Date: August 8, 2022
- Wall St wobbled due to Pelosi’s Taiwan visit but STI proved resilient
- Boosted by banks, the STI rose 2.2%
- Bank of England raised rates by most since 1995, warned of long recession ahead
- OCBC’s earnings surprised on upside, stock gained 4.9% over week
- DBS’s earnings beat consensus, stock gained 4.2% over the week
- Singapore Governance and Transparency Index at all-time high
- US Treasury yield curve remained inverted, futures market now pricing in 66.5% chance of 75-basis points rate hike in Sep
Thanks to the banks, local market proved resilient
The local stock market proved surprisingly resilient in the face of a mid-week wobble suffered by Wall St and other major markets as a result of US House Speaker Nancy Pelosi’s historic visit to Taiwan – an island at the heart of the global chip-making industry that China considers part of its territory.
Despite China responding by slapping economic sanctions on Taiwan and conducting military drills around the island that were among the most significant in almost 30 years, investors here and in the US focused instead on corporate earnings – in the case of the local market, it was profits reported by the banks whilst on Wall St it was better-than-expected figures reported by tech firms.
Boosted by rises in the three banks, the Straits Times Index ended the week with a gain of 71 points or 2.2% at 3,282.88. Volume however remained low, with a daily average of just S$1.01b done, ranging from a low of S$911.6m traded on Tuesday to a high of S$1.2b traded on Thursday.
Pelosi’s visit caused some concern that quickly passed
Prior to Ms Pelosi’s visit to Taiwan on Wednesday, China had warned of serious consequences if the trip were to take place. The White House had sought to distance itself from the visit by saying it cannot control another branch of government; however, it also emphasized that any visit does not change in its “One China’’ policy.
The last high-ranking US official to visit Taiwan was then-Speaker Newt Gingrich in 1997 which occurred after the Third Taiwan Straits Crisis and the Taiwan’s first democratic presidential election in 1996.
China’s response this time was to fire missiles into waters along Taiwan’s north-east and south-west coasts. Japan said five missiles landed in its waters.
The US, for its part, does not officially recognise Taiwan, which has for all practical purposes been independent since 1950. However, Washington maintains a strong relationship with the island – which includes selling weapons for Taiwan to defend itself.
Bank of England jacked up rates by most since 1995, warned of long recession ahead
Overseas, the Bank of England decided to raise its key interest rate by half a percentage point from 1.25% to 1.75% in an attempt to fight inflation. It was Britain’s biggest hike in 27 years.
The move came as officials predicted recession will begin in the fourth quarter, and last all the way through next year. That is the longest slump since the financial crisis. Officials expect the economy to shrink by around 2.1 per cent in total.
The BOE also boosted its forecast for the peak of inflation to 13.3 per cent in October amid a surge in gas prices and warned that price gains will remain elevated throughout next year.
OCBC’s earnings surprised on the upside
On Wednesday, OCBC reported net profit of S$1.48 billion for the three months to June, up 28 per cent from S$1.16 billion for the same period a year ago. It was also higher than the S$1.26b forecasts by analysts in a Bloomberg poll. The bank has declared an interim dividend of 28 cents per ordinary share, up from 25 cents last year.
Group chief executive Helen Wong said overall economic growth in the bank’s key markets is expected to remain positive this year but at a slower pace due to heightened headwinds.
“The Russia-Ukraine war is worsening strains in the global supply chain. This also heats up inflationary pressures, with negative consequences on the overall global economy,” she told reporters on Wednesday.
OCBC has cut its forecast for this year’s loan growth to a mid-single digit, down from the mid- to high- single digit it announced during its first-quarter results.
There are also rising recessionary risks induced by monetary policy tightening in key developed markets, said Ms Wong.
OCBC’s shares gained S$0.57 or 4.9% over the week to end at S$12.24.
DBS reported 7% increase in Q2 profit
Singapore’s largest bank DBS on Thursday reported a 7% increase in Q2 net profit to S$1.82b, fuelled largely by a 17% increase in net interest income amid rising interest rates. The net profit figure beat a consensus estimate of S$1.64b from analysis polled by Bloomberg.
DBS’s net interest margin (NIM) gained 12 basis points to 1.58% as the impact of rates hikes was fully felt. With the bank’s July NIM hovering around 1.8%, chief financial officer Chng Sok Hui said it is expected to reach 2% some time between 3Q and 4Q this year.
DBS declared a dividend of S$0.36 per share for Q2, to be paid on 26 Aug. This brings dividends for the first half to S$0.72 per share.
Maybank said although DBS missed 1H22 expectations on lower-than-expected interest income, this is set to turn around and accelerate in 2H as asset re-pricing picks up.
“Asset quality is a key risk, but the Group’s strong portfolio and provisioning offers a buffer. We believe there are significant upside risks to dividend payouts going forward as the Group looks to return excess capital. A potential China re-opening, continued execution in India and a turnaround in wealth fees are near term catalysts. Raise target price to S$42.18. BUY’’ said Maybank in a 4 Aug report.
The broker said it estimates that DBS is carrying S$2.4b in excess capital. Its target price was derived by using a dividend discount model.
DBS’s shares rose S$1.31 or 4.2% over the week to end at S$32.84.
Earnings in brief
Commodities firm Wilmar International reported a 55.1% increase in net profit for its first half ended 30 June to US$1.2b and has proposed an interim dividend of S$0.06 per share. It noted that this is the highest interim dividend since listing and is expected to be paid on 24 Aug. In response, the stock rose S$0.17 or 4.1% on Friday to S$4.30 on volume of 18.9m.
Telco Starhub reported a 10.3% drop in net profit for its first half ended 20 June to S$60.9m compared to a year ago. This was despite higher revenue for the six months, which rose 8.7% to S$1.1b. Its total operating expenses rose 10.5% to S$967m. Starhub’s shares fell S$0.02 to S$1.24 on volume of 1.8m on Friday.
Raffles Medical reported that net profit for its first half ended 20 June rose 51.3% to S$59.7m compared to the same period last year. This came largely because of higher revenue from the reopening of Singapore’s borders. No interim dividend was declared, as the company had earlier announced its intention to consolidate interim and final dividends into an annual core dividend of up to half its average sustainable profit after tax and minority interests. The stock added S$0.03 at S$1.35 on turnover of 5.8m on Friday.
Singapore Governance and Transparency Index at all-time high
The Singapore Governance and Transparency Index (SGTI) rose to an all-time high of 70.6 this year, up from 68.7 last year. For the third year running, airline ground handler and caterer SATS was first in the general category, with a score of 122 points out of a possible 144.
The SGTI evaluated 489 companies based on their corporate governance practices as well as the timeliness, accessibility and transparency of their disclosures. It is jointly maintained by CPA Australia, NUS Business School’s Centre for Governance and Sustainability and the Singapore Institute of Directors.
US Treasury yield curve remained inverted after strong jobs report
The U.S. added 528,000 jobs in July, more than doubling expectations for 258,000, while the unemployment rate fell to 3.5%, better than estimates for 3.6%.
Following the jobs numbers, the 2-year Treasury yield jumped 17 basis points Friday, to 3.23%, while the 10-year yield was up 14 basis points to 2.84%.
This means that short-term rates are higher than long-term rates, a phenomenon known as an inverted yield curve which is thought to forecast a recession.
The concern for the stock market is that the Federal Reserve will increase its tightening of monetary policy, as a weakening in the labour market is needed to try to rein in red hot inflation. The market is now pricing in a 66.5% chance of a 75-basis point rate hike in September, up from 34% on Thursday, according to CME Group.