Bad news for US economy is good news for stocks?

Date: June 27, 2022

  • The STI rose 13 points or 0.4% over the week to 3,111.65
  • Traders kept a firm eye on Wall St for direction
  • US Fed chairman Powell spoke about possibly slowing the pace of rate hikes if justified by data
  • Wall St rallied on data indicating economy may be slowing
  • Analysts expect 75-pts hike in July and 50 in Sep
  • Singapore market has seen net institutional outflows in 2Q
  • Sembmarine defended merger with Keppel O&M
  • Singapore’s factory output grew better-than-expected 13.8% in May

US inflation and rate hikes still the focus as STI gained 13 points at 3,111.65

Rising inflation and interest rate worries continued to haunt global markets last week. With Wall Street leading the way, the pressure created by these concerns led to a rocky week for trading here – the Straits Times Index (STI) gyrated in tandem with overnight moves in the US as well as the futures market during the day before ending the week at 3,111.65 for a net gain of 13 points or 0.4% over the five days.

Average daily volume was a low S$959m, a reflection of the caution that prevailed throughout as traders waited for firmer signals from overseas. As always, the main guidance came from the US, where Federal Reserve chairman Jerome Powell spoke to the Senate Banking Committee.

Powell: rate hikes could ease if the economy and inflation slow

On Wednesday, Powell said that if the economy and inflation slow down enough, the Fed would slow down the pace of its interest rate hikes. He also said that the central bank is determined to bring down inflation and has the ability to make that happen.

In addition to expressing resolve to fight inflation, he said economic conditions are generally favourable, with a strong labour market and persistently high demand.

An economic slowdown is good for the market?

Mr Powell’s comments have led to the belief that news of a moderating or slowing US economy could be good for stocks.

Wall St received indications that a slowdown could be imminent on Thursday and Friday. On Thursday, the S&P Global U.S. Purchasing Managers Index for June fell to a reading of 52.4. Any result above 50 represents expansion in manufacturing activity, though the result was below that last reading of 57.

On Friday, the University of Michigan’s consumer sentiment index had a reading of 50, lower than the prior result and well below an April reading that was above 60. The index has steadily trended lower since then, as consumers grow less confident about their ability to spend in the face of persistently high inflation.

As a result, US stocks jumped on Thursday and Friday and for the week, the Dow, the S&P 500, and the Nasdaq climbed 5.4%, 6.45%, and 7.5%, respectively.

Economists expect US rate hikes in July and Sept

The Fed will deliver another 75-basis points interest rate hike in July, followed by 50 points in September, and will not scale back to 25 points until November at the earliest, according to economists polled by Reuters.

The latest poll results show that momentum is still behind the Fed doing more, not less, despite rising recession concerns and a steep sell-off in financial markets.

Rabobank’s senior US strategist Philip Marey was quoted by Reuters as saying “Since the Fed is still underestimating the inflation problem…not recognising that a wage-price spiral has already started, we expect they will have to raise rates faster than they now expect’’.

“Unfortunately, the hiking path is also likely to be followed by a recession’’.

Singapore market has seen net institutional outflows in 2Q: SGX

In a 20 June Market Update, the Singapore Exchange’s (SGX’s) investor education portal My Gateway said for the 2Q22 to date, the STI has generated an 8% decline in total return, with the FTSE Developed Index declining 16%.

For the quarter, the broader Singapore stock market has seen S$1.05 billion of net institutional outflow, reducing the 2022 YTD net institutional inflow to S$74 million, with the STI 2022 YTD total return at 1%.

“As global inflation gauges have continued to press longer term record levels since 31 March, expectations for the end of 2022 US Fed Funds Rate have increased from 225-250 bps to 350-375 bps. The impact of higher rates has also weighed global growth outlooks, with the World Bank tapering its 2022 global growth estimate to 2.9% (from 4.1%)’’ said My Gateway.

Sembmarine defended proposed merger

In response to a shareholder who has claimed that the Sembmarine-Keppel O&M merger is “highly disadvantageous’’ to Sembmarine shareholders, Sembmarine last week defended the proposal, saying that without the merger,  it will, as a standalone entity, have to navigate an “even more competitive landscape” – where it noted offshore players have sought consolidation or were otherwise “challenged by the radically-changed fundamentals” of the business and needs of customers.

Highlighting increased agility, technical strength and operational efficiencies of a combined entity, Sembmarine said it intends to offer offshore renewables, new energy and cleaner solutions in the O&M sector with the resultant “premier global player” it envisions.

The deal will be based on a 50:50 enterprise value ratio which reflects the equal enterprise values of the 2 companies, before taking into account their respective capital structures.

Keppel will own 56 per cent of the combined entity, while Sembmarine shareholders will own 44 per cent. Keppel will then distribute in-specie 46 per cent of the combined entity shares to its shareholders and retain a 10 per cent stake, which will be placed in a segregated account.

Based on illustrative FY2021 pro-forma metrics provided by the group in its Jun 20 statement, the combined entity would result in a combined net loss of S$1.3 billion, but narrower loss per share (LPS) of S$0.022 compared to Sembmarine’s FY2021 LPS of S$0.065.

Gearing of the combined entity will be lower at 22 per cent on a pro forma basis, compared to 33 per cent for Sembmarine on a standalone basis.

The response came after shareholder Philip Loh launched an online campaign against the deal on a website

Among his arguments is that net tangible assets (NTA) per share of the combined entity would be S$0.07, as opposed to Sembmarine’s NTA per share of S$0.12.

“While the merger allows the combined entity to be a larger and more prominent figure, this is not a panacea for all global competition. At the end of the day, the combined entity will still have to compete against other companies in the offshore and marine sector from China and Korea’’ said Mr Loh.

Singapore’s factory output grew 13.8% in May

Singapore’s industrial production grew 13.8% year-on-year in May, beating expectations of private-sector economists who had expected the figure to be 5.5%.

Excluding the usually volatile biomedical manufacturing, May’s output rose 18% compared to 8% in April. Electronics production jumped 33.6% year-on-year in May whilst semiconductor output was up 45.7%.