Monthly wrap for December 2022: A 1.18% loss for the STI – but still a gain of 4.09% for the year

Date: January 3, 2023

  • December’s main focus was the US FOMC which yielded a 50-pts rate hike
  • The accompanying statement was not dovish, so stocks came under pressure
  • The STI fell 1.18% for the month, but still managed a 4.09% rise for the year
  • All 3 US indices posted losses for the year
  • The 10-year US Treasury yield started the year at 1.5% and ended at 3.8%
  • China lifted its Covid-19 restrictions, shares of glove makers rose
  • Offer for Chip Eng Seng’s shares is “on balance’’, “fair and reasonable’’

In December, all eyes were on the Fed

The month of December was largely dominated by the same consideration that had dogged stock markets for most of this year – how much US interest rates would have to be raised to combat high inflation.

Prior to the Dec 13-14 Federal Open Markets Committee (FOMC) meeting, markets had risen sharply after comments by Fed chief Jerome Powell that suggested the central bank was shifting to a more dovish stance.

At a speech at the Brookings Institution, he said “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”

The Fed disappointed with its hawkish stance

However, at the meeting, although rates were raised by the widely-expected 50 basis points, the accompanying statement and projections were not what markets were hoping for – the Fed’s “dot plot’’, which shows the level to which Fed officials project rates will be raised, showed a level of 5.1%, beyond market expectations and above the September projection.

It was the central bank’s seventh rate hike of 2022 and followed four straight 0.75 percentage-point rises. It brought the fed-funds rate target range to 4.25% to 4.50%.

In the accompanying press statement, Mr Powell said he anticipates “that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time’’.

In addition, he said “the historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done’’. These hawkish comments sent stocks down again.

The Fed’s rate hike was followed by similar hikes by the Bank of England and the European Central Bank.

How the Singapore market fared

The net outcome as far as the Straits Times Index was concerned, was a loss of 6 points for the week and a fall of 39 points or 1.18% for the month at 3,251.32.

For the third quarter the STI recorded a gain of 30 points or 0.93% whilst for the year, it managed to add 128 points or 4.09%, after it had risen 9.8% in 2021.

How Wall St fared in 2022

The three main US indexes all posted losses for the year: The Dow Jones Industrial Average dropped 8.8%, while the S&P 500 shed 19% and the Nasdaq tumbled 33%.

The yield on the benchmark 10-year U.S. Treasury note peaked above 4.2% in October after beginning the year at 1.5%. It ended the year with a yield of 3.8% which means the 10-year has seen its biggest annual rise as far as data stretch back to 1977.

Investors had to contend with multiple issues this year, including consumer goods price inflation, central banks’ aggressive interest rate hikes, big losses for tech companies, and the collapse of the cryptocurrency exchange FTX. They also had to mull the possibility of a recession in 2023.

It was the worst year for the stock market since 2008, with volatility to match: The S&P 500 saw 46 daily moves of 2% or more in either direction, the most since the 2008-09 financial crisis.

Trading in the final week – mainly quiet

Trading in the final week of the year was a mainly quiet affair, which was not unexpected given that many players were away for the holidays. The STI traded within a narrow band, and average daily volume over the four trading days was S$553m, way below the S$1b average of previous weeks.

US economic data give rise to hopes that inflation might soon moderate

In US economic data, housing numbers released last Tuesday added to the sentiment that inflation is likely to further fall in 2023.The S&P CoreLogic Case-Shiller price index showed that U.S. home prices fell 0.5% in October from September, the fourth consecutive decline month over month. All 20 cities in the index posted monthly declines. The Federal Housing Finance Agency, or FHFA, the national housing index, came in flat versus September.

Home prices are a major component of the consumer-price index, and a decline will help the rate of inflation fall in 2023.

China decided to abandon its zero-Covid policy and lifted restrictions

China’s Shanghai Composite Index rose 1% on Tuesday after Beijing said it planned to lift Covid-19 quarantine requirements on international arrivals early next month.

The news also lifted the shares of glove manufacturers listed here. On Tuesday, the price of Medtecs jumped as much as 19.4% or $0.035 to hit an intraday high of S$0.215 in high volume of 18.9m. The counter ended the day at S$0.205, up S$0.025 or 13.9% with 23.7m done. Also benefiting were shares of Glove, which finished the day S$0.025 or 9.8% higher at S$0.28 on turnover of 18.2m.

“On balance’’, the offer for Chip Eng Seng is “fair and reasonable’’: IFA

The independent financial adviser (IFA) Xandar Capital for Chip Eng Seng’s privatisation offer said that “on balance’’ the $0.75 offer price per share is “fair and reasonable’’ despite it being at a 43.9% discount to the property firm’s revalued net asset value (RNAV) per share of S$1.3363, a discount that that drawn a query from the Singapore Exchange (SGX).

Responding to the query, the IFA said whilst the discount is high, it concluded that the offer is fair because the factors against did not outweigh the factors for the offer.

Xandar said supporting the “for’’ side are 8 factors with financial metrics equal to or above the value or valuation of Chip Eng Seng’s shares, whilst only 3 are below and are “against’’ the fairness.

Among the valuation statistics used were premium or discounts to VWAP (volume weighted average price), P/E (price/earnings) ratio, EV/EBITDA (enterprise value/ earnings before interest, tax, depreciation and amortisation) ratio, P/NAV (price/net asset value) ratio and P/RNAV (price/revalued net asset value) ratio.

As for the reasonableness of the offer, the IFA said it should consider other matters, including the existing voting rights of the offeror and its concert parties, and the liquidity of Chip Eng Seng’s shares.