Hopes of lower rates beats slowdown fears

Date: June 24, 2019

  • The STI rose 98.77 points or 3.1% over the week to 3,321.40;
  • Volume also improved, with daily totals topping S$1b;
  • Prices rose because of hopes of lower interest rates, stimulus measures;
  • US-China trade could see some developments as Trump meets Xi at G-20;
  • Banks and Reits see the most action, Fortune Reit to delist from SGX

Hopes of more easing (and possibly easy money) underpin gains

Stock markets often behave in ways that may not make economic sense and the present rebound which has lasted about three weeks now appears to be one such case.

On the one hand it is the prospect of lower interest rates which has continued to drive prices higher, enabling the Straits Times Index to add almost 100 points or just over 3% per cent over last week to 3,321.4. Turnover also picked up, with daily business regularly crossing S$1b.

On the other hand however, markets are ignoring the fact that the reason for possible US rate cuts later this year is that the ongoing US-China trade dispute is not taking a toll on just China but now also the US, and that growth everywhere is being revised downwards.

In other words, stock prices, which in theory are supposed to discount future economic conditions, are rising despite expectations that the global economy will slow in the months ahead.

Put differently, the prospect of more easy money appears to be holding sway at the moment, relegating other, more fundamental concerns, to secondary importance.

More easy money – The US Federal Reserve was the first major central bank to signal a possible rate cut

The dotplot from latest Federal Open Markets Committee meeting last week showed that eight members favoured one cut this year, eight voted in favour of the status quo and one still wants a rate hike.

Although the FOMC voted to keep rates steady at 2.25-2.5%, Fed chair Jerome Powell said in the accompanying press conference some officials believe the case for accommodation has “strengthened’’, adding that policymakers were concerned with some recent economic developments.

His comments were interpreted as dovish and have prompted the US Treasury market to now price in a 100% chance that the Fed will cut rates in July.

On Thursday, the Reserve Bank of Australia governor strongly hinted that rates would be cut next month whilst some observers have also suggested that the government might have to print money to support the struggling economy.

Similarly, the Bank of Japan kept interest rates steady on Thursday but its governor Haruhiko Kuroda signalled readiness to ramp up stimulus as global risks could the economic outlook. Also hinting of more stimulus ahead was the European Central Bank’s  (ECB’s) Mario Draghi.

The ECB foresees “lingering softness” in the short term, in particular due to geopolitical factors and trade conflicts, which have weighed on exports and on the manufacturing sector — two important drivers of economic growth in the euro zone.

What of the US-China trade war?

According to some reports, news that China’s President Xi Jinping and US President Trump are to meet at next week’s G-20 summit in Japan has played a part in pushing stocks up. This suggestion is based on a) the two leaders reaching a mutually acceptable deal or b) trader banking on “buying in anticipation’’ irrespective of the outcome of the meeting.

In the estimation of most analysts, a) is unlikely to occur. The two leaders have met a few times already and although the public relations machinery touted the meetings as constructive, trade relations have deteriorated steadily. As a result, b) appears to be more plausible.

Still, there is the possibility that if the two leaders do not engage amicably, this would place pressure on the Fed to cut rates quickly – something which Trump has been lobbying for over the past few months.

Local stocks in the news – banks, Fortune Reit, S-Reits

Banks have provided the main blue chip play in the local market over the past few years and it was the same story last week. For example, DBS on Wednesday alone jumped S$0.63 or 2.5% at S$25.43 with 7.3m shares traded.

OCBC Investment Research that day upgraded its recommendation on DBS to “buy’’ with a fair value of S$29.18. The broker’s head of research Carmen Lee noted that DBS’s shares had fallen by 16.2% over a 5-week period from a recent high of S$28.64 to a low of S$24.01.

She added that US-China trade tensions were one of the main reasons for the slide, along with weaker interest rates. She also likened DBS to a Reit because of its quarterly dividend payouts.

Hong Kong and Singapore dual-listed Fortune Reit last week announced it will delist from the mainboard. Its manager ARA Asset Management cited overheads, compliance costs and low trading volume on SGX as the reasons for the decision.

The Reit has a primary listing in Hong King and a secondary listing here. The average daily volume between June 2018 and May 2019 was 2.4m units in Hong Kong versus 62,000 on SGX. Furthermore, all its properties are in HK, the unit price is quoted in HK dollars in HK and in Singapore.

The Business Times on Friday reported that Morgan Stanley in a Thursday research note acknowledged that except for industrial Reits, Singapore Reots or S-Reits posted disappointing results in the first quarter.

Notwithstanding this, the US investment bank believes current valuations should be supported by a benign interest rate outlook and increased redevelopment potential. Its top pick is Ascendas Reit because “it is the best proxy for defensive Reits and could benefit from redevelopment projects’’.