Monthly wrap for July 2021: Recovery versus Regression

Date: August 2, 2021

  • The STI gained 36 points or 1.15% in July at 3,166.94;
  • New domestic curbs caused worry that economic recovery could be affected;
  • Wall St continued to set new records despite growth concerns;
  • US inflation isn’t a problem yet: US Fed
  • China’s regulatory crackdown weighed on sentiment;
  • MAS lifted dividend cap on banks and finance companies

New domestic curbs – will they cause the economy  to regress?

As far as the Straits Times Index was concerned, July was not a particularly notable month with the benchmark gaining just 36 points or 1.15% at 3,166.94 over the four weeks.

There was no window-dressing push on the last day of trading – after the index jumped almost 39 points on Thursday last week thanks to rises in the three banks, it then fell back by about 14 points on Friday, probably in tandem with a 150-points slide in the Dow futures during Asian trading hours.

As it turned out, the Dow Jones Industrial Average did actually fall 150 points to 34,935 in US trading a few hours later. Still, Wall St had on Thursday hit yet another all-time high, so notwithstanding Friday’s correction, confidence in US equities clearly remains high.

The biggest concern domestically was how much impact the new curbs that kicked in during the month and extend until 18 August will have on growth. The view there was also some concern that the new Delta variant of Covid-19 will spread quickly globally and threaten the re-opening of economies.

So far, economists remain cautiously optimistic that the impact on domestic growth will not be that significant and that manufacturing, which has not been affected by the curbs, will continue to underpin positive growth this year.

The US inflation debate: still not a problem according to the Fed

Over in the US, the ongoing debate over whether inflation is a problem continued, with the US Federal Reserve sending mixed signals on what its next monetary policy move might be. In its latest Open Markets Committee meeting last week, it said it is moving closer to when it can start reducing massive support for the US economy, though Chair Jerome Powell said there was still some way to go while continuing to emphasize that inflation signals are only “transitory’’.

US bonds continued to benefit, 10-year Treasury yield continued to sink

Even as equities rose to record levels, there was a flight to safety into bonds that sent the 10-year Treasury yield below 1.3%. It ended the month at 1.23% after briefly dipping below 1.2% during the month. Its 2021 high was 1.7% in February. Bond yields and prices move in opposite directions.

China’s tough stand on several of its own sectors roiled markets

Among the more recent developments as the month progressed was China’s regulatory crackdown on companies listed in the US which started in mid-July and then extended into those operating in the technology, education and property sectors within its own borders.

On Tuesday last week, the Hang Seng Tech Index, a gauge of many Hong Kong-listed China stocks, plunged as much as 10% whilst the yuan slipped to its lowest since April against the US dollar.

The Hang Seng Index in the meantime, lost 4.1% on Tuesday after tumbling 4.2% on Monday, the largest two-day loss since Oct 2008.

Beijing has been attempting to rein in private enterprises it blames for exacerbating inequality, increasing financial risk and challenging government authority.

As one news report stated: “a seeming acceptance of short-term pain for stockholders in pursuit of China’s longer-term socialist goals is a rude awakening for investors’’.

For July, Hong Kong’s Hang Seng declined 1.35%, for a monthly loss of 9.9%, while the Shanghai Composite dipped 0.4%, bringing its monthly decline to 5.4%. The Nasdaq Golden Dragon China Index —which follows U.S.-listed Chinese tech—tumbled 20%.

US growth may not be that robust

It is worth noting that US stocks last Thursday hit new highs despite the country’s growth missing expectations by some margin.

The US economy grew at a seasonally-adjusted annualized rate of 6.5% in the second quarter, far short of Wall Street’s expectations and up just a touch from the first quarter. Economists had expected an 8.5% rise in second-quarter GDP, up from a downwardly-revised 6.3% rate in the first quarter.

The preliminary reading on gross domestic product places economic output above its pre-pandemic level for the first time. But the much cooler-than-expected rate of expansion underpins concerns that growth from the depths of the short but deep pandemic-induced recession has peaked.

MAS lifted dividend cap on banks

The Monetary Authority of Singapore on Wednesday last week announced it is lifting dividend restrictions on the local banks and finance companies. The outcome was that banks recorded large gains on Thursday that pushed the STI up 38.86 points or 1.24% to 3,180.61.

DBS led the way with a rise of S$0.43 or 1.43% gain at S$30.50 on volume of 5.85m. OCBC was next, gaining S$0.25 or 2.07% at S$12.32 with 9.4m traded whilst UOB added S$0.36 or 1.4% to end at S$26.28 on turnover of 3.6m. In all, the value traded in the three banks amounted to S$388m, or 25% of Thursday’s turnover value of S$1.51b.

MAS said the banks’ strong capital adequacy ratios “are projected to remain resilient” even if there is a “stalled global recovery associated with delays in vaccine deployment and a global resurgence in the pandemic due to mutated virus strains”.

In July and August last year, the MAS had called on banks and finance companies to cap their dividend per share (DPS) for FY2020 at 60% of FY2019’s DPS and offer shareholders the option of receiving the remaining FY2020 dividends as shares in lieu of cash.

RHB said the decision was positive because it signals confidence and strength in Singapore’s banking system and maintained an “overweight’’ on the sector. Moody’s noted the move follows a similar relaxation by the European Central Bank in July and the Fed in March. The ratings agency expects banks will increase their dividend payouts to pre-pandemic levels of around 50% of net income.