source: tradingeconomics.com; Singapore GDP Annual Growth Rate

Last week, a new report from the government’s Committee on the Future Economy (CFE) made several recommendations. It mainly consists of a continuation of existing policies while maintaining the government’s mid-term GDP growth rate at two to three percent. Manufacturing is expected to continue as the main drive for Singapore’s economy at 20 percent of the country’s GDP, up from the existing 18 percent.

Analysts from Credit Suisse Research believe that there will be further upside to MSCI Singapore in 2017 with three key themes that were highlighted earlier this year. The themes include (1) stocks with ROE improvement, (2) yield stocks pricing in higher rates and (3) domestic policy changes. Read about the three themes and respective stock recommendations here.

Recommendations

A key point of the recommendation is to note that Singaporeans are increasingly concerned about the proposed tax reform. It will see a more progressive income tax and higher GST which analysts from Credit Suisse Research expect to increase to eight percent from the current seven percent. However, the increase in GST may further dampen the struggling retail sales as historic figures showed that sales have declined two percent to three percent after GST implementation.

S68Source: Bloomberg; Singapore Exchange (SGX:S68)

As an inevitable change, CFE recommended that Singapore should amend its regulation to permit dual class shares for listed companies. Hong Kong, Singapore’s main rival in Asia is currently studying to implement the dual class shares system. It will increase the competitiveness of Singapore Exchange (SGX) internationally to attract technology companies to list after losing Alibaba to New York Stock Exchange (NYSE) a couple of years ago. Permitting dual class shares for listed companies in Singapore will benefit Singapore Exchange as more listings will help it generate revenue from listing fees.

C09 C31Source: Bloomberg; City Developments (SGX:C09) and CapitaLand (SGX:C31)

A “Master Developer” approach was also recommended for development of large integrated program. This will see large developers with experience in managing large integrated projects to partner with the government for such projects. The purpose is to increase the efficiency of such developments instead of stretching existing government resources. Big players such as Capitaland and City Developments will benefit from it.

Such partnership will be used to rejuvenate Orchard Road as retail in the area has been slipping and has lost its shine which may benefit selected retail REITs such as SPH REIT in the longer term.

Smart Nation

Ongoing development of digital capabilities and building of Smart Nation is the highlight of the report and one that investors should look upon to be invested in the future of Singapore. Currently, it is being rolled out in Jurong as part of the government’s plan to trial run smart city in Jurong Lake district.

Jurong is planned to be Singapore’s second CBD as the current CBD is increasingly congested. The government’s plan is to build the area into a place for people to live, work and play. Property investors may look to invest in Jurong for potential growth from the transformation of the area to the second CBD.

Three stocks have been named below as the best proxy for investors to get involved in Singapore’s Smart Nation development.

Singapore Technologies Engineering

S63Source: Bloomberg; Singapore Technologies Engineering

Singapore Technologies Engineering (STE) is the leading provider of technologies for Singapore’s Smart Nation project. Its cutting edge technology in smart transport enables it to be the “only company in Asia that is able to provide a comprehensive suite of in-house intelligent rail transit products”. Previously, the system has been implemented in countries such as Brazil and China.

The growing amount of contracts for its electronics division is attesting to the group’s ability in providing services to the government in terms of Smart Nation and cyber security. In 2016, ST Electronics secured a total of $2.33 billion in contract, which translates to 45 percent year on year growth.

Analysts from Credit Suisse Research gave ST Engineering (SGX:S63) a “Buy” call with a target price of $4.00.

Keppel DC REIT

AJBUSource: Bloomberg; Keppel DC REIT

Last year, the inflow of new data centres in Singapore “hurt the ability of data centre operators to raise rates, with utilisation in the market dipping slightly to 82 percent”. However, the continued growth of IP traffic in Asia and global data creation should continue to drive demand for data centres in the region.

In addition, CFE recommends that Singapore builds strong digital capabilities which include data analytics and harnessing will add to the existing demand. This increase in demand will support the leasing activities by Keppel T&T which is the sponsor and pipeline for Keppel DC REIT.

Analysts from Credit Suisse Research gave Keppel DC REIT (SGX:AJBU) a “Buy” call with a target price of $1.31.

Venture Corporation

V03Source: Bloomberg; Venture Corporation

Singapore, European Union, China, India and the United States are the leading countries in smart city innovation and development. Among which, North America and China are expected to see the “fastest growth”. Venture Corporation is well poised to gain from this trend given its “capability to design and manufacture components of industrial PC, embedded systems and a range of vertical-specific Internet of Things (IoT) platforms”.

A higher growth can be expected from Venture as it shifts its product mix to the higher growth medical and life science segment. Given the complexity and specialised nature of the products in the segment, Venture Corporation’s margins can potentially increase together with the shift in product mix.

Analysts from Credit Suisse Research gave Venture Corporation (SGX:V03) a “Buy” call with a target price of $11.60.