· Singapore equities posted their fourth consecutive quarter of gains with the 5.8% rise in 2Q26. It hit record highs on 25th June. The market is up 11.3% in 1H26.
· We do not believe there is an AI bubble at this stage. The driving force behind data centre spending are the frontier AI models. It is undergoing a S curve rate of adoption and revenue growth. Valuations and price action remain far below the 2000 dot-com bubble. There is general absence of speculative froth in asset markets. The US economy is also picking up strength in consumer spending and job growth.
· Sectors we favour are banks, semiconductors, building materials, power and higher yielding REITs.
Review: Singapore equities posted their fourth consecutive quarter of gains with the
5.8% rise in 2Q26. It hit record highs on 25th June. The market is up 11.3% in 1H26.
The ceasefire in the Middle East lifted transportation stocks (Figure 2). The surge in
volatility has also benefited exchanges and banks. Expectations of a bottoming out in
interest rates have also rallied the banking stocks (Figure 1). Sluggish oil and gas capital
expenditure and falling energy prices have depressed energy-related stocks (Figure 3).
REITs have started to recover, led by industrial names (Figure 4).
Outlook: The central debate across equity markets is whether we are in an AI bubble.
We don’t think there is an AI bubble at the moment.
1) The massive AI or data centre capex cycle by hyperscalers (including Oracle and
Meta) is expected to rise 73% in 2026 and 22% in 2027 (Figure 8). It then cascades into
large semiconductor purchases, with billings rising 86% YTD26 to reach US$1tr
annualised (Figure 9). In turn, wafer fab capex is expected to jump 40% YoY to
US$175bn (Figure 10). The core of all data centre and semiconductor spending comes
from frontier AI models (or LLMs), namely Anthropic and OpenAI. The combined
revenue of both LLMs could total US$85bn or higher this year. It looks small compared
to the data centre capex. However, if the S-curve growth in revenue continues,
revenue is expected to reach US$300bn by 2030, justifying the spike in capex.
Furthermore, economies of scale could drive profitability. We view the listing of
Anthropic and OpenAI as a de-risking event. It secures capital for capex needs and
provides transparency into the growth pace of frontier AI model companies.
2) The current tech cycle valuations are still far below the dot-com boom of 2000. At
its peak, Cisco traded at 150x forward PE in 2000 (Figure 11). In contrast, Nvidia is
trading at 24x PE. The price action of the tech sector since the introduction of ChatGPT
at the end of 2022 parallels the dot-com price moves when Netscape was launched.
Share prices have not reached the euphoric levels of the 2000 bubble (Figure 12). Not
every S-curve adoption constitutes a bubble.
3) There is an absence of speculative froth, judging by the underperformance of
proxies such as gold, Bitcoin and ARK Innovation ETF (Figure 13). Most of the current
rally is concentrated in semiconductor stocks. Although margin financing of US stocks
is rising, it remains within historical averages and is in line with market gains (Figure
14).
4) The US economy is gaining strength. Retail sales (excluding gas) are expanding at
the fastest pace in more than 3 years (Figure 15). Jobs are recovering in the US. More
importantly, it is led by economically sensitive sectors rather than by healthcare and
government jobs (Figure 16). On interest rates, the market expects one rate hike from
the Fed this year, likely in September. We are not expecting any hikes. We believe
inflation has peaked and is perhaps politically untenable.
Recommendation: In our Absolute 10 model portfolio, we have removed Prime US
REIT and replaced it with ST Engineering. We remain positive that the office market in
the US is recovering as supply is constrained and demand is aided by the improvement
in the US economy. We are cautious that expectations of higher-than-expected
inflation and interest rates will limit share price performance. Defence spending is
rising structurally, with ST Engineering benefiting from an additional boost in export
sales. We still favour banks for their resilient dividend yield of around 4% and upside
in interest income. Loan growth is surging towards 8% YoY, a four-year high. There
was also a major spike in deposits since the Middle East conflict began. March
recorded a S$66bn jump in banking deposits. This is far higher than the prior five-year
average of around S$9bn a month. The liquidity will lower banks’ funding costs.
Semiconductor stocks will register the fastest growth, fuelled by record demand from
key equipment customers, namely ASML, Applied Materials and Lam Research. In
construction, order momentum has slowed, but activity has picked up. It has
supported a 29% rise in demand for ready-mixed concrete. In healthcare, there is
pricing pressure from insurers and medical tourism is losing competitiveness.
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Paul has 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.
He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.
