Banks main drivers as fading US interest rate and inflation fears help support stocks

Date: July 24, 2023

  • The STI rose 30 points or 0.9% at 3,278.3 in low volume as US rate fears ease
  • Manulife US Reit in focus after steep valuation fall
  • Sakae’s shares in play on news of Douglas Foo’s proposed share sale
  • Sabana Reit’s manager warns that staff may leave if EGM resolutions are passed
  • Strong earnings and benign economic reports helped support US stocks
  • Probability of 25-bp rate hike this week by US Fed is now 99%
  • Are US stocks now overvalued? It depends on where rates are headed


The STI rose 30 points or 0.9% in low volume, banks were main drivers

The Straits Times Index managed a gain of 30 points or 0.9% over the week at 3,278.30, underpinned by a firm Wall Street which appears to have put its interest rate and inflation worries behind it for the time being.

However, volume here was unspectacular, averaging just S$905.2m per day compared to S$1.06b the previous week. Banks were the main drivers of the index, with notable contributions from Keppel Corp, Singapore Airlines and Seatrium.

DBS gained S$0.75 or 2.3% at S$32.74, UOB rose S$0.79 or 2.8% to S$28.62 and OCBC added S$0.32 or 2.6% to end the week at S$12.69.

Manulife US Reit in focus after steep fall in portfolio valuations

Manulife US Reit came into focus last week after it announced on Tuesday a 14.6% drop in its portfolio valuation as at 30 June 2023 to US$1.6b.

The decline was due to several factors, including higher discount and terminal capitalisation rates, as well as continued weakening of occupancy performance across the US office market.

The Reit is expected to report a loss for the first half of 2023. Also, its aggregate leverage has risen to 57% following the new valuations, passing the 50% limit allowed by the Monetary Authority of Singapore.

The Reit’s manager however, noted that there has been no gearing limit breach as the circumstances that led to the limit being passed were beyond the manager’s control.

The fall in valuations has caused a breach of loan covenants, potentially affecting distributions. On Wednesday, the Reit’s price collapsed by as much as 33.7% or US$0.057 to US$0.112 – the lowest since its listing in May 2016.

It later managed a modest rebound to US$0.116 with 56.7m units traded that day, but ended the week at US$0.112.

DBS Group Research downgraded the Reit from “buy’’ to “fully valued’’ with a US$0.10 target price after raising its discount rate assumptions to a weighted average cost of capital of 8.6% from 6.8%.

UOB-Kay Hian in the meantime, has downgraded the Reit to a “sell’’, cutting its target price from US$0.47 to US$0.165 whilst noting that the erosion of capital values was “more severe than anticipated’’.

RHB on the other hand, maintained a “buy’’ on Manulife US Reit, albeit with a reduced price target. It said it is “high time for the sponsor Manulife to show more active and immediate support’’ which could come from asset acquisitions from the Reit or continued financial support.

Post-revaluation, RHB noted that the Reit still trades at a 60% discount to book value. The broker has shaved its target price from US$0.40 to US$0.25.

CGS-CIMB maintained an “add’’ on the Reit, lowering its price target from S$0.55 to US$0.41. It believes the current price has already factored in many of the challenges the Reit is facing.

Sakae’s shares in play on news of Douglas Foo’s proposed share sale

Shares of mainboard-listed Sakae, best known for its restaurant chain Sakae Sushi, spiked more than 130% at one point on Wednesday before closing that day with a 122% or S$0.121 gain at S$0.22 on volume of 1.5m.

The jump in share price came after the company announced that Sakae Holdings’ founder and executive chairman Douglas Foo is looking to sell a 20 per cent stake in the restaurant operator for S$26.5 million.

On Tuesday, Mr Foo entered into a sale and purchase agreement with Makara Capital to sell 27.8 million shares in the company.

Makara Capital is a private equity firm that backed Singapore telecommunications company MyRepublic with a S$70 million investment in 2017.

If the proposed sale is completed, Mr Foo will remain as executive chairman and controlling shareholder with 64.1 million shares, or about 46.15% of the company.

Sakae’s shares ended Friday at S$0.215.

Sabana Reit’s manager warns that staff may leave if EGM resolutions are passed

Sabana Reit’s manager has warned there is no assurance that existing staff will stay if resolutions at the 7 Aug extraordinary general meeting (EGM) requisitioned by activist investor Quarz Capital are passed.

Quarz had in June requisitioned the EGM to vote on removing the Reit’s manager and internalising the function in order for the Reit to enjoy cost savings.

Based on the EGM circular, if the manager and the property manager are unable to retain their staff and lose their capability to serve as the manager or property manager during the interim period until new appointments are made, the responsibility of managing Sabana Reit would potentially fall onto the trustee, or professional advisers the trustee appoints.

“The longer it takes for the trustee to implement and effect the change, the greater the risk to the ongoing viability of Sabana Industrial Reit’’ said the circular.

The Reit’s trustee noted that a considerable amount of time, expected to be at least 12 months and costs would be required to internalise the management function.

Strong earnings and benign economic reports helped support US stocks

The Dow Jones Industrial Average rose for ten consecutive days up to and including Friday, its longest winning streak since 2017.  Last week, the Dow and the S&P 500 gained 2.1% and 0.7% respectively, while the Nasdaq slipped 0.6%. However, the Nasdaq is still up about 34% so far in 2023.

Better-than-expected corporate earnings and benign economic reports were the reasons for the Dow’s strength last week. For example, latest jobless claims reported on Thursday were below estimates, speaking to a strong labour market whilst earlier in the week, data showed that retail sales rose about 1.5% for June, though that was less than the 2% increase in May.

According to analysts the data suggests that the economy is strong, but not so strong the market expects the US Federal Reserve to lift interest rates drastically from here. The Fed may implement one or two more rate hikes as it tries to get inflation down a bit more, but likely not more than that.

Meanwhile, second-quarter results have painted a rosy picture for U.S. companies. As of Tuesday morning, companies representing about 8% of the S&P 500’s market capitalization had reported their profits, and just over three-quarters of them disclosed higher earnings per share than expected, according to Credit Suisse.

The aggregate EPS result has cleared the estimate by about 11%, while sales have beaten by just under 2%, indicating that profit margins are healthier than expected.

Probability of 25-bp rate hike next week is now 99%

The Fed meets next week to decide on whether to rate interest rates. Based on the CME FedWatch tool, the market has priced in a 99% chance of a 25-basis points hike to 5.25-5.5%.

All eyes will be on the Fed’s accompanying statement to see how many more hikes there might be in the months ahead.

Are US stocks now over-valued? It depends on where rates are headed

According to some observers, there is no doubt that at its current level near 4570, the S&P 500 looks expensive. The index is now trading at just over 19 times the aggregate earnings per share its component companies are expected to produce over the next year, up from about 15 times at the start of the index’s 27% rally from its low point in October.

At the same time, rates could drop. The two-year Treasury yield which reflects expectations about the federal-funds rate, is just under 4.8%. That leaves it a bit short of 5%, the highest in more than a decade, and not likely to go much higher. It could fall if investors start to price in the possibility of rate cuts, something that would also drag down the 10-year yield, now at about 3.75%.

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