As AI bubble fears grow, can Singapore withstand a sharp market correction?

SINGAPORE: Singapore's economy will inevitably feel some effects if the artificial intelligence (AI) bubble bursts, but it remains diversified enough to be resilient, analysts told CNA.

This is despite the country's significant exposure to the AI boom through its sizeable semiconductor, data centre and tech industries, they said.

Earlier this month, the Monetary Authority of Singapore (MAS) warned that some stock valuations in the technology and AI sectors seemed “relatively stretched”.

In its 2025 financial stability review, MAS noted that some firms had used "novel and potentially circular private" financing arrangements to expand and may face intensifying pressure to generate sufficient revenue.

MAS' comments spotlighted the global concerns of an ongoing AI bubble and speculation that the bull market in tech stocks may not last.

If optimism about AI’s ability to generate sufficient returns fades, there may be sharp corrections in the broader equity market, said MAS.

“The materialisation of this risk could be exacerbated by the build-up of leverage, with spillovers to economic growth,” the review said.

Nearly 500 AI start-ups are active in Singapore, and the country secured US$1.31 billion in private AI funding from July last year to June this year, a report earlier this week revealed.

MAS' remarks are an important reminder for prudent vigilance, said Mr Ravindra Kumar, chief information officer at Maybank Singapore.

"Singapore is an open and globally connected economy, so it would inevitably feel some effects from a global correction," he said.

In the event of a sharp correction, semiconductor, electronics manufacturing and property-related developers could be directly affected due to reduced valuations and returns, said senior economist at Oxford Economics Sheana Yue.

"The concentration and scale of job losses and company closures will be greatest (in these sectors)," she said. 

Those indirectly affected include institutional investors with exposure to AI, she added.

Independent economist Song Seng Wun said the overall impact depends on the severity and extent of the correction – and how the global economy responds.

"For us, it's really all about what is the external demand situation looking like," he said. "Remember, Singapore (is a) small, tiny, little city state (that) depends on global trade."

If the "crisis of confidence" in the market translates into more companies worrying about jobs and investments, that will trickle down to Singapore, but if global trade is resilient, Singapore will not feel much of an effect, he said, adding that the government has tools at its disposal to support the economy.

Mr Kumar of Maybank noted that Singapore's fiscal position is strong and its diversified economy – spanning finance, manufacturing and trade – provides "substantial resilience against systemic shocks".

"Singapore's diversified economy, well-capitalised banking sector and robust regulatory frameworks serve as important stabilisers that help cushion against such disruptions," he said.

GLOBAL STOCK MARKET CRASH UNLIKELY

Still, analysts are not expecting a global stock market crash owing to stretched valuations in tech and AI at the moment.

For one, AI technology is still at its infancy, but is advancing at a rapid pace.

Mr Chong Yik Ban, a research analyst at Phillip Securities Research, said that while concerns about an AI bubble are growing, he does not foresee a crash.

“No one can forecast future AI applications with certainty and declare AI investment is a waste, especially when generative AI is still in its early stages of widespread adoption,” he said.

The investment into AI is well covered by companies’ operating cash flow, and interest rate cuts will ease funding into AI spending, he added.

“I would argue that AI is not in a bubble at this stage,” said Mr James Ooi, market strategist at Tiger Brokers. 

He said the stock valuations are anchored by an “exceptionally large addressable market”, and pointed out that the Nasdaq-100 index is trading at around 37 times the companies’ earnings, a far cry from the dot-com peak, where stock prices were trading at 175 times earnings.

However, Mr Ooi cautioned that AI-related stocks are volatile and carry higher risk.

“Many AI names are already priced for perfection,” he said. 

“They have consistently delivered strong ‘beat and raise’ results, but the moment they fail to meet or exceed expectations, even a minor misstep could be heavily punished.”

FLIGHT TO SAFER INVESTMENTS

In times of volatility, investors may start looking at alternatives that do not carry such risks.

On this, Mr Ooi said consumer staples, shorter-duration high-grade bonds and gold exchange-traded funds are also possible defensive options.

“These segments generally offer greater stability and more predictable income, providing a smoother ride when markets turn choppy,” he said.

For those who have a lower risk appetite, some might look within Singapore's market too for investment alternatives.

Mr Ooi pointed to real estate investment trusts and banks that pay dividends and have strong balance sheets as possible defensive plays.

“Singapore blue chips have a strong track record of delivering stable dividends and demonstrating defensive characteristics, making them a steady anchor for investors in the current environment,” he said.

Mr Glenn Tan, a portfolio manager at wealth advisory firm Providend, also said financial institutions and property developers are possible opportunities for investors.

He said local banks have seen stellar growth in wealth management-related fee income, which has allowed their profits to maintain or grow even when interest rates fall.

Property developers, too, are well positioned to take advantage of persistent housing demand driven by immigration and household formation, said Mr Tan.

“The prospect for Singapore blue-chip stocks has been quite positive in the past year, and this seems likely to persist in the near and medium term,” he said.

STAYING INVESTED FOR THE LONG TERM

Analysts also advised investors not to be too "tactical" when it comes to investing, noting that volatility in stock markets is a fact of life.

“For investors with strong conviction in their portfolios, staying invested and keeping their eyes on the long-term prize is often the more effective approach,” said Mr Ooi.

He said the data shows that time in the market matters more than timing the market.

Mr Tan said those who sell their investments because they expect a crash often find it difficult to reinvest their money, leading to significant opportunity cost.

“Trying to predict the unpredictable not only leads to needless stress, but also incurs transactional and opportunity costs that are all but guaranteed to erode returns in the long run,” he said. 

Those who have concerns should instead diversify their portfolios to avoid excessive impact, said Mr Tan.

“Historically, the brunt of losses caused by a bubble bursting have been borne in a single country and a single sector.”

Passive investors can consider globally diversified exchange traded funds, while active investors can look at sectors experiencing long-term secular growth or “boring” industries that deliver consistent dividends.

“Investors need not allow concerns on AI or the technology sector to deter them from investing,” he said.