February market wrap – Volatility, GST hike and…market resilience?

Date: March 1, 2018

February will be remembered for the return of volatility, the realization that stocks cannot keep rising indefinitely and the Government’s Budget in which it was announced that Goods & Services Tax will be raised from 7 to 9% sometime from 2021 onwards, news that has dominated headlines and discussions since it was announced.

It will also be remembered for a fall in US bond prices because of inflation fears, a rise in the 10-year Treasury yield to just below 3% and a huge spike up in the VIX Index, suggesting that complacency (or greed, if you prefer) had been replaced by a hefty dose of fear.

Last but not least, there were corporate governance issues that emerged surrounding Midas Holdings and Datapulse Technology that gave the media and commentators plenty to write about.

Despite all of the above however, stocks did ultimately avoid a total collapse, staging a notable comeback in the second half from alarming plunges in the first half, so bulls might quite justifiably argue that the positive picture remains intact and that investors should buy the dips whilst staying invested to ride out the troughs which lie ahead. Only time will tell if this assessment holds true.

For the month, the Straits Times Index lost 16 points at 3,517.94, bringing its year-to-date performance to 3.4%. It suffered its largest single-day loss for the month on 6 Feb when it fell 76.55 points or 2.2% to 3,406.38 in response to an overnight collapse on Wall Street that saw the Dow plunge 1,175 points or 4.6% to 24,345.

The key factor throughout the turmoil in US markets has been fluctuations in the 10-year Treasury yield brought on by interest rate and inflation worries. Some observers have forecast that if this crosses 3% then stocks will really be in trouble, so it comes as no surprise that the Dow’s first 1,000+ plunge of the year on 5 Feb mentioned above came in tandem with the yield jumping to a high of 2.88% after release of a wage report suggested to the market that the US Federal Reserve might raise interest rates four times this year instead of the expected three.

The Dow’s second 1,000+ points plunge of 2018 came just three days later on 8 Feb when it lost 1,032 at 23,860 but even though the futures market had signaled pressure ahead on that day, the Straits Times Index actually rose sharply, thanks largely to DBS’s announcement of a S$1.20 dividend that came after the bank said its 3Q earnings had risen 31% to S$1.19 billion. The selling on 9 Feb took the STI down to its 2018 low of 3,377 but thereafter, it rebounded in line with Wall St, bolstered mainly by gains in the banks, thanks to their announcements of solid earnings.

The rebound was largely because the US market chose to focus on an improving economy rather than volatility in the Treasury market or changes in interest rate expectations. As the month drew to a close however, Wall St-led pressure returned. On Tuesday this week, comments by US Federal Reserve chairman Jerome Powell in his inaugural testimony to the Financial Services Committee revived worries of four instead of three rate hikes this year. The 10-year Treasury thus jumped five basis points that day to 2.915 per cent.

As for the local market, daily volume stayed consistently above the industry’s ballpark breakeven point of S$1 billion. Wednesday’s turnover of 2.1 billion units worth S$2.1 billion was the highest since S$2.2b was traded three weeks earlier on 7 Feb, though this should come as no surprise since spikes in volume are to be expected on the last trading days of each month.

If banks turned in a positive set of results and thus supported the STI, on the other end of the earnings spectrum, beleaguered commodities firm Noble Group on 20 Feb warned that it is expecting a 4Q net loss of US$1.7-1.9b, which would bring its net loss for the year ended 31 Dec 2017 to between US$4.8-5b. The expected loss will lead to a negative asset position for Noble, although the company believes that a proposed debt restructuring should “restore shareholders’ equity and create a sustainable capital structure”. Noble’s shares ended the month at S$0.172.

Also, in the red was SembCorp Marine (SMM) which reported a Q4 net loss of S$33.4m, reversing a net profit of S$34.3m the previous year. Turnover was 21 per cent lower at S$655m mainly due to lower recognition for rigs and floater and offshore platform projects. Traders might recall that SMM was queried by the Singapore Exchange on 12 Feb for reasons why its shares collapsed S$0.32 to S$2.37 that day. The company replied that it did not know of possible reasons. Since its latest earnings release on 22 Feb, SMM’s shares have fallen S$0.51 or 19.4% in five trading days.

Two other prominent names to report losses were Golden Agri Resources and Hyflux. The former announced it lost US$29.1m for its 4Q ended 31 Dec 2017, whilst the latter said for 2017 it suffered a net loss of S$116.4m.

Early in the month, China railway firm Midas said during the course of audit and subsequent searches by the Company’s counsel, it has uncovered several litigations, enforcement orders and court documents involving companies within its group.

“Amongst these, there is an enforcement order filed against Jilin Midas Aluminium Industries Co., Ltd, a wholly-owned subsidiary of the Company incorporated in the People’s Republic of China (“PRC”), for previously undisclosed liability in the amount of RMB30 million”.

“Based on available information, about RMB12 million out of unaudited ledger balances of RMB873 million as at 31 December 2017 for our PRC subsidiaries were frozen by court orders” said Midas. Its shares have been suspended since 8 Feb.

Datapulse in the meantime, has been the target of criticism following the purchase of Wayco Manufacturing one day after Datapulse constituted a new Board. The company has now been instructed by SGX to appoint independent professionals by 9 March to undertake a review of Datapulse’s internal controls and corporate governance practices.

Last but not least, day traders would know that the STI usually tracks movements in the Dow futures and the Hang Seng Index, though not necessarily in that order, and that this link was very much evident throughout most days in Feb.