“Sell in May and go away”

Date: May 17, 2021

  • Wall St’s volatility and US inflation fears brought the sellers out;
  • Adding to the pressure was news of fresh local curbs;
  • The STI fell 145 points or 4.5% to 3,055.02;
  • Stocks in focus included ComfortDelGro as it looks to unlock value of Aussie assets;
  • CapitaLand reported improving operational performance;
  • Economists sticking to their forecasts for local economy.

STI lost 145 points or 4.5% last week

There is a market saying that investors should “sell in May and go away”. This refers to the supposed underperformance of stocks in the 6-month period May-Oct which is traditionally attributed to investors going on holiday during the summer months in the northern hemisphere before re-entering the market in November.

Although there is some research to suggest that the period May to Oct does indeed underperform other periods, the problem is that with the ongoing pandemic and recent surge in cases worldwide, travel is not possible so attributing stock market selling in May to investors leaving to go on vacation doesn’t apply this year.

According to conventional wisdom, two external factors were responsible for last week’s selloff in the early part of the week – news of a continued upswing in virus numbers and inflation worries.

Both should logically not have come as any surprise since a) there has been no clarity as to when the pandemic will be over and cases were still widespread in many countries, and b) the relentless money printing by the US Federal Reserve was bound to have an inflationary effect sooner rather than later.

Notwithstanding this, markets were said to be caught by surprise, with the result that the Straits Times Index over the holiday-shortened week fell 145 points or 4.5% to 3,055.02, each day dragged lower by weakness in the Dow futures, the latter turning out to be an accurate predictor of how the US market would perform later in the day.

The largest fall however, was recorded on Friday, when the index first lost almost 100 points before rebounding to a net loss of 68.24 points on news of tighter measures and the possibility of a second “circuit breaker” lockdown in a year. Volume on Friday was a heavy 3.52b units worth S$3.22b.

Inflation worries erupted on Wall St – then settled down on Friday

On Wednesday, Wall St was taken by surprise after the US Labor Department reported a much-bigger-than-expected jump in the consumer-price index for April, up 0.8% overall and 0.9% for the “core” measure that excludes volatile food and energy costs. Those were the biggest monthly surges since 1995 and 1981.

US Federal Reserve was quick to downplay the numbers, brushing them off as “transitory” with vice-chair Richard Clarida saying that stimulus would still be needed for some time. These comments helped steady the rise in bond yields, with the 10-year yield settling seven basis points higher at 1.68%.

“This year is going to be a big battle between the bullishness of mass openings and stimulus on one hand and the inflationary consequences on the other. Expect regular pockets of volatility” wrote Deutsche Bank.

US Treasury yields then fell on Friday after retail sales data for April showed no growth after a big jump in March. The yield on the benchmark 10-year Treasury note slipped to 1.645% in afternoon trading, while the yield on the 30-year Treasury bond dipped to 2.371%.

ComfortDelGro posted 56% rise in 1Q net profit, seeks to unlock value from Aussie assets

Transport operator ComfortDelGro (CDG) reported a 56% rise in its 1Q net profit to S$56m despite revenue slipping 0.7% to S$856m. The figures were boosted by government Covid-19 help – included in total revenue was government relief of S$8.1m.

In a media release last week the company said it is looking to unlock value of its assets in Australia where it is one of the largest privately-owned bus operators.

“The move, which could take a variety of forms including a partial sale of assets or an initial public offering, comes 16 years after ComfortDelGro first began operations Down Under through the acquisition of Sydney bus operator, the Westbus Group” said CDG.

UOB Kay Hian estimated CDG’s shares to be potentially 32.3% more of its Australian assets are valued at 10 times EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) and raised its target from S$1.85 to S$1.95.

Maybank Kim Eng reiterated its “buy” call on the stock with a target price of S$1.88. “We continue to like CDG as it offers exposure to domestic transport recovery. The impending review of Downtown Line financing framework and potential restructuring of its Australia bus assets remains a catalyst. Key risk includes further lockdowns in operating countries”.

The counter closed at S$1.58 on Friday, down S$0.05 on volume of 38m.

CapitaLand reported improving operational performance

Property giant CapitaLand said in a business update that the operational recovery in its asset classes in 2H 2020 has continued into 1Q 2021, albeit at a varied pace in different countries.

It reported a recovery in its full suite of businesses in China and a resilient international portfolio but cautioned that residential development in Singapore may be “tempered by increasing construction costs”. CapitaLand on Friday fell S$0.06 to S$3.51 with 17.3m traded.

Economists sticking to their forecasts

According to a Business Times report, private sector economists are retaining their full-year economic forecasts for the local economy despite the threat of another circuit breaker.

“Economic activities will be hampered by the restrictions but because we have better procedures in place like TraceTogether and contact tracing in place, we will cope with it far better this time” CIMB Private Banking economist Song Seng Wun was quoted as saying.

The report also quoted DBS senior economist Irving Seah expecting Q2 growth to still hit about 14% assuming the current restrictions do not last beyond four weeks.