Covid-19 woes continue to weigh on sentiment

Date: April 6, 2020

  • The STI dropped 139 points or 5.5% over the week at 2,389.29;
  • Government announced partial lockdown from 7 April;
  • Government proposed rental relief Bill, analysts say it will hurt retail S-reits;
  • Wall Street remained weak, stocks fell after Friday’s soft US jobs report;
  • US Treasury yields remain at record lows;

After a terrible first quarter, the selling continued

The numbers do not make for encouraging reading: The Straits Times Index lost 741.6 points or 23% in the first quarter, most of which came in March when the index dropped 530 points. Wall Street did not fare any better – in the first quarter, the Dow Jones Industrial Average also shed 23%, which was the index’s worst first quarter performance in history.

In terms of overall quarterly performance for the Dow, this was only surpassed by the 1987’s 4Q loss of 25.3%.

Neither market has started the second quarter any better – over the course of last week which included the final 2 trading days for March, the STI lost 139 points or 5.5% to end at 2,389.29.

Friday’s US jobs report – only the start

The US market in the meantime, has also been weak – and this was not helped by Friday’s jobs report which showed US employment plunged by 701,000 in March and the jobless rate surged to 4.4 per cent.

The US Labor Department also department acknowledged its statistics could not yet capture the full extent of the damage wrought by the growing Covid-19 pandemic, and its own weekly data on first-time claims for jobless benefits showed 10 million people lost their jobs in the last two weeks of the month.

Singapore government announced tougher measures

On Friday, the Singapore government announced further measures to control the spread of the Covid-19 virus which included closure of almost workplaces from Tuesday 7 April onwards. On Friday, the STI was the region’s worst performer when it fell 63.74 points or 2.6%.

S-Reits have been weak

Singapore real estate investment trusts or S-Reits have been weak recently, mainly because cash flows from tenants are now highly uncertain. During the week, the government said it is proposing a Bill which would allow tenants who are unable to pay their rent to hold off from paying for up to six months.

When passed, landlords would not be allowed to terminate the lease of these tenants, or repossess the premises, if rent is not paid during the relief period.

In a 2 April report titled “Singapore Retail Reits in for a Rough Ride’’ DBS Group Research said it has turned cautious on the retail S-Reit sector in view of unprecedented tightening measures introduced by the government.

“With a focus on conserving cash due to worsening operational outlook, we anticipate potential cuts in payout ratios (from 100% to 90%) for most retail S-REITs and cut our distributions per unit to the tune of 14% to 27% on the back of rental rebates offered by landlords to affected tenants’’.

DBS added that the risk from the Bill is that if tenants/businesses go bust after 6-12 months even with rent deferment, landlords will be faced with a potential spike in bad debts. “This is a factor we believe has yet to be addressed, to be fair to landlords who have their own obligations to fulfill’’ said DBS.

US Treasury yields remain depressed

US Treasury bonds have been the safe haven of choice by most investors and this continued to the case last week. On Friday, the 10-year Treasury yield was down 3.7 basis points to a three-week low of 0.587%, adding to a 15.7 basis point drop over the week.

The 2-year note rate was virtually unchanged at 0.211%, leaving a 4.6 basis point decline intact for the week.

What sort of recovery might we see?

Fund managers Schroders in a report last week said it is forecasting a V-shaped recovery, with the US returning to its previous level of activity in the third quarter of this year.

“Not everything will come back at once and there will be some permanent damage, but the return to work will bring a significant reacceleration in growth, especially when supported by loose monetary and fiscal policy’’ said Schroders’ chief economist and strategist Keith Wade.