Date: August 6, 2018
- STI lost 1.8% in weak volume;
- Trump threatened more tariffs on China goods, China responded with threats of its own;
- DBS’s results disappointed so banks were sold off;
- Tech stocks were also weak on earnings concerns;
- US FOMC kept interest rates unchanged;
Over the course of the five days the Straits Times Index fell about 60 points or 1.8% to 3,265.73. The largest loss came on Thursday after DBS Bank reported its 2Q earnings, and after US President Trump on Wednesday instructed his trade officials to look at increasing tariffs to 25 percent from 10 percent on US$200 billion in Chinese imports.
In response to Mr Trump’s order, the Chinese government’s top diplomat Wang Yi on Thursday said: “We hope that those directly involved in the United States’ trade policies can calm down, carefully listen to the voices of U.S. consumers … and hear the collective call of the international community’’.
The Hang Seng Index plunged 626 points or 2.2% on Thursday, whilst the STI’s loss was about 43 points or 1.3%. Turnover on Tuesday 31 July was the highest for the week at S$1.5 billion most probably thanks to month-ending “portfolio rebalancing’’, whilst the lowest was the S$835m done on Monday. In between, turnover hovered around the S$1 billion mark, not particularly encouraging given that it is said to be the industry’s breakeven level.
On Friday, China said it could impose tariffs on US$60b worth of US goods. “The US side has repeatedly escalated the situation against the interests of both enterprises and consumers,” it said. “China has to take necessary countermeasures to defend its dignity and the interests of its people, free trade and the multilateral system.”
Banks took a hit
For its second quarter ended 30 June, DBS reported an 18% rise in net profit year-on-year to S$1.33 billion, which was below the consensus estimate of S$1.44 billion. It was also 12% lower than Q1. In addition, the bank has lowered its property loans growth forecast by S$1 billion because of last month’s property cooling measures.
DBS’s shares on Thursday dropped $0.44 or 1.63% to S$26.50 on volume of 9.13 million, taking with them UOB and OCBC, the former losing 2.1% and the latter 2.2%. In total, selling of the three banks accounted for S$420 million of the market’s turnover that day, roughly 34%.
Deutsche Bank said in a Thursday report that whilst DBS’s share price has already come off recently, falling by 13% since the 1Q18 results at the end of Apr’18 (underperforming the STI by 5%), Deutsche believe the weakening momentum in the capital market may continue to look challenging in the near-term, with DBS relatively more exposed than peers. It maintained a “hold’’ on DBS with 12-month target price of S$30.
Other stocks in play – Genting, tech counters
Among the other stocks in play was Genting Singapore, which featured regularly in the most actives list and held firm when the broad market came under pressure.
Deutsche Bank in its 25 July “buy’’ on Genting, said it thinks the casino operator stands a good chance of winning one of the licenses to operate an integrated resort (IR) in Japan.
“The bill to implement an IR was approved at the upper house plenary on 20-Jul-18, bringing GENS closer to the long awaited IR catalyst. We find many similarities between Singapore and Japan gaming bill which could make both Singapore IR operators, Las Vegas Sands and GENS a front runner. Coupled by the turnaround in Singapore operations, we thus believe the risk reward justifies our Buy rating’’ said Deutsche. It set a 12-month price target of S$1.60 for the stock.
Technology stocks AEM Holdings and Hi-P International suffered large blows during the week – AEM crashed S$0.245 or 24.6% on Wednesday to S$0.75 on volume of 33.7 million whilst Hi-P plunged S$0.12 or 9.5% to S$1.15. In AEM’s case, the company warned of “significant volatility’’ ahead whilst Hi-P reported a 19% fall in Q2 profit to S$12.3 million.
FOMC held rates steady
On Wednesday, the US Federal Open Markets Committee (FOMC) held its latest meeting and, as expected, kept interest rates unchanged. The word used to describe US economic growth was changed from “solid’’ to the “strong’’ that it used in its June statement, and as for inflation, the FOMC said price measures excluding food and energy “remain near” the central bank’s 2% goal, an updating of the previous statement that said they had “moved close to” that target.
After the FOMC, the federal funds futures market priced in a 92% chance of a 25-basis points rate hike in September and a 71% chance of another in December.
The outlook
Schroders in its August Talking Point titled “What’s changed since January?’’ noted that although it started 2018 position for a reflation play, it became concerned with equity valuations in the first quarter and shifted money into government bonds, commodities and defensive currencies like the US dollar and Japanese yen.
Looking ahead, it said stock market valuations have improved for the first time since 2015.
“Since the start of the year, the price-to-earnings ratio on the main US stockmarket index, the S&P500, has contracted from 22.4 to 20.7’’ said Schroders.
“In emerging markets meanwhile, we’ve seen bond yields rise (which means prices have fallen) and emerging market currencies have weakened by 7% on average. This suggests that there are now some fresh opportunities to potentially generate return in this region.
At the beginning of the year, we also stated reasons why “3% was the magic number”. As long as global GDP growth stayed above 3% and the US 10-year Treasury yield stayed around 3%, the reflationary environment would continue and equity markets would be supported. So far these conditions have been met’’.
