Monthly wrap for March 2022: Climbing a wall of worry

Date: April 1, 2022

  • The STI climbed a wall of worry to rise 166 points or 5.1% to 3,408.52 over the month
  • The STI’s first quarter gain was 9.1%
  • The rise came despite was in Ukraine and the US Fed signalling it will be aggressive in raising interest rates
  • Oil prices weakened after news that US will tap its reserves
  • The US Treasury yield curve inverted twice during the week
  • US inflation is still running red hot
  • Banks and hospitality Reits were best performers
  • Sembmarine gave notice of 3 years of losses
  • Market cap rose 2.8% to S$884.2b

Stocks managed to climb a “wall of worry’’, STI up 9.1% in 1Q

The Straits Times Index managed a 166 points or 5.1% gain at 3,408.52 over the month of March, which might lead to quite a few raised eyebrows given that the war in Ukraine is dragging on, oil prices are still elevated and the US Federal Reserve has signalled it will raise interest rates seven times this year and hinted that it will have to be aggressive in fighting inflation, which would mean larger-than-expected rate hikes.

In the final week of the month hopes of a ceasefire this week helped support prices, but most of the gains had already come before news of talks between Ukraine and Russia. Furthermore, those hope were dashed after reports Russian shelling of Ukrainian cities continued unabated.

According to some observers the ability of equities to climb the proverbial “wall of worry’’ posed by the negative factors cited above is possibly because conditions had not worsened in the five weeks since Russia invaded Ukraine; in other words, no additional bad news has been taken as good enough news to buy the dip.

Furthermore, most experts are not predicting a recession yet, and there’s ample liquidity to provide support.

Whatever the case, the STI is proving resilient to external shocks. It has risen 284.84 points or 9.1% in the first quarter, a figure that rises to 9.6% if dividends are included.

Oil prices fell on ceasefire hopes and US’s announcement to release reserves

News emerged on Tuesday that Russia would significantly reduce its military activity near Kyiv and that the two sides would hold ceasefire talks. That helped send the price of WTI crude oil down about 1% to just over US$104 a barrel, which is well below the multiyear high of US$130 hit in early March.

However, stock prices later in the week slumped after it became obvious that there was no letup in Russia’s bombardment of Kyiv. Still, oil prices continued to slide on Thursday after the US decided to release of an average of 1 million barrels a day of oil reserves for the next six months, news which helped send the price of WTI crude oil down about 6% to US$100 a barrel.

“The scale of this release is unprecedented: the world has never had a release of oil reserves at this 1 million per day rate for this length of time,” the White House said in a statement.

The US Treasury yield curve inverted twice in the week

The yield curve–in this case the difference in yield between the 10-year and 2-year Treasury bond–briefly inverted before finishing on Tuesday with the 10-year yield 0.03 percentage points higher than the 2-year yield. An inversion would mean the 2-year yield would be higher than the 10-year yield and is traditionally taken to mean a recession could be coming. Earlier this week, 5-year yields rose above 30-year yields for the first time since 2006.

“The risk of an abrupt slowdown or recession has increased, along with the prospect of a swifter sequence of rate rises from the Federal Reserve and disruptions due to the war in Ukraine,” wrote Mark Haefele, chief investment officer of global wealth management at UBS.

However, many bulls have been quick to point out that an inverted yield curve does not automatically mean that a recession is definitely on the way, and also that the curve needs to remain inverted for a period—weeks or months, depending on whom you ask—before it is a reliable recession indicator.

US inflation is still running high

The personal consumption expenditure price index, the Federal Reserve’s preferred method of measuring inflation, rose 6.4% year over year for the month of February, above the previous result of 6%. The core personal consumption expenditure index, which does not account for food and energy prices, rose 5.4%, showing that prices rose across sectors in the economy.

Banks led the way

In a 21 March report, SGX’s investor education portal My Gateway reported that banks were leading the rebound at the time, and that the combined quarterly net interest income of DBS, OCBC and UOB amounted to S$5.31b in 4Q21, which was up 3% quarter-on-quarter and 5% year-on-year, remaining above S$5b throughout 2020 and 2021 amid low interest rates after peaking at S$5.7b in 3Q19.

“Another key development… that supported the recent gains of the bank stocks was a more hawkish outlook for US interest rates by the end of 2022. The 16 March FOMC rate hike to a 25bps to 50bps band was built into expectations, however the week also saw CME FedWatch expectations for a target band of 200bps to 225bps increase by the end of the 2022. These expectations rose from 17% to 42%. This would represent another seven hikes of 25bps each in 2022..’’ noted My Gateway.

Sembmarine gave notice of 3 years of losses

Sembcorp Marine’s shares saw heavy trading during the past week after the company gave notice that it recorded three consecutive years of pre-tax losses.

In its notice, the marine and offshore firm said its market capitalisation as of 28 March was S$2.64b, which means it still meets the financial entry criteria to avoid being placed on the Singapore Exchange’s watch list.

Sembmarine’s shares were actively traded after the announcement was made on Tuesday, losing S$0.005 or 4.9% at S$0.098 before closing at S$0.10. They ended the month at S$0.097.

Singapore’s market cap rose 2.8% to S$884.2b, hospitality Reits among best performers

The market capitalisation of the 658 companies listed on SGX rose 2.8% over the month to S$884.2b. The market cap of the 30 stocks in the STI gained 4.4% to S$559.7b. As at 31 March, the STI’s components made up 63% of total market cap.

The Business Times quoted SGX’s market strategist saying that the STI ranked among the Asia-Pacific’s best performers, second only to Australia’s S&P/ASX 200.

Mr Howie also said real estate investment trusts or Reits were among the strongest sectors across the globe over March, with gains across all the various types of property classes. Not surprisingly given that the Government during the month announced an easing of all travel restrictions, hospitality Reits were among the top performers.

“In Singapore, prior to the final trading session of March, the Reit sector had also attracted the most net institutional inflows for the month’’ said Mr Howie.

“The iEdge S-Reit Index also generated a 5.2% gain for the month, with dividend distributions boosting the total return to 5.3%. Frasers Hospitality Trust, CDL Hospitality Trust, Far East Hospitality Trust and Ascott Residence Trust ranked among the top 6 performing Reits for the month, with the 4 hospitality trusts averaging 14.4% total returns’’.