Rate cut hopes still hold sway over trade war fears

Date: July 15, 2019

  • The Straits Times Index dropped 9.47 points to 3,357.34;
  •  Sentiment was supported by hopes of a US rate cut;
  • US-China trade worries take taken a back seat – for now;
  • Local economy posted flat growth for 2Q, no recession expected yet;
  • Reits came under pressure after a sterling run since start of year;
  • SGX announced new voluntary delisting rules

Throughout the month of May markets spent their time worrying about rising trade tensions between the US and China. As a result, prices fell. Throughout June, these fears were still present but the attention switched to dovish comments by the US Federal Reserve, comments with gave rise to hopes that interest rates might be cut, ironically to stimulate a slowing US economy that was starting to be affected by the trade war. As a result, prices rose.

So far in July those hopes are still present – the Straits Times Index last week was supported by rate cut hopes, bobbed around a tight band, and ended a nett 9.47 points or 0.3% at 3,357.34. Daily turnover continued to hover around the S$1b mark.

Most of the support for local stocks came from Wall Street which in turn was supported by Fed chief Jerome Powell’s Congressional testimony last Wednesday where he virtually confirmed that the central bank will lower its federal funds targety one-quarter percentage point at the conclusion of the next Federal Open Market Committee on July 31, mainly because of a slowing economy.

In his prepared statement, Powell said that since Fed officials met last month, “uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.” Meanwhile, inflation has fallen farther from the Fed’s target.

Incidentally, Mr Powell also said he would not leave his job if President Trump tried to have him fired. Observers took this positively as it helped restore confidence in the independence of the Fed.

Local economy posts flat growth in 2Q

During the week the government announced that there was virtually no GDP growth in the second quarter. However, it added that it is not yet forecasting a full-year recession.

The economy has now recorded its slowest quarterly growth since 2009 and has slowed sharply from the first quarter’s 1.1% expansion.

Five new digital banking licences to be issued

Maybank Kim Eng said in a Sector Note on Wed that even with ultra-aggressive growth, new challenger digital banks are unlikely to gain meaningful market share.

Incumbents are already deploying sophisticated solutions. That said, innovations can broaden the market, especially for under-served segments. The ultimate prize will be the underbanked in ASEAN. Consortiums with access to behavioural data, AI and regional footprints will likely be the recipients of these new licences. For immediate regional digital banking exposure, we prefer UOB & DBS’’ said the broker.

The Reits sector came under pressure on analyst downgrades

One of the notable developments was a selloff in the Reits sector, perhaps understandable given that the FTSE Straits Times Reit Index had, at the start of the week, risen 18% since the start of the year.

In a Sector Outlook note dated 8July and titled “Not Worth the Chase’’, CLSA said Singapore Reits or S-Reits have outperformed the STI on the back of rate cut expectations and risk-off sentiment and that with valuations rich at 5.1% yield and 1.2x price/book, it has downgraded S-Reits from Neutral to Underweight.

Operationally, Reits are not immune to a prolonged trade war and we see limited room for interest rate savings in the near term. Conversely, we see downside risks from 1) a change in risk sentiment; 2) a weaker rental outlook and 3) dilutive equity fund raisings’’ said CLSA.

“Loosening of Fed fund rates is also unlikely to benefit S-Reits materially at this point. During 2007-09, the Fed cut rates from 5.25% to 0.-0.25%. This round, the room to cut is much less with the current Fed target range at only 2.25-2.5%…Our Microstrategy team believes that the Fed’s rate cut could see the last leg of the bull market and recommends bond proxies which tend to outperform during corrections’’.

UBS Global Wealth Management lowered its weighting for S-Reits from “overweight’’ to “neutral’’ in April. “Reits have had a tremendous run, so we think they look fairly valued’’ UBS’s Tan Min Lan was quoted as saying in a Business Times report on Thursday. “A lot of the good news has been priced in’’.

In the same report, analysts from Morningstar and CMC Markets were quoted as saying essentially the same thing, namely that the rise since the start of the year had left S-Reits overvalued.

New voluntary delisting/privatisation rules introduced by SGX

The Singapore Exchange on Thursday announced that with immediate effect, exit offers have to be fair and reasonable, and the shareholder vote in a delisting/privatisation scenario will have to exclude the offeror and concert parties.

“Arising from feedback, the approval threshold is maintained at 75% of total number of shares held by independent shareholders and voting’’ said SGX. The exchange also removed the 10% block vote, which said the voluntary delisting resolution must not be voted against by more than 10% of the total number of shares held by shareholders present and voting.

The latest from Hyflux

Troubled water treatment firm on Thursday said its potential white knight, the UAE’s Utico, is looking to take an 88% stake in Hyflux through $300m in equity and $100m in a shareholder loan. It also intends to offer the cash equivalent of a 4.4% stake in the enlarged Utico group, plus additional cash to Hyflux’s holders of perpetual and preference shares.