Same factors, different week

Date: February 18, 2019

  • The Straits Times Index gained 37 points or 1.2% at 3,239.74;
  • The same factors present for previous months drove stocks – US-China trade talks, US govt shutdown;
  • Trump signs compromise bill to keep govt open but will declare national emergency to get funds for Mexican wall;
  • Yield gap between 2-year and 10-year US Treasury is narrow 0.141%;
  • SIAS sent 33 searching questions to Hyflux;
  • DBS kicks off 4Q 2018 reporting season for banks on Monday 18 Feb;
  • Singtel, Starhub came under pressure after reporting disappointing earnings.


In the first post-Chinese New Year week of trading, the external factors influencing stock price movements were the same as those that influenced trading for the past month – the state of US-China trade talks and the likelihood of another US government shutdown. In fact, US-China trade talks have been ongoing for more than a year now, and although there have been plenty of noises made by both camps, nothing concrete in the way of a mutually acceptable deal has yet to be reached.

US-China talks, Trump accepts lower funds for wall but to declare national emergency

Last week there appeared to be encouraging developments on both fronts – on Tuesday reports emerged from Washington that US President Trump might be prepared to let the 1 March deadline for imposing fresh tariffs on China lapse, whilst Washington sources said a bipartisan deal to avoid another shutdown was on the cards that offered Mr Trump only US$1.375b instead of the US$5.7b he wanted to build a Mexican wall.

As a result, Wall Street rallied strongly that day, enabling the Straits Times Index to enjoy its best one-day jump this year on Wednesday when it surged almost 44 points or 1.36% to 3,244.77. However, there was an element of “buy in anticipation, sell on news’’ present – in the US on Wednesday, after Mr Trump (grudgingly) accepted the deal, stocks fell from their intraday highs.

On Thursday it emerged that although Trump would sign the bill, he would simultaneously declare a national emergency in order to get more funds. It was also announced that January’s retail sales fell below expectations and that the US and China remained far apart on the trade front.

On Friday however, signs emerged that the US and China may be approaching a deal after two days of high-level talks in Beijing. The two countries said they are working toward an initial written agreement, and will continue negotiations next week in Washington. The U.S. has threatened to more than double tariffs on $200b of Chinese goods if there’s no deal by March 1.

Yield gap is now razor-thin

Stocks therefore fell and bonds rose. The 2-year US Treasury yield on Friday ended at 2.524% whilst the 10-year yielded 2.665%. The gap between the two, which stood at about 0.2% at the end of 2018 has now narrowed to 0.141%.

SIAS rapped Hyflux

In local news, perhaps the most significant was SIAS’s letter to the board of directors of troubled water treatment firm Hyflux Ltd that contained 33 questions on Hyflux’s finances and corporate governance practices, among them justification for remuneration paid to senior management when the company was not doing well.

The association had previously appealed for Hyflux’s creditors to be patient and not apply for the company to be wound up. In a Wednesday editorial, The Business Times said it appears as if SIAS’s patience had run out and noted that the letter to SIAS served as a “wake up call’’ to Corporate Singapore to raise its governance bar.

Hyflux replied to SIAS’s letter on Friday. The Business Times in its  Saturday report titled “Hyflux’s replies to SIAS raise more questions’’ said shareholders were not satisfied with some of the answers.

Bank results out soon

Banks are due to report their results soon and it came as no surprise that the bulk of the gains enjoyed by the index throughout the week came from rises in DBS, UOB and OCBC.

In a sector note last week, local broker Maybank Kim Eng said DBS will report 4Q18 results on 18 Feb, followed by UOB & OCBC on 22 Feb.

“We expect slowing loan growth as the sector leaves the ‘growth’ phase of its cycle and enters ‘consolidation’. Nevertheless, we expect continued NIM expansion as asset yields are re-priced upwards amid falling YoY credit costs. We will pay close attention to these as the banks report. A good showing here should support improving ROEs and robust dividend outlook. DBS & UOB top picks. Short-term pair trade: long DBS, short OCBC’’ said the broker.

Deutsche Bank in its 4Q preview said it expects banks to face headwinds in 4Q18, negatively affected by a weak stock market with deteriorating market sentiment.

Coupled with other seasonal factors such as lower transactional/trading volume, higher costs and slower asset growth, we expect this set of results will be the weakest quarter for the sector this year’’.

“However, this is largely expected, with share prices having corrected by 6-7% and underperforming the STI by 1-2% during 4Q18. Within SG banks, OCBC and UOB stand out as more attractive to us and we maintain our SG preference over the HK banks’’ said Deutsche.

 It added that within the sector, it sees DBS’s earnings being cut at a faster pace than OCBC and UOB.

“According to Bloomberg consensus, DBS ‘s EPS from 2019E to 2020E has been cut by 3-5%, vs. UOB’s 1-2% and OCBC’s -3% in the past 6 months. Heading into 4Q18 results, our pecking order is OCBC>UOB and DBS. We will revisit our pecking order post guidance and outlook post 2018 results’’.

 All three bank stocks closed weaker on Friday.

Singtel and Starhub under pressure

Shares of telcos Singtel and Starhub dropped sharply on Friday after both reported profit falls that missed consensus estimates. Starhub reported a 61.8% fall in net profit for its 4Q to $19.8m and cut dividends from 4 to 2.5 cents per share. Singtel in the meantime, reported a 14.2% decline in Q3 profit to $823m. Starhub’s shares lost $0.23 or 12.1% at $1.67 and Singtel fell $0.04 or 1.32% at $2.99.