Trade concerns dominate

Date: July 2, 2018

  • STI dropped 4.7% for the month, down 3.9% during the first half of 2018;
  • For the month, the main worry was a global trade war;
  • For the year to date, rising interest rates and the pace of US Fed tightening have also played a part;
  • Emerging markets have been hit by a withdrawal of funds;
  • US Treasuries have benefited;
  • Noble Group and Hyflux get breathing space;
  • SGX to allow dual-class shares with immediate effect.

Trade wars to the fore

June 2018 will be remembered for an eruption of trade war worries as the US resumed slapping tariffs on Chinese imports, adding Canada, Mexico and the European Union as former trading partners who now face sanctions.

All these recipients then responded either with threats of tariffs on US goods in the future, or with actual measures of their own, setting off worries of a full-blown trade war. The market’s response was mainly to sell off stocks, whilst moving into possible safe havens like US Treasuries and the US dollar.

As a result, the Straits Times Index lost about 160 points for the month or 4.7% at 3,268.70. For the first half, it fell 134 points or 3.9%.

One local dealer hit the nail on the head when he remarked “no one knows how to price in a trade war because we’ve never had one before, at least on such a large scale”.

Emerging markets have been hit by a mass withdrawal of institutional money because of trade concerns but according to Morgan Stanley’s chief Asia and emerging markets strategist Jonathan Garner, there’s more to come.

There’s also accelerated tightening in the US and risks from rising oil prices, said Mr Garner in a news report last week as he described the current market as “dangerous” adding that he thinks we are “heading into an outright bear market”. MS has lowered its 12-month target for the MSCI emerging markets index from 1,160 to 1,000.

US Treasuries

The benchmark 10-year Treasury yield started the month closing in on the 3% level but finished June around 100 basis points lower at 2.86%, most probably because of a shift into safer investments.

On 25 June, Morgan Stanley declared that the spike up in bond yields that started in February has run its course, and that the high of 3.12% that was reached was the peak for 2018. Trade worries, weaker emerging markets and a strong dollar will keep a lid on rates because of a changing dynamic for global bonds, said the US investment bank.

Lifelines for Noble, Hyflux

Two prominent local names, water treatment firm Hyflux and commodities trader Noble Group who are both in financial distress, were given lifelines this month. In Hyflux’s case, the High Court granted the company a six-month extension to a moratorium from creditors’ claims whilst in Noble’s case, substantial shareholder Goldilocks Investments finally agreed to Noble’s restructuring plan after months of opposition.

Making way for dual-class shares

The Singapore Exchange (SGX) after a lengthy public consultation process, last week announced it will allow companies with dual-class share structures as primary listings on the mainboard. This follows a similar move two months ago in Hong Kong and is aimed at encouraging the entry of new economy companies such as tech startups to list here.

Looking ahead – Singapore strategy

DBS Group Research in an Asia strategy report last week warned of a volatile third quarter in which more upside for the US dollar and bond yields could weigh on stocks. However, DBS thinks Singapore equities are attractively valued at 13x forward earnings and 1.2x book value, which are figures below the 10-year average.

Also last week, RHB said in its Small Mid-Caps strategy report that since US President Donald Trump initiated a possible trade war against China and its other key deficit trading partners in March, manufacturing stocks in Singapore have corrected 30-60% from March highs.

The average sector P/E (price earnings) has also decreased from 11x in 2017 to about >8x currently. With the trade issue still unresolved and potentially worsen, a further de-rating is possible before bottoming out. This is especially when the average sector P/E was just 4-5x in 2016 before the massive technology surge in 2017. Most of the manufacturing players are also experiencing slower growth rates, as 2017 was an exceptional year. Their earnings might also be impacted by global events and the trade war worsening. Thus, we are NEUTRAL on the sector

said RHB.

UBS Global Wealth Management last week said it is still overweight on global and Asia ex-Japan stocks on strong earnings growth. It said Singapore also remains at “overweight” due to its “sound fundamentals,” recovering real estate market and improving bank profitability. The bank added it is “underweight” Malaysia, Taiwan and emerging markets.

OCBC Investment Research in the meantime, in a 26 June report said Singapore developers have underperformed the STI this year and is of the view that the divergence between developers’ share price performances and fundamentals presents buying opportunities.

While we ease our private sales transaction volume projection for 2018 to 10k-12k (previously 12k-15k) based on the current run-rate, this still implies a backend loaded year. We also raise our Singapore residential price growth forecast to 8%-12% from 3%-8%

said the broker.