The Asia brokerage and financial services group talks to this publication about the recent budget package in Singapore and the impact it will have, including on those served by the wealth management industry.

In February, the Singapore government unveiled its annual budget; the package addresses a number of areas, including those potentially affecting wealth managers’/private bankers’ clients, such as business owners. (See a previous commentary here.) The package came out around the same time that Hong Kong issued its own set of measures, including those affecting high earners.

We talked to Tiger Brokers about the budget, and what it thinks are its implications for sectors including wealth management. Tiger Brokers is based in Singapore and Beijing.

The comments were provided by a spokesperson for the business.

WealthBriefingAsia: How will the announcement affect the following sectors' growth outlook – technology, green energy, fintech, cybersecurity, etc – and their impact on investors’ portfolios?
The Singapore government's intent to pump more than S$1 billion ($744.2 million) over the next five years to further boost AI capabilities, is welcoming news for investors. Generative AI has taken the world by storm, and there is a current frenzy for AI stocks, e.g. Nvidia. 

Despite encouraging Singaporean companies to develop their AI capabilities, Singapore is not yet a preferred location for established AI stocks. The labour shortage across Asia necessitates the adoption of AI to offset the lack of workforce participation and improve productivity. This national need for AI is reflected in the government's budget stimulus, which is meant to improve productivity, competitiveness, and GDP in Singapore, a nation with historically low birth rates. 

The push for AI in Singapore is still in the early stages, so it's too early to tell whether this will lead to a boom in AI-related stocks in Singapore. Due diligence on the part of the investor is required.

Portfolio positioning: Generative AI is taking over the world by storm currently and it's predicted to contribute to growth for companies which invest in such technologies, and the US is especially doing well here. US equities in AI stocks are much more recommended therefore, such as those in the “Magnificent 7” (Nvidia, Meta Platforms, Microsoft Alphabet, Apple, Amazon, Tesla). In Singapore, the AI industry overall is still nascent, therefore, the STI index isn't performing well generally. 

Institutional investors have a prevailing view that Singapore equities and assets are defensive. If they adopt a risk-off approach to investing, for example, lesser growth stocks in their portfolio and have more dividend-paying stock, then Singapore equities are 'perfect'. Singapore stocks that are recommended: Local banks such as DBS, UOB, OCBC.

In Budget 2024, A S$5 billion ($3.72 billion) Future Energy Fund is set up to help the country for its transition to other cleaner energy sources. Additionally, MAS plans to inject S$2 billion into The Financial Sector Development Fund (FSDF) to bolster talent development initiatives and foster innovation in financial services. Furthermore, there are plans to establish a National Cybersecurity Command Centre to enhance the Republic's capabilities in detecting and neutralising cyber threats. 

AI has the potential to benefit various industries in the following ways:

Energy: AI holds the promise of significantly reducing energy consumption and operational costs within the energy sector. 
Fintech: In the realm of finance, AI plays a transformative role by streamlining processes, automating routine tasks, and elevating overall efficiency in financial services. Machine learning algorithms may empower fintech to enhance risk management, fraud detection, and algorithmic trading.
Cybersecurity: The integration of AI in cybersecurity introduces a proactive approach to threat detection and response. AI-powered systems have the capability to swiftly detect and neutralise cybersecurity threats, offering real-time protection.

How will the rise in corporate tax and labour costs affect the profit margins of companies, especially those in the labour-intensive sectors and those with high foreign reliance?
Institutional outlook on Singapore's Budget 2024 is generally positive when it comes to short-term profitability – the overall impact, however, is marginal. When it comes to making their investment decision, we recommend institutional investors look at company moats, valuation, quarterly earnings and plans, etc instead. 

Liquidity is the most important thing that institutional investors are looking for – share float and market cap of a particular stock. Venture market capitalisation, for example, is currently valued at around S$4 billion, which makes it unpopular. This is why institutional investors go for companies with large market cap in SG, such as Singtel, ST Engineering, SIA, etc. This also limits their choices in the Singapore market.

As for Singapore, the higher-than-usual interest rate and its effect on the STI will be neutral, as the top three banks in Singapore – DBS, UOB, and OCBC which account for 47 per cent weightage in the STI – will stay wide due to the current interest rate. As for the remaining listings' valuation on STI, it will remain compressed. 

