Upping the ante on trade wars and property fever

  • Trade war concerns persisted as US raises tariffs on China;
  • China retaliated with levies on US goods;
  • After a MAS warning, the government here then announced fresh property curbs, stocks got whacked;
  • STI dropped 77 points or 2.3% for the week to 3,191.82;
  • Venture’s woes continued;
  • US stocks supported by robust June jobs report.

Trading in the third quarter has followed closely along the lines of trading in the second quarter, with stocks mainly weak because of trade war worries. The US in recent weeks has upped the ante on this front, drawing strong and vocal responses from Canada, Mexico, South Korea, the European Union and of course, China.

On Friday, the US imposed a 25% tariff on US$34b worth of Chinese goods, the latter responded with duties on various US items including soybeans and automobiles. These moves would normally have triggered a Wall Street selloff, however thanks to news that the US economy added a better-than-expected 213,000 jobs in June, this did not occur.

Oil prices in the meantime have been creeping upwards, the US dollar has been strengthening and perhaps the only consolation is that bond yields have been soft, thanks to money seeking safe havens. The 10-year Treasury yield ended the week at 2.82%.

In the local market, the Straits Times Index lost 77 points or 2.3% over the first week of July at 3,191.82, with most of the loss coming on Friday when property stocks and banks took a beating following Thursday’s announcement of new property cooling measures.

Volume for the week ranged from a low of S$827 million on Monday to a high of S$2 billion on Friday, the latter elevated by the heavy property-related selloff.

On Thursday, the government announced new moves to cool the property market, one day after the Monetary Authority of Singapore’s managing director Ravi Menon warned that action might have to be taken to curb euphoria in the sector.

Among the new measures are higher stamp duties for those buying second, third or more properties and revised loan-to-value limits. City Developments, CapitaLand, Oxley and UOL all plunged sharply on Friday, as did all three banks. Most broking firms have downgraded the sector to either “underweight" or “neutral".

Venture continued to tumble

Tech sector leader Venture Corp’s shares have taken a beating over the past 2 months over concerns surrounding its sales of electronic cigarettes. In downgrading the stock last week, UOB-Kay Hian said Venture’s stellar 2017 was driven mainly by IQOS (I Quit Ordinary Smoking) devices and that the broker’s checks suggest that these devices contribute 25% of Venture’s revenue and 40% of gross profit.


With IQOS production slowing down and shifting away to its competitor, Venture’s earnings are at risk of declining in 2018 and beyond. Growth and margins are expected to normalise and we cut earnings forecasts by 16-34% for 2018-20. Downgrade to HOLD, with a lower target price of S$18.20. Entry price: S$14.00

said UOB-Kay Hian in its 5 July report.
In response, Venture’s shares plunged S$0.33 that day to S$17.17. On Friday the stock closed at S$16.50, bringing its loss for the week to S$1.34 or 7.5%.

The outlook

DBS Group Research in a 4 July Singapore Strategy report “Buckle up for a rough ride" said its base case is for trade war threats to subside by year-end but it is cutting its year-end Straits Times Index target to 3650.


Beyond the rebound, volatility will increase, as trade war worries and tightening liquidity will cap bounces. We set a base-case scenario assuming that the current trade war cries are mainly political rhetoric ahead of the November mid-term election, and should subside towards year-end. That said, newsflow on trade war is likely to get worse before it gets better. We cut our base-case STI target to 3650, taking into account possible earnings cut and lower risk premium


However although it said it thinks a full-blown trade war is unlikely, its bear case is for the index to head down to 2,915, which is 10.5x earnings, derived from two previous market bottoms during the 2011 Eurozone crisis and the 2016 oil price crash.

In its July Talking Point titled “How might a trade war play out?’’, Schroders said there could be three outcomes.

  • “Inflationary impact: Although current tariffs are hurting businesses in certain sectors (such as auto and aerospace manufacturers etc), further tariffs are likely to be levied on consumer goods such as clothing, footwear and white goods. This risks driving inflation higher as consumers are faced with higher prices on everyday items.
  • Stronger US dollar: As central banks outside the US try to offset the effect of higher tariffs on their exports by easing policy and investors search for “safe havens” as they do in uncertain times, we are likely to see a rise in the value of the dollar. This will hamper trade and impact the emerging markets as their currencies devalue in the face of an appreciating dollar.
  • Lower growth and higher inflation (stagflation): Overall, we may have to raise our inflation forecasts as a result of higher prices on traded goods, and lower our growth expectations as trade slows given weaker demand and a stronger dollar".
In a separate report, Schroders said it has downgraded equities to neutral to reflect a more cautious stance. “Positive earnings revisions have become less widespread recently and a number of upcoming political events could lead to heightened risk aversion" it said.