Review: Singapore equities registered their fourth consecutive quarter of gains, with a 4.9% rise in 1Q25. Leading the gains have been defence and conglomerates (Figure 2). REITs also registered positive returns (Figure 4). Worse performers have been victims of an impending trade war, including shipping and transportation (Figure 3). Shipping container rates have collapsed around 50% this year, and the risk of fees on Chinese-made vessels docking in the US has hurt shipyard Yangzijiang. ST Engineering was the standout performer with a 45% rally in 1Q25. Better than expected results and Europe looking to ramp up its defence spending triggered a rally in the stock.

Outlook:  The so-called Liberation Day (of US tariffs) on 2nd April could be the start of a cascading trade war. So far, 15 countries have been identified, aka the Dirty 15, for high reciprocal tariffs. We don’t expect these tariffs to be reciprocal but rather discretionary. Actual reciprocity is zero tariffs on both sides, which is already underway through free trade agreements. Reasons for tariffs have been expanded to non-tariff barriers, unfair funding, labour suppression, and currency manipulation. Some countries mentioned in the past by Trump or other officials with high tariffs include Canada, Mexico, China, Kuwait, India, S Korea, and Europe (Figure 6). We view the coming trade war as a negative shock for global growth. The US is not immune as it is the 3rd largest goods exporter in the world (Figure 7). Tariffs are a consumption tax that causes consumers and corporates to pull back on spending due to higher prices. The benefit of globalisation, such as lower prices, is not visible compared to the cost of dislocated industries. Singapore has tried import substitution.  Protective tariff barriers breed uncompetitive high-cost industries with monopolistic privileges. This leads to high prices, the rise of corruption, and a decline in innovation. The exceptions are industries that have a comparable advantage either in resources or technology.

Recommendation:   After years of slumber (Figure 8, 9), we are beginning to see small and mid-caps come alive. We are positive on the planned S$5bn to be spent on Singapore equities by MAS’s equity market development programme (EQDP). It can elevate the valuations of small-mid cap stocks and create the much-needed price and volume momentum. If we assume a minimum of 30% of the S$5bn is allocated to Singapore equities, of which half goes to small-mid cap below S$1bn, the S$750mn is equivalent to around 3% of the available free float. We believe the impact will be even larger considering the current lacklustre liquidity. Apart from the potential injection of liquidity, small mid-caps have deep value from a bottoms-up perspective. Over the past seven years, the average takeover or privatisation premium paid over the prior 1- and 3-months trading price is around 50% (Figure 10). The willingness to privatise an asset at a 50% premium reflects the high intrinsic value of many small-mid cap stocks. Finally, the fundamentals of multiple small-mid cap sectors are improving, namely, building materials (Figure 11), construction (Figure 12), property (Figure 13), oil and gas services, and commodities. Supporting these sectors has also been the growth in government spending (Figure 14). As we enter a period disruptive for economic growth, we favour REITs because it is less sensitive to economic cycles and the bulk of their debt has been refinanced higher since the Fed hiking cycle in 2022. Upside surprise will come from the expected rate-cutting cycle in multiple countries (Figure 15). It is not only REITs and banks that are aggressively returning capital; we see multiple companies raising their dividend payout (Figure 16) and share buybacks including, Venture Corp., Sembcorp Industries, Singtel, ST Engineering, Raffles Medical and Q&M Dental. In our model portfolio, we removed ST Engineering due to its strong price performance and China Aviation, which has disappointed in returning more capital to shareholders. We added real estate agency PropNex, which has a huge 64% market share in property transactions. There is a huge spike in sales of new home launches, up almost 6-fold YoY YTD25 will drive up earnings growth. We initiated coverage on Geo Energy (BUY, TP S$0.47) – 43% jump in coal production and new revenue source and CNMC Mining (BUY, TP S$0.49) – estimated 47% rise in net profit from 20% growth in production 18% increase in gold price.

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