The increase in corporate tax and labour costs will undoubtedly have an impact on profit margins. Labour-intensive sectors, including construction, accommodation, and the food and beverage industry, will be particularly affected. This challenge is not unique to Singapore; countries worldwide are grappling with higher labour costs. To address this concern, the world may need AI-powered robots, although a breakthrough in humanoid robots may still be several years away. Consequently, in the midterm, labour costs are expected to persist as a factor influencing profit margins.

Regarding the corporate tax rate, the Singapore government is implementing a 15 per cent effective tax rate starting next year. This aligns with a global trend as many countries aim to prevent multinational corporations from shifting profits to low-tax jurisdictions. 

Singapore is adjusting its corporate income tax system under the Base Erosion and Profit Shifting initiative (BEPS 2.0), requiring multinational enterprises with a global revenue of at least €750 million ($815.3 million) annually to pay a global minimum effective tax rate of 15 per cent starting in 2025.

Approximately 1,800 multinational enterprises, previously paying below a 15 per cent tax rate, are expected to be affected, impacting their profit margins. However, Singapore is introducing new refundable tax credits for qualified corporations engaging in activities related to the green transition, innovation, and research and development.

With over 130 countries adhering to this global agreement, including Singapore, which remains one of the best places globally for businesses, corporations consider various attractive factors beyond tax rates. These factors include a favourable business environment, strategic location, robust economy, skilled labour force, and ease of doing business.

Cost of living
Singaporeans are grappling with rising living costs as the Goods and Services Tax (GST) reaches its full 9 per cent implementation in 2024. Following last year's 1 per cent increase, the current hike marks the final stage of a two-phase plan designed to minimise the immediate impact on consumers. However, the full 2 per cent rise is expected to have long-term ripple effects on the economy.

While some may not immediately feel the 1 per cent increase on daily purchases, households are already seeing their groceries, personal care, and clothing bills rise. The true impact is particularly noticeable on big-ticket items like concert tickets or electronics, where the combined effect of GST and potential price increases hits consumers harder. Furthermore, rising GST can incentivise businesses to raise prices beyond the tax increase, further straining household budgets.

Global economic considerations: Fed interest rate policy, growing recession possibilities and their effect on investors' portfolios.
Interest rate cuts (US) – In the beginning of the year, rumours circulated of six interest rate cuts which we think is far-fetched. Now, traders are predicting three rate cuts, which makes more sense probably, with the first interest rate cut most probably scheduled in May. It will take some time for the first rate cut to influence economic activity, growth and share prices, especially since the US presidential election will be held in November. 

As for the global market's response to the rate cuts: It wouldn't matter much in the US as the forecast for companies' earnings growth is optimistic this year. Additionally, with the ongoing AI hype, it wouldn't impact the American economy that much due to the ongoing delay in the interest rate cut. Traditional investing wisdom tells us that an environment with prolonged high interest rates will affect the valuation of company stocks, e.g. the S&P P.E ratio will not be around 24.6 as it is now and will probably dip to 18. The statistics we have on hand show that it will be a good year for the US economy.

As for the overall economic outlook, the likelihood of a Singapore recession is low due to strong forecasts for the US and Chinese economies. In the event of a recession, Singapore will most likely experience a 'mild landing'. 

If you are a high net worth ar an ultra-HNW individual, what in the budget would you say is relevant in terms of the tax impact (income, capital gains, other)?
High net worth and ultra-high net worth individuals are most affected by the higher Buyer's Stamp Duty (BSD) for higher-value properties and increased taxes for high-end cars in Budget 2023. However, we do not see a similar "wealth tax" in Budget 2024.

In Budget 2024, the Singapore finance ministry extended Sections 13D, 13O, and 13U, which are tax incentives used in establishing a single-family office in Singapore, until 2029. Section 13O will be enhanced to include limited partnerships registered in Singapore. There will be a revision of the economic criteria for Sections 13D, 13O, and 13U; However, details will only be provided by MAS by 3Q2024. Thus, it remains uncertain how business spending conditions and the minimum fund size of Sections 13D, 13O, and 13U could be revised.

Generally, the extension of Sections 13D, 13O, and 13U until 2029 is welcomed by HNW and ultra-HNW individuals for setting up family offices here.