Fears of a US hard landing sent stocks plunging

Date: August 5, 2024

• The STI lost the 3,400 level, down 45 points or 1.3% at 3,381.45
• Main worry from Wall St is that the US economy may suffer a hard landing
• SIA’s shares took a beating after profit fall
• Seatrium announced profit turnaround, stock takes a beating
• UOB’s Q2 profit was up 1% to S$1.43b, declared dividend of S$0.88 per share
• OCBC’s Q2 profit up 14% to S$1.94b
• STI’s 7-month total return was 9.6%: SGX Research

Wall St’s plunge sent the STI below 3,400

Wall Street’s sudden worry that the US economy will not experience a soft landing sent its major indices tumbling last week, dragging the Straits Times Index below the 3,400 mark with a loss of 45 points or 1.3% at 3,381.45.

Average daily volume spiked up to S$1.37b from S$1b the week before.

No soft landing for the US economy?

On Wednesday, US stocks rose after the latest Federal Open Markets Committee meeting, after which the Fed left the door wide open for a September interest rate cut.

However, US stocks plunged on Thursday and Friday after economic data was released that called into question the previous widely-held view that the economy was headed for a “soft’’ landing, ie. stable growth amidst benign inflation.

On Thursday, the Institute for Supply Management said that its manufacturing PMI dropped to 46.8 in July, the lowest reading since November, from 48.5 in June. A PMI reading below 50 indicates contraction in the manufacturing sector, which accounts for 10.3% of the economy.

On Friday, the US Labour Department announced that the economy created fewer jobs than expected in July, showing further cooling in the labour market from last year’s overheated levels. Employers added 114,000 nonfarm payrolls last month, below expectations for a gain of 175,000.

For the week, the S&P 500 and the blue-chip Dow Jones Industrial Average both retreated 2.1% each, while the Nasdaq Composite slipped -3.4% into correction territory.

The market narrative has changed in a matter of days, and concerns now abound that the Fed has slowed down the economy too much and has not eased policy soon enough. The latest nonfarm payrolls report has stoked recession worries, and investors will be paying close attention to upcoming economic data.

SIA’s shares took a beating after profit fall

Singapore Airlines (SIA) reported a 38.5% fall in net profit to S$451.7 million in its first quarter ended 30 June. In response, the market sold off its shares with the price plunging almost 11% on Thursday.

Weaker operating performance, a reduction in net interest income, lower surplus on disposal of aircrafts and spare engines, and a lower share of profit from its associated companies contributed to the decline in net profit.

Revenue rose 5.3% year on year to S$4.7 billion for the quarter whilst passenger flown revenue grew 4.1% to S$3.8 billion, supported by a 13.8 per cent increase in passengers carried and strong load factors.

Group expenditure was up 14 per cent at S$4.2 billion. Fuel expenditure rose 30.1 per cent to S$1.4 billion, while non-fuel expenditure increased 7.7 per cent to S$2.9 billion.

On Thursday after the stock went ex-dividend for a payment of S$0.38 per share, the counter closed S$0.73 or 10.5% down at S$6.24 on volume of almost 32 million traded. Factoring in the fact that the stock traded ex-dividend, the fall was S$0.35 or about 5%.

According to a Straits Times report, analysts said investors might hold back from buying the stock until there is more clarity on the earnings outlook. It quoted Raymond Yap from CGS International as cutting his SIA target price to S$5.88, citing falling passenger yields, rising operating costs and moderating cargo yields whilst downgrading his recommendation to “reduce’’.

Citigroup on the other hand maintained its “neutral’’ rating on SIA with a S$6.76 target. “We believe investors could find SIA’s bull case a challenge in the near-term as unit passenger pricing declines against unit cost inflation’’ it said.

Meanwhile, Maybank Securities said “Looking ahead, demand for air travel is expected to stay healthy in the upcoming months but passenger yields are likely to stay below the previous year’s levels as more capacity enters the markets, particularly in the Asia-Pacific region’’.

Seatrium announced profit turnaround, stock takes a beating

Offshore and marine specialist Seatrium on Friday marked its turnaround with a net profit of S$36 million for the first half ended Jun 30, reversing from a net loss of S$264.4 million in the corresponding year-ago period.

Revenue for the half year rose 39.1% to S$4 billion, from S$2.9 billion the year before. The group attributed the increase to recognition from new-build projects, and increased repairs and upgrades activities.

Seatrium said its return to profitability reflected its strong focus on executing projects and improving margins. This is the first time the company has reported profits for the half-year period since its formation in 2023.

However, on Friday Seatrium’s shares plunged S$0.19 or 11.3% to S$1.49 on volume of 96.7 million, making it the STI’s worst performer that day when the index dropped 38.39 points or 1.12%.

UOB’s Q2 profit was up 1% to S$1.43b, declared dividend of S$0.88 per share

UOB reported a 1% increase in net profit for its second quarter ended 30 June to $1.43b thanks to double-digit fee income growth and lower credit allowances

Excluding one-off expenses incurred in the acquisition of Citigroup’s consumer banking businesses, the bank’s net profit for Q2 would have been S$1.49 billion – beating the S$1.47 billion consensus forecast in a Bloomberg survey of three analysts.

Net fee income for Q2 grew 18% year on year to a near historical high of S$618 million, driven by a rebound in loan-related and wealth management fees, as well as double-digit growth in credit card fees.

Net interest income for the quarter fell 1% to S$2.4 billion due to a moderation in net interest margin. Net interest margin was down seven basis points to 2.05% for the quarter, from 2.12% in the previous corresponding period.

UOB declared a dividend of S$0.88 per share for the half-year ended Jun 30, up from S$0.85 per share in the same period a year before.

OCBC’s Q2 profit up 14% to S$1.94b

For Q2 ended Jun 30, 2024, OCBC’s net profit rose 14% to S$1.94 billion, underpinned by income growth and a decline in allowances.

The earnings – which OCBC said were the second-strongest on record, behind last quarter’s profits – beat the S$1.81 billion consensus forecast in a Bloomberg survey of four analysts.

Total income rose 5 per cent on the year to S$3.63 billion, with NII inching up 2 per cent to S$2.43 billion.

The slightly-higher NII was led by a 5 per cent increase in average assets, and partially offset by a six basis point (bps) drop in NIM to 2.2 per cent year on year.

OCBC declared an interim dividend of S$0.44 per share for the first half year, up 10% from S$0.40 the year before. This represents a payout ratio of 50% of the group’s net profit for the first half of the fiscal year 2024.

STI’s 7-month total return was 9.6%: SGX Research

SGX Research in its latest Market Update said STI added 3.7% in July, bringing the seven month total return to 9.6% and that while the banks averaged 2.8% gains for the month, both the iEdge S-REIT Index and iEdge SG Manufacturing Index generated 5.5% total returns compared to the 1.2% rise in Sing dollar terms posted by the FTSE APAC Index.

SGX Research also reported that Singapore stocks booked S$198 million of net institutional inflow on the month, reversing more than 15% of the net outflow in 1H24 and that last month the three banks saw S$38 million of net inflow, the iEdge S-REIT Index saw S$19 million of net outflow, and the iEdge SG Manufacturing Index saw S$76 million of net inflow.

“The STI ended July with its P/B (price/book) ratio at 0.3 standard deviations (s.d.) above the five-year historical mean. By comparison, the iEdge SG Manufacturing Index P/B ratio ended at 0.4 s.d. above its mean and the iEdge S-REIT Index ended the month at 1.2 s.d. below its mean’’ said SGX Research.

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