Monthly wrap for January 2019: An encouraging start to the year

Date: February 4, 2019

  • STI gained 122 points or 4% for January;
  • Inconclusive US-China trade talks and Fed’s interest rate intentions were main focus;
  • A hawkish Fed at the end of 2018 morphed during January into one that appears dovish;
  • Slowdown in China’s and Europe’s economies capped rises;
  • US bond yields rose over the month;
  • Turnover in local market showed signs of slight improvement;
  • SGX hopes to gain authority to order second audits if it deems it necessary.


As goes January

There is a market saying which states “as goes January, so goes the rest of the year’’. In plain terms this means that January’s performance is thought to set the tone for the remaining 11 months, so if stocks rose during the month, then the market should remain firm throughout the year.

This maxim unfortunately did not play out in 2018 when the Straits Times Index rose sharply in January but then registered a 10% loss for the year. Investors however, might be hoping that this year will be different, and that history doesn’t repeat itself because once again the STI has recorded a rise in the first month of the year, this time by 122 points or 4 per cent at 3,190.97.

Where it might head between February to December is anyone’s guess, but much would depend on the two factors which formed the main investment backdrop for 2018.

US-China trade talks

The first factor has been present for about two years now year, though the market only seriously came around to it around 6-9 months ago – US-China trade tensions. Prior to that investors treated the threat posed to global trade by the conflict with a great deal of indifference, such that the numerous twists and turns surrounding the talks were brushed off as being largely inconsequential.

The latest development however, appears to have grabbed the market’s attention – last week, US prosecutors filed charges against China’s tech giant Huawei, accusing employees, executives and even its founder of repeatedly lying to government officials and business partners for the Chinese company’s benefit. Documents outline in detail an alleged scheme to pay employees to steal trade secrets.

In response, Huawei denied that it or any of its subsidiaries or affiliates have committed any of the crimes listed in the indictments.

Whatever the outcome the worry is that the US’s move plus the arrest of Huawei’s chief financial officer in Canada last month muddies the already-murky waters swirling around the trade talks.

The US Federal Reserve and interest rates

Like the US-China trade situation the second factor has also been an ever-present for many months now –  what the US Federal Reserve might do with regards to interest rates. In this connection Fed boss Jerome Powell has played a pivotal role – his comments in October about the central bank not being done with its rate hikes sent stocks spiraling down; the statement last week after the year’s first Open Markets Committee meeting about being patient when it comes to rate hikes sent stocks surging.

Goldman Sachs noted that Chairman Powell stated that the length of the ‘patient period’ would depend entirely on incoming data, and also stated that the policy stance was ‘appropriate’ at this time, with the policy rate now in the range of the Committee’s estimates of neutral.

“Powell’s comments on the balance sheet appeared to modestly increase the odds of an eventual move to a slower pace of normalization. We viewed both the January statement and press conference as dovish and have reduced our subjective odds of a March hike to less than 5% (from 10% previously) and our Q2 hike probability to 25% (from 55% previously)’’ said Goldman.

Global and China’s growth

On 21 Jan, China reported that its GDP growth for 2018 was the slowest in 28 years and the International Monetary Fund cut its global growth forecast for the second time in three months.

China’s numbers were hit by weak domestic demand and the ongoing trade dispute. Its final GDP figure for last year was 6.6% growth, down from 6.8% in 2017. The release of the numbers coincided with a warning by President Xi Jinping that the country faced deep and complicated challenges.

On the same day, IMF’s managing director Christine Lagarde said “after 2 years of solid expansion, the world economy is growing more slowl, and risks are rising. Does that mean a global recession is around the corner? No. But the risk of a sharper decline in global growth has certainly increased’’.

The IMF predicted that the global economy will grow at 3.5% this year and 3.6% next year, down from its last downgrade in Oct, largely because of slowdowns in China and Europe.

Apple’s and Amazon’s earnings

US corporates in Jan generally reported a mixed bag of earnings. On 2 Jan for example, Apple shocked the market when it lowered its guidance for its December quarter. Its statement read “while we anticipated some challenges in key emerging markets, we did not forsee the magnitude of the economic deceleration, particularly in Greater China’’. Between 2 and 3 Jan the Dow Jones Industrial Average plunged a total of 1,012 points.

On Thursday last week, Amazon reported a fiscal fourth-quarter profit of US$6.04 a share, beating Wall Street’s forecast for US$5.63. Revenue of US$72.4 billion also topped expectations for US$71.87 billion. (In the same quarter a year ago, Amazon reported earnings of US$3.75 per share on US$60.5 billion in revenue).

However, Amazon forecast first-quarter net sales of $56 billion to $60 billion, lower than the $60.83 billion expected from analysts.

US bond yields in the meantime, rose gradually throughout the month. The 2-year Treasury started January yielding 2.391% and ended at 2.46%, while the 10-year’s move was from 2.556% to 2.629%.

In local news…

SGX to tighten audit, valuation rules

The Singapore Exchange in January announced it is proposing a new power to require the appointment of a second audit, on top of the normal audit, but only in exceptional circumstances. The intention is to write this into the Listing Rules after consulting the market.

Market cap up 3%

The Singapore market’s total capitalization rose 3% in January to $919.4 billion. The 30 STI components’ value rose 3.5% or $19.1b to $564.8 billion. The strongest performing sectors were mining (up 9%), manufacturing (up 7.9%), Reits (up 7%) and construction (up 6.2%).