Date: August 14, 2023
- The STI added only 2 points or 0.06% at 3,294.28
- China’s poor economy weighed on sentiment
- US inflation data suggested Fed will stay the course
- Singapore’s 2023 growth forecast downgraded, no technical recession expected
- Sabana REIT’s unitholders vote to move from external to internal manager
- Sembcorp to be included in MSCI S’pore Index from 1 Sep
- Moody’s downgraded US banks
- Next week: minutes to FOMC’s July meeting to be released on Wednesday
China’s economic problems weighed on sentiment
US inflation worries took a backseat for most of the week, replaced instead by concerns over the state of China’s economy after the country released weak economic data.
At its highest closing for the week the Straits Times Index stood at 3,322 on Thursday; concerted selling pressure on Friday however, meant a loss of the 3,300 level that had just been regained on Monday.
For the week, the STI recorded a gain of just 2 points at 3,294.28, though a late bounce on Friday took it off its intraday low of 3,279. Average daily volume was a mediocre S$1b in a week shortened by the National Day holiday on Wednesday.
Another raft of economic data from China put stocks around the world on the back foot. Chinese exports fell 14.5% in July from the year-ago period, the biggest decline in more than three years. Imports fell 12.4%, far worse than the 5.4% drop expected by analysts polled by FactSet.
China’s National Bureau of Statistics reported Wednesday that consumer prices fell 0.3% year to year in July, the first negative reading since February 2021. Producer prices have been falling since late last year and tumbled 4.4% last month on an annualized basis.
In its latest global economic outlook, the International Monetary Fund said China is “losing steam” and noted that its labor market and real estate sector are facing steep challenges.
The slide in the consumer and producer price indexes has spurred comparisons with Japan, and speculation that China, too, will enter a period of prolonged deflation. In China’s case, however, the pain might be worse, given growing trade restrictions and the country’s significant debt load.
“China’s deflation, which reflects weak household demand as well as excess capacity in some parts of Chinese manufacturing, is likely to reverberate around the world,” says Eswar Prasad, an economics professor of trade policy at Cornell University and former China division chief at the International Monetary Fund.
Growth for Singapore economy in 2023 downgraded; no technical recession
Singapore downgraded its economic growth forecast for 2023 to between 0.5 per cent and 1.5 per cent amid a weak outlook for the export-driven manufacturing sector.
The growth forecast was narrowed from an earlier range estimate of 0.5 per cent to 2.5 per cent after the economy grew by an annual 0.5 per cent in the second quarter of 2023 and 0.4 per cent in the first three months, said the Ministry of Trade and Industry (MTI) on Friday.
The Business Times quoted MTI’s permanent secretary Gabriel Lim highlighting aspects of the macro environment that guided the revised forecast. These included softness in China’s economy and weakness in manufacturing which is proving to be more protracted that previously thought.
MTI chief economist Yong Yik Wei said Singapore should expected positive, though modest, year-on-year growth in the second half and that no technical recession is expected.
US inflation data suggest the Fed will keep monetary policy tight
US wholesale inflation picked back up in July – the producer-price index, or PPI, rose 0.3% in July, the U.S. Bureau of Labor Statistics said on Friday. The odds of an interest-rate increase of 25 basis points when the Federal Open Market Committee meets in September ticked up to 13.5% from 11% on Thursday following the PPI release, according to the CME FedWatch Tool.
The odds of no rate increases through the September and November meetings dipped to 62.3% from 69.8% on Thursday.
Sabana REIT’s unitholders vote to move from external to internal manager
Unitholders of Sabana Industrial Real Estate Investment Trust (Sabana REIT) voted on Monday at an extraordinary general meeting (EGM) to remove external manager Sabana Real Estate Investment Management (SREIM) and kick off the process of internalising the REIT’s manager.
The EGM had been requisitioned by activist investor and unit holder Quarz Capital Asia on June 7 on the grounds that an internal manager would result in a better alignment of interests between manager and unitholders and a removal of potential conflicts of interest, leading to potential cost savings and improved distribution per unit (DPU).
The current manager had countered that internalising the management function is an uncertain and potentially expensive process that could destroy value for unit holders. Sabana REIT may also end up in breach of its loan covenants, it said.
Sabana REIT’s current manager is owned by its sponsor and largest unitholder ESR Capital, which holds a 20.6% stake in the REIT. Hong Kong-based ESR said in a statement on Monday afternoon that it was disappointed with the outcome.
It said: “While the current manager will continue to act as the interim manager, unit holders will have to endure a period of uncertainty about how Sabana Reit will be managed in future, and this will create pressure on the value of Sabana Reit and may call into question its long-term future.”
