Monthly wrap for June 2019: Of trade wars and interest rate cuts

Date: July 1, 2019

  • The Straits Times Index rebounded 204 points or 6.5% in June;
  • Gain for the first six months was 253 points or 8.2%;
  • Main push for the month came from hopes that the US Fed and other central banks will cut interest rates;
  • These hopes were thrown in doubt last week by Fed officials;
  • Property developers saw action on news of land supply curbs;
  • Banks and Reits were also in focus

After May’s plunge, a “technical rebound’’ in June?

The Straits Times Index lost just over 9% in May, a plunge that is arguably steep enough to warrant some sort of quick rebound soon after. Whether or not such a rebound is deemed to be due to “technical’’ factors is best left open to debate, possibly because few people can properly explain what a “technical rebound’’ really means.

By the same token, the sharpness of the rebound for the first three weeks of June when the index rose sharply then left the door open for a pullback at some stage, and this duly arrived last week. On Friday, the index drifted to a 6.99 points loss at 3,321.40.

The local market’s capitalisation for June was $933.9b, 3.3% higher than at the end of May. The largest gainer was Singtel, whose market cap grew by 9.4% or $4.9b.

Trade war concerns took a backseat to interest rates

May’s pullback was largely because of escalating trade tensions between the US and China. Although these tensions have existed for more than two years, markets had been lulled into a false sense of complacency by positive overtures from both camps, particularly the US. This changed when the US slapped tariffs on more Chinese goods and imposed sanctions on China’s tech giant Huawei.

The rebound in June was mainly thanks to hints from the US Federal Reserve that because the trade war was adversely affecting the US economy, interest rates might have to be cut.

However, all eyes will on the currently ongoing G-20 summit in Japan to see if there might be more developments on the US-China trade front.

The irony – or perversity – of this reasoning should not be lost on investors – stock prices, which in theory rise in anticipation of an economic recovery, instead rose in June because there might be an economic slowdown.

US rates likely to be cut in July – or will they?

On Tuesday however, Wall Street stocks fell after yields on Treasury debt fell, and St. Louis Federal Reserve President James Bullard said investors shouldn’t expect a half-percentage point rate cut in July.

Fed Chairman Jerome Powell said separately that officials were debating whether trade policy uncertainty will cause the economy to slow and warrant rate cuts later this year. He said the Fed will take a “wait and see’’ approach given how recent rapid economic changes have been, and added that the Fed is “insulated from short-term political interests’’.

Both these developments jolted investors who at the time were convinced that a July rate cut was on the cards.

In local news – government to limit land supply in 2H

In early June, the government announced it will curb land supply for the second half of the year because of falling demand after cooling measures were introduced last year.

The news thrust shares of property developers into play, temporarily boosting daily volume above the $1b mark.

Banks were the main focus – again

In Singapore, banks have been the market’s mainstays for the past few years thanks to expected higher interest rates which are seen as being good for their bottom lines.

In its 25 June Singapore Stock Pulse, DBS Equity Research focused on the bankings, and said modest net interest margin (NIM) expansion and mid-single digit loan growth continues to support earnings growth.

“Fed (interest rate) cuts may spur liquidity-driven rally, but would pose downside earnings risks for banks in FY20F’’ said DBS. “Singapore banks’ valuation should be supported by strong capital levels and decent dividend yields amid benign credit environment’’. It added that UOB is its top pick with S$29.20 target price, and that it has downgraded OCBC to HOLD with S$11.50 target.

Maybank Kim Eng said in a 24 June report that its economics team has dropped its 3-month SIBOR forecasts by 20 basis points for 2019 and by 40bps for 2020.

“This could squeeze NIMs for banks. Our sensitivity analysis suggests the impact in FY19 will not be material. Lower interest rates may also defer NPLs (non-performing loans) and keep credit charges low, mitigating margin squeeze. An economic pick-up may result in higher loan growth while the yield-seeking may drive wealth management fees. Overall, we believe the sector will be able to defend dividends. Prefer UOB’’ said the broker.

UBS Global Wealth Management in the meantime, said last week that although the banks were beginning to look attractive, Reits were starting to look overpriced.

UBS started the year being “overweight’’ banks and Reits. It said the banking sector has underperformed while Reits have outperformed the benchmark index so far, adding that evidence of earnings growth and return on equity expansion could support a rerating of the banks.

“We expect banks to deliver earnings growth on the back of resilient loan growth, stable asset quality and net interest margin expansion’’ said UBS. However, UBS said Reits’ valuations look rich with dividend yield one standard deviation below its long-term average and several Reits trading at multi-year highs.

According to SGX, STI stocks which have gained 10% or more in June include Golden Agri, City Developments, CapitaLand Commercial Trust, Yangzijiang shipbuilding, UOL, CapitaLand and CapitaLand Mall Trust.