Is The Worst Over For The Singapore Economy?

Singapore’s economy faced some pressure in 2016.

Low oil prices pushed many oil and gas-related companies into financial difficulties and some even went bust. This in turn affected the outlook for Singapore’s local banks – such as DBS Group Holdings Ltd (SGX: D05) and Oversea-Chinese Banking Corporation Ltd (SGX:O39) – as they are lenders to the oil and gas industry.

But, the recovery of oil prices to a level of around US$55 per barrel currently, along with the Singapore government’s recent measures to help support the offshore and marine sector, may be helping to ease the burden for both Singapore’s banks and the oil and gas-related companies here.

Meanwhile, the manufacturing sector  in Singapore – another important link in the local economy – was flat for the most part of 2016. It was only in the last quarter of 2016 when manufacturing activity saw a big leap; in December 2016, manufacturing output was up 21.3% compared to a year ago.

Does all these mean the worst is over for Singapore’s economy? If yes, what are some of the companies that might benefit? In theory, the banks should benefit from a growing economy given that their business performance is closely linked to the economic-pulse of the country. Retail mall owners such as Frasers Centrepoint Trust (SGX: J69U) may also get to enjoy more stable tenancy in a healthy economic environment.

But, there are also risks ahead. Perhaps the most notable one is the growth happening in Malaysia. In recent years, Malaysia has attracted huge foreign investments.

Many of the projects Malaysia is working on currently are in economic areas that have traditionally been important to Singapore. For instance, there is the RAPID project in Johor (an integrated petrochemical project), and the expansion of many port facilities in the country.

In 2016, the Singapore port handled 30.9 million TEU (twenty-foot equivalent units); that’s flat when compared to 2015. However, all the major ports in West Malaysia saw double-digit growth in volumes handled over the same period.

It is still unclear how Malaysia’s expansion could affect both the shipping and downstream oil and gas sectors in Singapore.

Fortunately, there are companies in Singapore’s stock market that are less dependent on the state of the country’s economy by virtue of the kind of businesses they are engaged in. Some of these companies belong to the telecommunications and the consumer staples industries.

Examples of companies in those industries are Singapore Telecommunications Limited (SGX: Z74)Starhub Ltd (SGX: CC3), and Sheng Siong Group Ltd (SGX: OV8). The former two are telcos while the third is a supermarket operator.

Foolish Summary

In summary, regardless of where the economy of Singapore is heading, there would still be businesses that could perform well in the long run.

It is important for investors to analyse a company based on the merits of its business and not place too much emphasis on forecasting macroeconomic events.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own shares in any companies mentioned.