By: John Cheng

(Bloomberg) — Singapore stocks’ biggest rise in years could continue as potential interest rate cuts in the U.S. increase the attractiveness of the high-yield market.

Growing confidence that U.S. interest rates have peaked could drive investors into the city-state’s high-yield real estate funds and bank stocks, as traders bet the Federal Reserve will begin easing monetary policy in September.

The Straits Times Index has risen nearly 7 percent this year, driven by lenders’ gains on strong dividend expectations. Brokerages such as UBS Group AG and JPMorgan Chase & Co. recently upgraded Singapore stocks to neutral as valuations are less stretched and the index heavyweights’ earnings momentum remained solid.

“The appeal of the Singapore stock market lies in the currency and dividend yield,” said Paul Chew, head of research at Phillip Securities Pte. “Slowing global growth and the potential for interest rate cuts will see investors move to lower beta countries like Singapore.”

The benchmark STI offers yields of over 5%, which is higher than what most regional markets offer, according to Bloomberg data. Valuations are still reasonable even after the recent rally. The index trades at 10.9 times forward earnings, below its five-year average of 12.3.

While interest rate cuts could weigh on banks’ margins, analysts believe that financial institution stocks can continue to outperform if monetary easing boosts asset management fees and credit growth.

Given the “intention to maintain net interest margins at least until year-end,” Singapore banks’ dividend payouts appear to be sustainable, said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management. The banks are also “sitting on excess capital.”

Lower borrowing costs also bode well for the country’s real estate sector, and a slump in Singapore REITs in recent years makes them more attractive.

The Southeast Asian country will certainly not be spared in an environment of increasing geopolitical tensions. A possible victory for Donald Trump in the upcoming US elections could pose significant risks for Singaporean REITs and manufacturing companies that derive part of their revenues from China.

“The return angle is still working quite well for Singapore equities,” said BNP Paribas’ Chen. “Singapore is one of the countries that is considered a stable indicator for the region,” and some international funds are looking to increase their exposure to the market.

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