Rising bond yields and geopolitical concerns to threaten Goldilocks

Date: May 21, 2018


  • No blowout in Malaysia but North Korea concerns emerged;
  • The local market traded within a narrow range with the STI falling 41 points or 1.1% over the week to 3,529.27;
  • Wall Street might be banking on “Goldilocks’’ again;
  • Stocks in play included Best World, Venture, SIA and new listing Hyphens Pharma;
  • Yield curve inversion is a rising concern.

The week started off with investors concerned that Singapore stocks could suffer if there was any major blowout in Malaysia after last week’s shock election outcome. As it turned out, after an initial selloff the Malaysian market stabilized and actually rose, leaving players here to look elsewhere for direction. A bombing in Jakarta, renewed US-North Korea tensions and weakness in the US bond market that saw the 10-year Treasury yield rise above 3% provided the main talking points in a week when the Straits Times Index ended 1.1% lower.

Turnover remained slightly above S$1b per day with an average of S$1.15b done daily. The week’s highest volume was done on Wednesday when S$1.2b changed hands.

Malaysia, North Korea and the US

The shock election result in Malaysia that saw defeat for the ruling Barisan Nasional party was widely thought to bring pressure to bear on the stock market when it reopened last week, with some analysts also concerned that there might have been spillover selling here.

These worries proved unfounded, as investors in Malaysian stocks and the ringgit responded positively to overtures by the new administration that it will be business-friendly. The same however, could not be said of developments in the Korean peninsula, where there are now doubts that the planned summit on 12 June between North Korean leader Kim Jong Un and US president Trump will actually take place.

These doubts arose last week when North Korea issued a statement ruling out what the US demands: complete, verifiable and irreversible denuclearization. On Thursday, Pyongyang’s chief negotiator with South Korea called the latter’s government “ignorant and incompetent” following the conduct of US-South Korea air combat drills.

Stocks in play – Beauty World, Venture Corp, SIA and Hyphens Pharma

Throughout the week the Straits Times Index traded within a narrow range, weakening on four of the five days, the exception being Thursday when it added 3.7 points.

Among the stocks with stood out was beauty products firm Best World, which collapsed $0.16 or 11% on Tuesday at S$1.29 on volume of 17.7 million shares after the company reported a 40.3% fall in profit for the first quarter ended 31 March to S$5.7 million on the back of a 43.3% drop in revenue. The fall was attributed to the company transitioning its China operations to a wholesale business model.

In downgrading the stock to a “hold’’, local broker CIMB said the company’s headline net profit was only 9.2% of CIMB’s full-year estimate of S$61 million and only 8.9% of Bloomberg’s full-year figure of S$63.4 million.

Our target price declines to S$1.39 as we now ascribe a P/E multiple of 12.5x (vs. 14.0x previously) on CY19F EPS, close to 1 standard deviation above its 2-year average mean. Whilst the stock offers some growth ahead, we believe this will largely be from 2H18F. Till then, we believe investors will shy away from the stock
said CIMB

Best World ended the week at S$1.26.

Technology sector leader Venture Corp has been in focus over the past few weeks, the stock first shooting up to S$30 in April before undergoing a rapid slide to just under S$20 a few weeks later because of earnings concerns. Over the past fortnight it managed a modest rebound but weakness set in again last week when on Wednesday it plunged S$0.96 or 4.3% to S$21.22 on turnover of 2.7m. It managed to stabilise somewhat on Friday when it bounced S$0.46 to S$21.10.

Singapore Airlines beat expectations when it reported a net profit of S$181.8m for its fourth quarter ended 31 March compared to a loss of S$138.3m a year ago. Not surprisingly, the stock jumped S$0.42 to S$11.56 on volume of 3.7m on Friday.

The market’s latest entrant was pharmaceutical and healthcare group Hyphens Pharma which listed on Catalist on Friday after offering its shares at S$0.26 each. The counter ended its debut at S$0.275 on volume of 20.4m traded.

Wall Street: Goldilocks again?

In the US bond market, the main question in everyone’s minds is whether higher bond yields and interest rates can still mean higher stock prices. Judging by last week’s trading the answer appears to be a cautious “yes” in which case talk will be of a “Goldilocks” economy, where growth is not too hot or too cold. The evidence however, is by no means conclusive.

On Monday, the 10-year yield crossed 3% but Wall Street’s three main equity indices – the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite – all closed in positive territory. Goldman Sachs that day pointed out that the US budget deficit is growing at a time when unemployment is falling, a combination that hasn’t occurred since World War 2 and forecast the 10-year yield reaching 3.2% by the end of next year.

However, just when some might have assumed that higher yields can co-exist with higher stock prices, Wall Street plunged on Tuesday when the 10-year yield rose to 3.082%, the highest since July 2011. Further confusing the picture was a rebound in stocks on Wednesday, even after the yield rose to 3.1%, though this was then followed by weakness on Thursday.

Worries over a flattening yield curve that might even invert have arisen in recent weeks. On Thursday when the 10-year Treasury yield closed at 3.115%, the 2-year note closed at 2.598%, the highest since August 2008. The 5-year yield in the meantime, closed at 2.957%, the highest since June 2009. An inverted yield curve is often taken to forecast an impending recession or economic downturn.