Review: Singapore equities ended a record ten consecutive months of gains with a
2.2% decline in March. 1Q26 was still a positive 5.1%. The market registered all-time
highs on 23 February. The Iran war drove up the performance of sectors in defence
spending, biofuels and capital markets (Figure 2). Banks managed to maintain gains
even in March and outperformed during the quarter with their resilient dividends
(Figure 1). REITs were pummelled as interest rate expectations dialled back from two
cuts early this year to the possibility of rate hikes (Figure 3). Consumer is another
segment of weakness as rising inflation squeezes disposable income (Figure 4).
Outlook: In a fog, the path in front is obscured, and every step risks a major fall. The
strategy is not to predict but preserve capital. Equities have morphed into a volatile,
levered short option on oil prices. With more troops being deployed into the region,
the risk of US ground forces and a prolonged war remains high. The closure of the
Straits of Hormuz is not only driving higher energy prices and inflation, but a risk of a
material shutdown in global production due to the unavailability of materials. During
the pandemic, vessel availability and lead times were the bottlenecks. The current
situation can be worse. There is no supply of feedstock or materials for product
manufacture. In Singapore, there have already been force majeures at chemical
facilities that have impacted multiple industries, including plastics, packaging, medical,
auto, food, and fragrance. Since the war began, US equities have been down 4.3%.
This is compared with the trough drawdown of around 17% in the last two wars,
significantly impacting energy markets – Kuwait and Ukraine (Figure 8). There is a
pathway for current oil prices to reach US$200 per barrel. The last Middle East conflict
that saw a major spike in oil prices was the Kuwait war (2Aug90). Crude oil price
jumped from an average of US$15 (Jun90) to a peak of US$42 (Oct90), a 275% rise.
Assuming a similar rise of Brent oil average of US$68 (Jan26), it implies a $187 peak
(Figure 9). The impact could be worse. Kuwait and Iraq were 7% of the global oil supply
that was embargoed. The current estimated impact is 10%. The Kuwait war had the
threat that Iraq could also invade Saudi Arabia. This is no different from Iran destroying
much of the Gulf oil infrastructure. In Singapore, the macro data has been strong, led
by semiconductor exports surging 51% in February. Loan growth continues to creep
up with a 6.3% increase in February. Loan growth is the fastest in more than four years.
Building materials demand is also surging, with January demand for ready-mixed
concrete up 47% YoY (Figure 10) and steel bars 124%. However, tourism is sluggish,
with YTD arrivals down 0.3% YoY. Interestingly, RevPAR has been resilient, rising 5%
YTD2/26. Singapore is attracting more high-value tourists (Figure 11).
Recommendation: We believe the war in Iran will broaden the existing capex cycle
underway globally. The key capex cycles are: (i) Data centre spending: Hyperscalers or
Big tech are ramping up their capex for AI and data centres by around 60% in 2026
(Figure 12). Singapore recently requested applications for 200MW of new data centres
in Jurong. The fragility of Gulf infrastructure will invariably lead to more data centres
being built in Asia. (ii) Semiconductor: Demand for AI and memory chips is dramatically
pushing up the rollout of foundry capacity and equipment (Figure 13). (iii) Defence:
Countries will push for more domestic military capabilities, as seen by NATO countries
raising their defence budgets (Figure 14). (iv) Renewable: Energy independence
becomes a national security priority as the Straits of Hormuz is weaponised. (v)
Construction: Singapore is enjoying a multi-year increase in construction demand.
Primary beneficiary of the current capex cycle and small-mid cap stocks (Figure 15). In
the data centre buildout, the primary beneficiary is IT service companies. Telechoice
has announced it is bidding for a material data centre project in the region. Frencken
will ride on the massive jump in semiconductor equipment demand from its key
lithography customer. Oiltek is tapping into the emerging demand for sustainable
aviation fuel oil. REITs will be the near-term underweight. In a stagflationary
environment, it will face pressure on rents, higher interest expenses and valuation
compression (Figure 16).
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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.
