A tepid week where the STI fell 2.1% after hawkish Fed testimony

Date: June 26, 2023

• US Fed Reserve chair Jerome Powell signalled more rate hikes to come
• Wall St’s indices all fell; the STI dropped 2.1% to 3,191.6
• Probability of a 25-basis points rate hike in July is now 74%
• Keppel and Sembcorp Industries in focus after EMA announcement
• Datapulse director seeks EGM to remove 5 incumbent directors
• RHB cut its DBS target price on weak earnings outlook
• Quarz and Sabana Reit’s manager locked horns over Quarz’s proposal to move to internal management
• The week ahead: some US houses recommend caution

 

The STI fell 2.1%, losing the 3,200 level

After rising every day in the previous week, the Straits Times Index fell for four out of the five trading days last week, dropping 69 points or 2.1% along the way to finish below the 3,200 level at 3,191.60.

Average daily volume amounted to a mediocre S$1.04b compared to the previous week’s average at S$1.43b. Players here took their cue from an indecisive Wall St, where US Federal Reserve chair Jerome Powell made two testimonies on the state of the US economy and provided guidance on the direction of interest rates.

As a result, for the week the Dow Jones Industrial Average dropped 1.7%, while the S&P and the Nasdaq each shed 1.4%. The Dow snapped a three-week winning streak, the S&P broke a five-week run, and the Nasdaq ended an eight-week rise.

Powell’s testimony – more rate hikes to come despite the June pause

Over in the US, in testimony before the House Financial Services Committee, Mr Powell laid out the Fed’s case for holding rates steady in June, arguing that the decision was made because of the combination of the 5 percentage points of rate hikes so far, the “uncertain lags” with which monetary policy affects the economy, and the potential for tighter credit conditions to slow economic activity.

But he also made clear more policy tightening is on the way. “We never used the word ‘pause,’ and I wouldn’t use it here today,” Powell told lawmakers.

Instead, Powell suggested that the Fed’s updated forecasts, which were released after the policy meeting last week, offered a reasonable path forward for the central bank this year. Those projections showed that 16 of the 18 members of the policy committee expect another interest-rate hike, and a broad majority expect two more this year.

According to the CME FedWatch Tool, the federal funds futures market is currently pricing in a 74% chance that the Fed will raise interest rates by 25 basis points in July, with the probability of no rate hike at 26%.

Keppel and Sembcorp Industries were in play

Keppel and Sembcorp Industries were among the stocks in focus following an announcement on Tuesday of plans for a temporary price cap (TPC) on electricity prices by the Energy Markets Authority (EMA).

The EMA’s TPC on wholesale electricity prices will take effect from July 1 to prevent huge volatility in electricity prices.

While both companies are energy providers and will be impacted by the EMA’s action, Sembcorp is seen as more vulnerable to the regulatory changes than Keppel Corp, which is seen as boasting a more diversified portfolio.

Under the new policy, if the moving average price for 24 hours exceeds the threshold, TPC will be activated for at least 24 hours till the moving average price falls below the threshold again.

According to a Straits Times report, DBS Bank estimates that if the TPC mechanism had been in place during the January 2021 to April 2023 period, there would have been a total of 26 TPC activations, or about a 4 per cent occurrence, reducing the Uniform Singapore Energy Price (USEP) by 7 per cent. The USEP is the half-hourly energy price in the Singapore wholesale electricity market.

“Assuming about a $S20 per megawatt hour (MWh) reduction in average USEP as illustrated in the consultation paper, the impact to Sembcorp could be about S$30 million, or 4 per cent, of annual group profit,” DBS wrote on Tuesday.

Also in a Tuesday report, CGS-CIMB estimated that with the start of the TPC, Singapore’s USEP will be in the range of SS $570 per MWh in the second half of 2023, and “still yielding good margins”. The investment house estimates that Sembcorp’s current exposure to spot electricity rates is about 25 per cent.

“We estimate the TPC would have a S$36 million (4 per cent) impact on Sembcorp’s financial year 2023F (forecasted) core profit,” wrote analysts Lim Siew Khee and Izabella Tan. “We think the negative share price reaction is overdone and see buying opportunity if weakness persists.”

