Monthly wrap for June 2021: A slow but steady recovery for the first half

Date: July 1, 2021

  • The STI gained 287 points or 10.1% in 1H at 3,130.46;
  • The STI lost 34 points or 1.07% in June;
  • Main forces were economic recovery versus virus resurgence and US inflation;
  • Wall St has so far shrugged off inflation worries as transitory but investors should still be wary;
  • US Fed has signaled it might increase the tapering of its bond purchases;
  • Major news here – Keppel-SembCorp marine in talks to merge, CapitaLand to divest stakes in Raffles City projects and Hyflux to be liquidated.

The main forces at play

Over the course of June the Straits Times Index gyrated in line with three forces – on the one hand hopes that widespread vaccination programmes worldwide will soon see the reopening of many economies, whilst on the other, worries of a resurgence of Covid-19 cases and whether US inflation is a problem that will force the US Federal Reserve’s hand.

So far, optimism over a probable economic recovery has won the day – despite plenty of volatility along the way, the STI has managed a 287-points or 10.1% rise over the first half to 3,130.46, helped in part by a likely “window-dressing’’ push of almost 41 points on Wednesday, the last trading day for June.

Wednesday’s jump, however, was not enough to prevent the index recording a 34-points or 1.07% loss for the month. Still, the overall first half performance has almost recovered the entire 2020 loss of 11.7%.

US inflation – is it a problem?

Regular readers would recognize the word “transitory’’ which emerged last month in discussions on whether US inflation, the possible byproduct of trillions in monetary and fiscal injections, is a problem.

The reason for this of course, is that if the Fed thinks it needs to act to contain rising inflation, then it will a) raise interest rates and b) reduce or “taper’’ its monthly bond-buying programme.

The market’s concerns on this front arose because early in the month, the US central bank said that instead of buying, it will begin selling more than US$13 billion of corporate bonds, a sign that it is planning on becoming less accommodative.

The central bank’s bond buying was to help keep corporate borrowing costs down so companies could access capital during the pandemic. The Fed also at the time signaled that it may soon begin discussing a larger tapering.

Adding to this was a major wobble mid-month when the Federal Open Markets Committee meeting held on to its current policy but also signaled faster and sooner interest rate increases, with its forecast suggesting two increases in 2023. In addition, And the Fed increased its inflation forecasts for this year and next.

So far, the market’s consensus view is that upticks in some inflation indicators – most notable the Consumer Price Index – suggest that inflationary pressures are transitory and therefore likely to simmer down in the months ahead.

The outcome as far as Wall Street is concerned, was that apart from the occasional slide, the uptrend continued – as of 30 June, the S&P 500 had set five consecutive all-time highs. Since 1998, only 2019’s 17.4% first-half surge has been larger.

The outlook for the months ahead: inflation concerns to persist

Despite the current impression that US inflation is not a problem and the strength shown by Wall Street’s stocks, it’s likely that the market will continue to fixate on the timing of tapering of the Fed’s monthly purchases of US$120 billion in Treasuries and mortgage-backed securities.

Investors should note that comments from a number of Fed officials are increasingly suggesting that tapering should begin at the start of 2022 and the first interest rate increases, from the current range of 0% and 0.25%, could begin at the end of next year.

In addition, Market Watch on Wednesday pointed out that Eric Rosengren, the president of the Boston Fed, expressed concern over the housing market in an interview with the Financial Times, and it comes as data shows house prices soaring. The median price for an existing home sale skyrocketed 24% in May. Other house price measures also are surging.

The outlook for the months ahead: Singapore’s growth to continue

In a Strategy report this week, Maybank Kim Eng said Singapore’s latest social restrictions to battle a new wave of COVID infections is unlikely to derail growth, in our view.

“The GDP contribution of the most affected domestic sectors is limited, and these are better prepared to respond to lockdowns than a year ago. External demand matters more and here indicators remain positive. Nevertheless, we expect choppy markets as infection news flow intensifies’’.

Major local news:

  1. Keppel-SembCorp Marine discuss merging
    Keppel Corp and SembCorp Marine have started talks on merging their offshore and marine (O&M) assets with a view to leaving both in stronger positions.

    It is envisaged that the combined entity will be a listed firm with Sembmarine shareholders holding stock in it. Keppel will also receive shares and a cash consideration of up to $500 million, or a cash equivalent.

  2. Capitaland to divest stakes in Raffles City projects
    CapitaLand will divest partial stakes in a group of companies that own six of its Raffles City developments in China to Ping An Life Insurance for RMB46.7b. The transaction leaves CapitaLand to retain an effective stake of12.6% to 30% in each development, which includes Raffles City.
  3. Hyflux to be liquidated
    Failed water treatment firm Hyflux’s judicial managers Borelli Walsh (BW) last month filed an application with the court to wind up the company.

    BW said a restructuring is not possible and Hyflux’s remaining value is best realized in a liquidation.BW had previously been granted an extension for their terms of office until 14 July to see if a restructuring was possible.

    The news puts an end to the Hyflux saga which started in May 2018 when the company applied for court protection while it sought a viable debt restructuring plan.

    Later in the month, Middle East investor Utico said it was still prepared to try and rescue Hyflux, but BW dismissed the offer, saying that it did meet the requirements.