On Tuesday DBS Group Research downgraded its call on Sabana REIT to “fully valued” from “hold”, while reducing its price target to S$0.30 from S$0.48. The research house expects Sabana REIT’s performance as Singapore’s first internalised REIT manager to “create additional uncertainties”, at least in the short term.
“While cost rationalisation and a more aligned management team with unitholders’ interest are mooted benefits, we believe that this is likely felt in the medium term. The current transactional phase could mean additional costs and resources which could add pressure to the returns of the REIT,” said DBS’ analysts.
Moreover, while forward yields remain attractive at 7.3% for the REIT, DBS said there could be potential cost spikes, along with uncertainties around the REIT’s refinancing.
According to DBS’s calculations, every 100 basis-point increase in borrowing costs will lead to a 9.2% decrease in distribution per unit (DPU), which will result in the DPU yield falling to 6.6% from the current estimation of 7.3%.
Sembcorp to be included in MSCI S’pore Index from 1 Sep
From 1 Sep, Sembcorp will make up one of 22 constituents of the MSCI Singapore Index, which covers approximately 85 per cent of the free float-adjusted market capitalisation of the Singapore equity market.
The inclusion follows a steady climb in Sembcorp’s stock price over the past three months, taking its market value past the $10 billion mark this week.
The stock closed S$0.04 or 0.7 per cent higher at $5.91 on Friday, on volume of 9.3m and is up 72 per cent since January. It has been the STI’s strongest performer this year with a 77% total return up to last Thursday.
On Monday, its price had surged S$0.49 or 8.75% to S$6.09 on heavy volume of 18m.
Selected earnings in brief
City Developments Ltd (CDL) reported a 94.1% drop in net profit to S$66.5m for its first half ended 30 June, mainly due to the absence of significant divestment gains as well as higher financing costs and impairment losses on its UK investment properties. Revenue was up 83.6% to S$2.7b due to strong contributions from property development, hotel operations and investment properties. An interim dividend of S$0.04 per share was declared.
Genting Singapore reported a that net profit for its first half ended 30 June more than tripled to S$276.7m versus the same period last year when the figure was S$84.4m. Revenue increased 62.9% to S$1.1b. The improved performance was attributed to a higher number of foreign visitor arrivals. An interim dividend of S$0.015 per share was declared and will be paid on 22 Sep.
Elite Commercial REIT reported a 32% drop in distribution per unit (DPU) to 1.74 pence for its first half ended 30 June versus the same period last year after retaining 10% of distributable income. Before retention, DPU was 1.94 pence. The retention “will help to strengthen the REIT’s financial position and help de-risk the REIT’’ said the manager. Gross revenue rose 3.4% to £19.1m and net property income (NPI) grew 10.5% to £20m. The DPU is expected to be paid 21 Sep.
Paragon REIT reported a 15.7% decrease in DPU for its first half ended 30 June to S$0.0242 which is expected to be paid on 22 Sep. The fall was mainly due to higher finance costs. Gross revenue was up 0.6% to S$143.1m and NPI rose 0.1% to S$106m. Income available for distribution fell 13.8% to S$70.6m. The REIT said tenant sales for its Singapore properties, which include Paragon, Clementi Mall and Rail Mall, rose 3% whilst footfall was up 24%.
Lendlease REIT reported an 8% drop in DPU for its second half ended 30 June to S$0.0225 even as distributable income rose 21.6% S$52.2m and gross revenue was up 65.1% to S$103.1m. Property operating expenses rose 54.3% to S$25.6m due to the acquisition of Jem in Jurong East in April 2022 whilst finance costs more than doubled to S$27.8m from S$10.4m last year. For the full year, the REIT’s DPU stood at S$0.047, down 3% from 2022.
Moody’s downgraded US banks
Moody’s stepped in late Monday with ratings downgrades on 10 lenders, while putting six lenders on review for downgrade, and giving negative outlooks to 11 banks.
Among the risks cited by Moody’s were rising funding costs, lower regulatory capital on hand at regional banks, the chance of commercial real estate defaults, and the possibility of a recession. It even cited a possible economic slowdown as a concern.
“We continue to expect a mild recession in early 2024, and given the funding strains on the U.S. banking sector, there will likely be a tightening of credit conditions and rising loan losses for U.S. banks,” Moody’s said.
What Wall St expects next week
On top of earnings releases, on Tuesday, the Census Bureau will issue data on nationwide retail sales for July, indicating whether consumer spending held up last month. On Wednesday, the Federal Reserve will release minutes from the latest FOMC meeting, which could offer clues as to the trajectory of monetary policy.
Investing with Insight: Watch this Week’s Technical Outlook
