Monthly wrap for February 2023: Renewed US rate worries cut 3.1% off the STI

Date: March 1, 2023

  • The STI fell 3.1% in Feb to 3,262.63 on renewed US rate worries.
  • All 3 US indices fell over the month.
  • Market is now pricing in 25% chance of 50-points rate hike this month.
  • The month started off on a firm note but it didn’t last
  • US consumer price index data showed inflation is still a problem.
  • All 3 local banks reported strong earnings but will face headwinds.
  • Analysts divided over their outlook for the banks.
  • Singapore’s market cap down 4.3% at S$815.3b.


US Interest rate worries dragged the STI lower in Feb

After rising 3.5% in January, the Straits Times Index fell 103 points or 3.1% in Feb to 3,262.63 as doubts over the direction of US interest rates resurfaced. Wall Street too, came under pressure following the release of stronger-than-expected inflation data and comments made by key US Federal reserve officials about their resolve to keep their foot on the interest rate pedal.

As a result, according to the CME FedWatch tool, the federal funds futures market is now pricing in a 25% chance that the Fed will hike rates by 50 basis points at its March meeting. The market is also pricing in rate hikes at the two meetings that follow in May and June.

All 3 major US indices fell in Feb

The Dow fell 4.2% in February, as of Tuesday’s close, and is now down 1.5% for the year. The S&P 500 has fared slightly better, down 2.6% this month but about 3.4% higher in 2023.

The technology-heavy Nasdaq outperformed both, down 1.1% in February but remaining 9.4% higher so far this year.

The month started off well but it didn’t last

The US Fed at the start of the month delivered a widely-expected rate hike of 25 basis points which brought its short-term rate to a target range of 4.5-4.75%.

However, although Fed Chairman Jerome Powell sought to keep the focus not on the downshift in the pace of tightening but instead on the bank’s future steps – and on the “ongoing increases” in rates, potentially multiple, that bank officials see on the horizon, the US market chose to shrug off these warnings and instead appeared to latch on to hopes that an end to rate hikes is approaching soon.

As such, Wall St kicked the month off on a firm note, though this did not last for long. Things started to go south in the middle of the month after release of the January consumer price data which showed that while inflation fell on an annual basis from December, it accelerated on a monthly scale—a combination that contributed to pressure on US stocks and bonds.

Overall, the report showed that inflation is still coming down from year-ago levels, but a hot economy and tight labour market are keeping inflationary pressures strong across the board.

All three local banks reported strong earnings but will face headwinds

Thanks to higher net interest income (NIM), all three local banks reported strong earnings for their fourth quarters ended 31 Dec 2022 as well as for the full year.

For Q4, DBS reported a 68.5% rise in net profit to S$2.34b, OCBC reported a 34% rise to S$1.3b and UOB’s rise was 13.3% to S$1.15b.

The Business Times reported Moody’s Investors Service senior credit officer Eugene Tarzimanov saying he expects the three will further improve their profitability in 2023.

“Yet the pace of change will be less significant than last year because of growing funding and operating costs’’ he said.

The Straits Times quoted Fitch Ratings’ head of South and Southeast Asian Banks Tanya Gold saying loan growth is expected to slow in 2023. She expects only a 1% increase in loans for the 2023 financial year as slower economic growth dampens demand.

As for when the US starts to taper or reduce its interest rates, Phillips Securities analyst Glenn Thum was quoted saying he does not expect NIM to dip in the first two quarters.

“It will stay at an elevated rate of at least 2% and might even go higher than what the banks were guiding for the first two quarters, before moderating in the second half’’ said Mr Thum.

Analysts mixed in their bank recommendations

UOB Kay Hian raised its target price on DBS from S$45.35 to S$45.80 whilst RHB lifted its target for DBS from S$41.10 to S$42.

However, CGS-CIMB cut their DBS target from S$36.50 to S$35.70 on lowered NIM expectations given funding cost pressures. The broker has a “hold’’ call on DBS, said that the NIM upside from higher interest rates has already been priced in, whilst a pick-up in wealth management could take time to materialise as rates stay higher for longer.

For UOB, analysts largely maintained their calls. DBS analysts said UOB’s dividend yield of more than 5% continues to be attractive whilst RHB noted that with no specific negative developments, it remains “constructive’’ on UOB given its undemanding price.

However, CGS-CIMB cut their target for UOB from S$34.80 to S$33.30, taking into considerations the costs of integrating Citi’s regional consumer banking business. They did however, maintain their “add’’ call in the stock.

As for OCBC, Jefferies Equity Research said the bank missed estimates even though its final dividend of S$0.40 versus S$0.28 a year earlier beat expectations. Although OCBC has guided that it will target a payout ratio of 50%, the earnings miss will likely be received negatively by the market.

Keppel Corp reported a 40.6% year-on-year decline in net profit for its second half ended 31 Dec 2022 to S$429.1m on the back of lower revenue from continuing operations. For the full year, net profit was 9.4% lower at S$927m.

The Singapore Exchange (SGX) reported a 30.1% increase in net profit to S$284.6m for its first half of FY2023 ended 31 Dec 2022. This came on the back of a 9.6% rise in revenue to S$571.4m, driven mainly by increases in derivatives trading and clearing revenue, as well as treasury income.

Market cap down 4.3%

The total market value of the 632 stocks on the SGX fell 4.3% in Feb to S$815.3b. Keppel Corp was one of the biggest losers, its market cap falling S$3.8b to S$10b largely after it traded ex-distribution of Sembcorp Marine shares on 23 Feb. Also a notable loser was DBS, which lost S$4.2b at S$88.2b.

Inflight caterer and airline ground handler SATS also stood out following its announcement of a S$798m rights issue to help pay for its purchase of cargo firm Worldwide Flight Services. SATS’s market cap fell S$213.5m to S$3.2b.

The market cap of the 30 STI components fell 3.9% to S$537.1b. This is about 66% of the entire market.

Singapore’s NODX fell 25% in Jan

Singapore’s non-oil domestic exports (NODX) fell 25% year-on-year in January, the fourth consecutive month of decline. It was the worst start to a year since the US sub-prime crisis in January 2009, and outstripped the median fall of 21.9% forecast by economists in a Bloomberg poll.