and high expectations for earnings, dividends and buybacks left little room for disappointment.

3. Why have Singapore banks led the decline?

Singapore banks have been at the centre of the recent sell-off, but the weakness appears to reflect a reassessment of expectations and valuations rather than a material deterioration in fundamentals.

The sector had enjoyed a strong run over the past year, underpinned by resilient earnings, improving net interest margins, healthy wealth management activity and attractive capital return programmes. This left valuations increasingly demanding and the sector vulnerable to profit-taking as broader market sentiment turned more cautious.

Investors are now focused on potential near-term earnings headwinds. Rising bond yields could weigh on non-interest income through mark-to-market losses on trading portfolios, while higher funding costs have raised questions about how much further net interest margins can expand. This is particularly relevant given that Singapore interest rates have not risen as quickly as US rates, potentially limiting the earnings uplift that some investors had anticipated.

At the same time, third-quarter market volatility could result in softer wealth management fee income, while investors are monitoring whether recent regulatory developments in China may affect capital flows and net new money growth.

That said, we do not see the conditions for a prolonged downturn. Singapore banks remain exceptionally well-capitalised, with strong balance sheets, resilient earnings and ongoing commitments to shareholder returns. As such, the recent weakness appears more consistent with a healthy consolidation following a strong rally than the start of a fundamental downturn in the sector.

4. How important are US interest rates and bond yields to the outlook for Singapore equities?

Singapore equities are particularly sensitive to global interest rates given the market's heavy concentration in financials and other yield-oriented sectors. Higher bond yields tend to weigh on equity valuations through an increase in discount rates which compress the present value of future earnings. They also lower the relative attractiveness of dividend-paying sectors such as banks and REITs, as investors are able to earn higher yields from bonds instead.

At the same time, rising oil prices can reinforce inflation concerns, increasing the likelihood that interest rates remain higher for longer. This has contributed to the recent rise in Treasury yields and prompted investors globally to reassess risk assets.

As a result, movements in US rates continue to have a disproportionate influence on investor sentiment and capital flows into Singapore equities.

5. Has the correction created opportunities, and what should investors watch next?

Our base case remains that this is a valuation and positioning reset within a broader global risk-off environment, rather than the start of a prolonged Singapore-specific downturn.

At the macro level, we are closely monitoring US Treasury yields, Federal Reserve policy expectations, oil prices and inflation trends. We would become more cautious if bond yields continue to rise without corresponding improvements in economic growth, or if Singapore's domestic economy weakens materially.

At the company level, the upcoming earnings season will be critical, particularly guidance from Singapore banks on loan growth, asset quality, net interest margins and capital returns.

While near-term volatility may persist, the recent correction has improved valuation support and is beginning to create selective opportunities for long-term investors. We are already seeing some rotation away from crowded bank positions into more defensive and previously lagging sectors such as telecommunications, REITs and utilities.

In particular, REITs have experienced a prolonged period of underperformance and now offer increasingly attractive valuations. In some cases, dividend yields are comparable to, or even higher than, those offered by Singapore banks, prompting investors to re-evaluate opportunities within the wider Singapore market.

For now, we continue to favour high-quality companies where fundamentals remain intact despite weaker near-term sentiment.

Please refer to uobam.com.sg/awards for the latest list of UOBAM awards.

*****

Important notice and disclaimers

This document is for general information only. It does not constitute an offer or solicitation to deal in units in the Fund (“Units”) or investment advice or recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. The information is based on certain assumptions, information, and conditions available as at the date of this document and may be subject to change at any time without notice. No representation or promise as to the performance of the Fund or the return on your investment is made. Past performance of the Fund or UOB Asset Management Ltd (“UOBAM”) and any past performance, prediction, projection or forecast of the economic trends or securities market are not necessarily indicative of the future or likely performance of the Fund or UOBAM. The value of Units and the income from them, if any, may fall as well as rise, and is likely to have high volatility due to the investment policies and/or portfolio management techniques employed by the Fund. Investments in Units involve risks, including the possible loss of the principal amount invested, and are not obligations of, deposits in, or guaranteed or insured by United Overseas Bank Limited (“UOB”), UOBAM, or any of their subsidiary, associate, or affiliate (“UOB Group”) or distributors of the Fund. The Fund may use or invest in financial derivative instruments, and you should be aware of the risks associated with investments in financial derivative instruments which are described in the Fund’s prospectus. The UOB Group may have interests in the Units and may also perform or seek to perform brokering and other investment or securities-related services for the Fund. Investors should read the Fund’s prospectus, which is available and may be obtained from UOBAM or any of its appointed agents or distributors, before investing. You may wish to seek advice from a financial adviser before making a commitment to invest in any Units, and in the event that you choose not to do so, you should consider carefully whether the Fund is suitable for you. Applications for Units must be made on the application forms accompanying the Fund’s prospectus.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

UOB Asset Management Ltd Co. Reg. No. 198600120Z