Monthly wrap for April 2019: STI at highest point for 2019, above 3,400

Date: May 2, 2019

  • Despite economic headwinds, STI rose to highest level this year;
  • For the month, the STI gained 188 points or 5.8% at 3,400.2 driven mainly by banks;
  • Rerating of banks came after DBS announced quarterly dividends and record profits;
  • US interest rates likely to be held steady despite Trump pressure;
  • IMF’s downgrade of world economy was shrugged off;
  • Companies in focus: Hyflux, Best World


US-China trade: No deal? No problem!

Over the course of the month, stocks rose on hopes that the US and China would soon end their trade differences – even though there were no concrete announcements to that effect and despite the US threatening tariffs on Europe.

Major economic announcements were mixed – early in the month the International Monetary Fund cut its outlook for global growth to the lowest since the financial crisis amid a bleaker outlook in most major advanced economies and signs that higher tariffs are weighing on trade, whilst China’s numbers which have been weak lately showed some signs of improvement.

The world economy will grow 3.3 percent this year, down from the 3.5 percent the IMF had forecast for 2019 in January, the fund said in its latest World Economic Outlook. The 2019 growth rate would be the weakest since 2009, when the world economy shrank. It’s the third time the IMF has downgraded its outlook in six months. As for the US, figures released last week showed that US GDP grew at a faster-than-expected pace of 3.2% in the first quarter of 2019.

Fed likely to stay its hand

As for US interest rates, the outlook is mixed. The US Federal Reserve has been dovish lately (ie. it has appeared reluctant to raise rates too quickly) but last week it came under pressure from US President Trump to cut rates. Mr Trump said China’s economy is doing well because the government was providing stimulus whilst keeping interest rates low. The Fed meets this week for a two-day Open Markets Committee meeting and most observers do not expect it to bow to political pressure and lower rates, though by the same token no one expects a rate hike.

Instead, given the unexpectedly strong first-quarter headline growth data released last week, the Fed may choose to update the language in its statement reflecting a sturdier performance by the economy.

Countering that is the sluggish performance of core inflation, however, which slowed to a 1.6 per cent year-on-year rate in March, according to the Fed’s favoured gauge. Poor inflation readings remain a major cause for debate in the Fed, as the central bank tries to figure out why unemployment of just 3.8 per cent and firm growth are not generating more upward price pressures.

The STI didn’t just push above 3,300 but also 3,400

The Straits Times Index throughout April took its cues either from Wall Street, China or both. For the most part it was the three banks which drove the index and towards the latter part of the month the index managed to not only break above the troublesome 3,300 mark but also 3,400.

The latter breakthrough came this week on Monday when DBS announced that Q1  profit rose 9% to a record $1.65b and that it has decided to now pay quarterly dividends instead of every six months. Not surprisingly, DBS’s shares jumped $0.99 or 3.6% to $28.40, taking with it the other two banks – UOB and OCBC gaining 2.5 and 2.6% respectively.

Although analysts welcomed DBS’s numbers, some recommended caution. OCBC Investment Research said Monday’s rise had taken the stock close to its fair value and called a “hold’’ on DBS, adding that it would be a buyer at $27.50 or lower. Phillip Securities also downgraded the stock to “accumulate’’ with $29 fair value largely because of the way it has risen lately.

Hyflux’s woes continued

Troubled water treatment firm Hyflux was regularly in the news last month. First came news in early April that Hyflux was terminating the restructuring agreement with its “white knight’’ rescuer from Indonesia SMI, then came news that both parties were taking legal action against each other, apparently in order to secure the $38.5m deposit that SMI had paid.

Later in the month Hyflux chief executive Olivia Lum announced she would accept a salary of just $1 per year until the company is successfully restructured. At the same time Hyflux announced it has another possible white knight who might be prepared to invest $400m, a party that was described as a developer and owner of water and power utilities in the Middle East. Hyflux said the money would be used for equity and working capital purposes as well as interim funding.

However, the High Court last week did not grant Hyflux the 3-month extension it was seeking to its debt moratorium. Instead, the company was given only one month. At the same time, a group of seven banks has applied to be carved out of the moratorium so they would be able to file applications to place Hyflux and its subsidiary Hydrochem Singapore to be put under judicial management.

And so did Best World’s

Beauty products firm Best World’s franchise sales in China has come under scrutiny over the past few months following a Business Times article that questioned how the company was generating revenue in China. Since then the company has said it will appoint a special auditor to report on those sales but last month a short seller named Bonitas Research weighed in with a negative report, prompting the Singapore Exchange’s regulatory unit to intervene. The unit said it is aware of the report and has ordered Best World’s independent reviewer to report directly to SGX. Best World’s shares were suspended from trading at $1.62 on 24 April after Bonitas’s report was circulated.