Date: January 8, 2024
- The STI, which enjoyed a late 100-points push a week earlier, fell 56 points or 1.7% to 3,184.3
- Banks were the main index movers; average daily volume was S$829m
- Wall St’s major indices all fell over the week, bond yields climbed
- Fed minutes and Dec jobs report suggested no rate cuts yet
- Market now pricing in 93% chance the Fed will not cut rates in Feb
- Singapore market is undervalued: brokers
- Outlook for banks is not great as lower rates are expected
- Seatrium’s S$250 million wind farm contract cancelled
Trading here got off to a weak start
Given that the Straits Times Index had risen sharply in the final three trading days of December gaining more than 100 points in the process probably through year-end window-dressing, it shouldn’t come as a surprise that the index then lost 56 points or 1.7% in the first trading week of 2024 to end at 3,184.30.
Also, no surprise was that the stocks which had surged in December’s final week were the same stocks which led the decline last week – namely, the three banks.
On Friday for instance, when the broad market was weak with 288 falls versus 250 rises, the STI recorded its only gain for the week, up 10 points thanks mainly to rises in the three banks. Average daily volume was a weak S$829m.
Wall St also got off to a weak start to 2024
Over on Wall Street, trading in 2024 also got off to a rocky start, with the major indices coming under pressure on Tuesday and Wednesday. The 10-year Treasury yield, which ended 2023 at 3.83% briefly climbed above 4% during Wednesday’s trading before finishing the week at 3.995%. The 2-year Treasury yield rose 7 basis points to 4.387%.
Despite a modest bounce on Friday, all three major US indices fell for the week – the S&P ended the week 1.5% lower, snapping nine consecutive weeks of gains and the index’s best run since 2004, whilst the Dow and the Nasdaq posted losses of 0.6% and 3.2%, respectively.
The Fed’s minutes showed rates will remain elevated for longer
Minutes from that Fed’s December meeting released Wednesday indicated that many officials seemed satisfied with the recent progress made on the inflation front, and deem cuts appropriate at some point in 2024.
However, the minutes also suggested that the Fed intends to maintain a restrictive stance in the short-term as uncertainties linger.
“Participants generally stressed the importance of maintaining a careful and data-dependent approach to making monetary policy decisions and reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably toward the Committee’s objective,” the minutes stated.
December US jobs report suggested no rate cut yet
Despite some signs of cooling, the December jobs report gives the Federal Reserve room to keep fighting inflation by holding interest rates steady, rather than contemplating near-term cuts to spur economic growth.
The U.S. added 216,000 jobs in December, according to data released Friday by the Bureau of Labor Statistics. The growth surpassed the forecasts of many economists and exceeded November’s revised gain of 173,000.
Probability of a rate cut in Feb fell from 15% to 6.7%
As result of these minutes, the probability that the Fed will keep rates unchanged at its February Federal Open Markets Committee meeting jumped from around 85 to 93.3%.
In other words, the probability of a rate cut rose from around 15% before the minutes were released to 6.7% now.
Outlook for the Singapore market and brokers’ picks
“On a PE (price-to-earnings) basis, the market is now at a 59 per cent discount to the US’ S&P 500. This is the biggest discount ever and only touched these levels briefly in the 2020 pandemic,” Maybank Securities head of research Thilan Wickramasinghe was quoted as saying in a 30 Dec 2023 Straits Times report.
In its 2024 strategy paper released on Nov 29, Maybank has “buy” calls on CapitaLand Integrated Commercial Trust, ComfortDelGro, Frencken, S-Reits in the hospitality and industrial spaces, DBS Bank, Venture, Singtel, Raffles Medical Group, Sembcorp Industries and AEM, among others.
“One bonus defensive name is ST Engineering – which should benefit from rising global air travel and defence spending,” Mr Wickramasinghe added.
The same report said OCBC head of equity research Carmen Lee’s 2024 “best buys” list includes DBS Bank, UOB, CapitaLand Investment and Frasers Logistics & Commercial Trust.
Among the small caps, investment house Lim & Tan has buy calls on the likes of Innotek, Centurion, Tiong Woon and Civmec, citing attractive valuation and strong order books.
CGS CIMB and UOB Kay Hian have a buy call on Seatrium (formerly SembCorp Marine), with a 12-month price target of S$0.19. The company has been enjoying strong growth in its order books and sequential improvement in business conditions.
Outlook for the banks – not great
According to a Business Times report, Singapore banks are unlikely to replicate the tremendous year they had in 2023, which saw them report record earnings. Higher interest rates boosted their interest incomes immediately even as their cost of funds took a while to catch up.
Analysts quoted said the local banking trio is likely to experience limited earnings growth and greater cost pressures. Loan growth will remain tepid as consumers and businesses decline to borrow or refinance at the current high rates.
As net interest margins (NIMs) peak and loan growth remains soft, however, any earnings upgrades have likely been done for this rate cycle, said the Citi research team in a note.
A stable net interest income into 2024 is likely the best outcome for the Singapore banks, the team said.
NIMs continue to face challenges on both ends – loan repricing and funding costs – said DBS Group Research analyst Lim Rui Wen.
NIMs have peaked given limited upside in the US federal funds rate. The hurdle for another interest rate hike in the US is high, Lim said, requiring incoming growth, jobs or inflation data to surpass expectations.
Singapore banks are expected to underperform within Asia, especially when compared against the more domestic-oriented players, said Nomura’s Asia-Pacific equity strategist Chetan Seth.
Banks in Asia are still posting high earnings growth, while the Singapore banks may see negative earnings growth due to a very high base, Seth said.
Within the region, Singapore banks also had the highest sensitivity to rate hikes, he said.
This results in limited room for loan repricing going forward as the banks are also facing intense competition in mortgage rates, she said.
Seatrium’s S$250 million wind farm contract cancelled
A wind farm contract worth S$250m awarded to Seatrium was cancelled by Empire Offshore Wind, a joint venture between Norwegian state-owned energy company Equinor and oil giant BP.
Seatrium said the cancellation was a result of “significant macroeconomic conditions” impacting the Empire Wind 2 project.
The cancelled contract was part of a S$500 million deal inked in May 2023 to develop platforms for two offshore wind farms, Empire Wind 1 and 2. They are located off the coast of Long Island in the US.
Construction work on the Empire Wind 1 platform commenced in the fourth quarter of 2023. Empire Offshore Wind confirmed that the project contract “remains unaffected and continues as planned”, said Seatrium.
“The cancellation of (the Empire Wind 2 project) contract is not expected to have material financial impact on the earnings per share and net tangible asset per share of the group for the current financial year.”
DBS Group Research highlighted that the affected contract value is relatively small, at less than 1.5% of the group’s orderbook.
“We believe the longer-term prospects for offshore wind (sector) remains constructive,” said the research house, adding that Seatrium’s other ongoing projects are unaffected.
DBS continues to like Seatrium for its turnaround story, reiterating a “buy” call and target price of S$0.18.
Over the course of the week, Seatrium’s shares fell S$0.005 to S$0.113.
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