As 2017 started on an uncertain note, Citigroup highlights three issues that our local economy can expect to face, as well as three indicators that investors can look out for to track the market bottom.

1. Credit Tightening Might Worsen SG Woes

Citi warns that worsening corporate profitability could lead to asset quality deterioration. In particular, the risk of corporate bond defaults in the offshore and marine (O&M) sector could tighten credit conditions for other sectors. Cost of financing has already emerged as a top concern for SMEs. Further tightening of lending standards may accelerate the slowdown in business loan growth.

2. Rippling Effect From Rising Unemployment

unemployment

Singapore has entered into a mild recession with the job markets heading into crunch period. With job creation now negative, job seekers are outnumbering job vacancies and there is a rising risk of job mismatch. Rising unemployment and slower wage growth may in turn stretch household debt servicing ratios, especially with rental incomes continuing to fall and mortgage rates likely to tick up in light of the US Federal Reserve’s interest rate policy.

3. Expansionary Fiscal Policy to Provide Much Needed Support

On the bright side, Citi believes that the Singapore government will introduce counter-cyclical fiscal support to support the Singapore economy. This could include off-budget measures that focus on (1) easing the corporate credit crunch via provision of credit guarantees, and (2) restoring cost competitiveness via wage subsidies and reduction of other non-wage costs.

Track these 3 Indicators to Know When the Market Bottoms

Citi believes that there are three indicators that have historically been helpful towards marking market bottoms. An uptick in all three indicators signals a turnaround in Singapore’s economy. These three indicators are:

1. Electronics Exports

Constituting 30 percent of Non-Oil Domestic Exports (NODX), electronics exports remain Singapore’s largest domestic exports category. Historically, NODX has led Singapore’s GDP and stock-market cycle. Thus, Citi highlights electronics exports as a key indicator to track. As highlighted in the third quarter economic survey of Singapore, there is still  a long-drawn decline in electronics exports.

2. Industrial Production Trend

While Singapore is restructuring its economic activities, manufacturing remains the largest contributor to Singapore GDP (at 21 percent of GDP). Considering which, industrial production is another indicator that has tracked stock-market cycles well in the past.

3. Capex Trend

Corporate capital expenditure (capex) trends are proxies to growth sentiments of a country’s GDP. If corporates expect Singapore’s economy to underperform in the upcoming years, they will be more prudent on capex spending to tide through rough times. And this is exactly what is happening. Corporates’ sentiments on growth remain weak in 2H16 as the more recent quarterly capex remains weak at -7 percent year-on-year.

Investors’ Takeaway: Careful Selection Is the Way to Go

As Singapore companies face headwinds from the above macro factors, Citi recommends careful stock selection among SG stocks.

In the property/S-REIT sector, Citi prefers CapitaLand and Ascendas REIT for its relative valuation. While the sector will not have exceptional growth in 2017, these two stocks will be better positioned to outperform its peers.

In the plantation sector, Citi reckons that underweight investors will start to rebalance their portfolio and re-weigh the sector following the price recovery of crude palm oil (CPO), brought about by poorer production, China’s renewed purchases and improved cash generation on lower capex. Among plantation stocks, Citi prefers Wilmar International for its diversified business.