Assuming flattish earnings per share during the current financial year, they reiterated their 12-month target price of $6.20 for the stock.

When the EMA’s announcement was made, Keppel and Sembcorp’s shares crashed 5.2% and 9.2% to S$6.60 and S$5.15 respectively. Keppel closed at S$6.64 on Friday whilst Sembcorp finished the week at S$5.41.

Datapulse director seeks EGM to remove incumbent directors

Hotel and hospitality property investment firm Datapulse Technology, which is on the Singapore Exchange’s watch list following three years of losses, said it has received a requisition notice from shareholder and board director Ang Kong Meng to convene an extraordinary general meeting (EGM) to pass eight resolutions, among them the removal of five directors.

The resolutions also seek to appoint two new directors – Hor Siew Fu who is independent director and chairman of the audit committee at water treatment firm Memiontec, and Perry Yuen, mergers and acquisitions partner at law firm Shook Lin & Bok.

In his letter, Ang, who holds a 23.7% direct and deemed interest in Datapulse and is a non-independent and non-executive director, said he was concerned about the management of the company and the direction the leadership is taking. In response, Datapulse’s board noted that the company’s losses and inclusion in the watch list were mainly due to Covid-19 which greatly affected the hospitality industry.

The company also said its management began a review of current operations in May and on 14 June announced that a financial adviser will be appointed to conduct a strategic review.

RHB cut its DBS target price amid weak earnings outlook

In a Friday report, brokers RHB said it has reduced its target price for DBS from S$35.70 to S$33 but maintained its “neutral’’ call. RHB has cut its FY2024 and FY2025 earnings forecasts by 9.6 and 11.6% respectively due to a poor economic outlook.

RHB’s economists expect Singapore’s gross domestic product for Q2 to contract by 1.4% year-on-year, with increased risk of a technical recession in the first half. It believes businesses will remain cautious into early 2024 and its lowered earnings estimates assume lower net interest margins, marginally higher credit costs and an increased effective tax rate.

The new target price is based on a 1.4x price/book which is one standard deviation above the historical mean, and a return on equity of 15.6%. DBS’s shares gained S$0.25 or 0.8% over the week at S$31.43. The bulk of this rise came on Thursday when the stock jumped S$0.43 to S$31.82.

Quarz and Sabana Reit’s manager continued to lock horns

Following a call earlier in the month by activist investor Quarz Capital for Sabana Reit to move towards an internal manager, both parties last week continued to express differing opinions as to how the Reit should be managed.

On Thursday, the Reit’s manager, Sabana real Estate Investment Management, filed a 35-page document and a 26-slide presentation rebutting Quarz’s proposal. It warned that following through on Quarz’s call might destroy value as it could cause great uncertainty. It also listed what it said were misleading or unsubstantiated claims by Quarz.

According to a Business Times report, a spokesman for the Reit’s manager said its removal would trigger a removal of manager clause which could result in mandatory prepayment of the Reit’s outstanding loans and interest if no satisfactory agreement is reached with the lenders.

In response, Quarz said the Reit’s external manager was using “empty threats’’ and that it was confident that the main lenders, UOB, HSBC and Maybank, would support the removal of the manager due to “serious corporate governance concerns, conflicts of interest and underperformance’’.

The week ahead: some US banks recommend caution

According to a 23 June Reuters report, some Wall Street banks are sounding caution on the US stock rally, warning that stretched valuations have made equities more vulnerable to declines.

Although the S&P 500 pulled back for the week, it is still up more than 13% since the year began, which have driven equities to more expensive levels. “The S&P 500 now trades at 19 times its expected 12-months earnings, well above its historic average of 15.6 times, Refinitiv Datastream showed’’ said Reuters.

“With valuations now pushing the outer limits of what we would think would be reasonable. … We would be taking some chips off the table,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute (WFII) was quoted as saying.

Meanwhile, Goldman Sachs was quoted urging investors to consider “downside protection” to their stock portfolios, though they expect the S&P 500 to reach 4,500 by year-end, or about 3.5% above current levels.

Investing with Insight: Watch this Week’s Technical Outlook

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