Trade frictions again roil markets

Date: May 21, 2019

  • The STI lost 68 points or 2% over the week to end at 3,205.46;
  • Escalating trade tensions between US and China was main cause;
  • China retaliated early in the week with tariffs on US$60b of goods;
  • US later in the week placed Huawei on an export blacklist;
  • Analysts believe no amicable settlement looks possible;
  • Singapore’s NODX continued to slide in April;
  • Best World admitted main China customer until 2018 is linked to the company’s founder, prompting SGX intervention.

The US-China trade war continued with moves by China, then US

The threat of a full-fledged US-China trade war has hung over equity markets for almost two years now, and although many observers had previously said that all risks had already been priced in, investors were still shocked last week at the speed at which tensions escalated.

The week started with news that China had retaliated to a US tariffs hike the previous week by imposing tariffs on US$60b worth of US goods.

From 1 June, Beijing will increase tariffs on more than 5,000 products to as high as 25%. Duties on some other goods will increase to 20%. Those rates will rise from either 10% or 5% previously. US President Trump had the previous week accused China of backing out of a deal that he claimed was close to being settled.

China in response criticised the White House for its “escalation of Sino-US economic and trade frictions, contrary to the consensus between China and the United States on resolving trade differences through consultations, jeopardising the interests of both sides and not meeting the general expectations of the international community.”

China’s duties mainly target U.S. farmers, who largely supported Mr Trump in 2016 but suffered from previous shots in the Trump administration’s trade war with China. The thousands of products include peanuts, sugar, wheat, chicken and turkey.

The impact on global markets started on Monday when Wall Street suffered its worst single day of 2019 and the Dow Jones Industrial Average slumped to a three-month low.

Although markets stabilised soon after, there was more to come. On Wednesday, Mr Trump cited national security concerns when he signed an order barring US firms from using telecom equipment made by China technology giant Huawei, prompting China to respond that it will take “all necessary measures’’ to protect the legal rights of Chinese firms.

Reports suggested that these moves point to the faint hopes of a trade deal evaporating, but it could also delay the roll-out of 5G networks worldwide. China also said the concept of national security should not be used as a tool for promoting trade protectionism.

The upshot of all this uncertainty and posturing was an uneasy week for the local market, with the Straits Times Index coming under pressure for the most part. The net result was a 68 points or 2% loss for the index at 3,205.46. Volume remained low – on Friday for example, only 1b units worth $870.56m were traded.

April’s NODX was down 10%

The ongoing US-China trade spat saw April’s non-oil domestic exports drop 10% year-on-year, after an 11.8% fall in March. A high base from a year ago partly contributed but economists generally agree that there has been a persistent export slowdown.

Banks and SIA in play

Banks have been the focal point for most of the index’s moves and so it was again last week. Maybank Kim Eng in a 15 May report on the banks titled “Through the fog of war’’ said the sector has contracted 8% in the past 2-weeks but it remains positive on the banks.

“On a 12-month forward PE basis, the sector is trading at 10x, a 13% discount to the long-term mean. We believe an element of profit taking following strong performance, coupled with contagion from US-China trade tensions, have contributed to this de-rating…’’

“Operationally, the troika of rising margins, positive loan growth & benign asset quality should continue to deliver higher ROEs. Current trade war tensions present a significant macro risk for near term performance, but the sector’s structural changes provide it with a strong platform to respond. We have tweaked earnings and target prices 1-3% for our coverage, but our recommendations remain intact: BUY UOB and DBS, HOLD OCBC’’.

Singapore Airlines reported that profit for the 4Q ended 31 March fell about 28% to S$203m. In calling a “buy’’ with S$11.20 target price, MKE said it likes SIA for its “careful and well thought growth strategy, which should enable it to be more defensive relative to other airlines that are embarking on aggressive growth. Its fuel hedge reduces operating risk and greatly safeguards positive margins going forward. Furthermore, its approx5% FY20E dividend yield is attractive compared to other carriers and also against the STI’’. SIA ended Friday S$0.10 down at S$9.30 on volume of 1.5m.

Best World came under scrutiny – again

Regular readers would know that beauty products firm Best World has not been far away from the business headlines over the past three months, ever since The Business Times newspaper in February highlighted certain issues over the firm’s franchise sales in China.

Since then Best World’s shares have been sold off despite the company agreeing to appoint an independent review into its China operations; meanwhile, the company has also become the target of a pair of short-sellers named Bonitas Research and Valiant Varriors.

Both have raised questions over Best World’s China operations whilst Valiant claimed that the former’s main China customer called Changsha Best’s main shareholder is the brother-in-law of Best World’s founder.

Best World last week confirmed the relationship, prompting SGX’s regulatory unit SGX RegCo to state that this connection “raises serious concerns about the veracity of the China sales conducted under the export model from 2015 to 2018 and whether these were conducted under normal commercial terms’’.

It has ordered the independent reviewer to report directly to SGX RegCo and has ordered Best World to ensure that Changsha Best and other import agents hand over copies of accounting records to SGX RegCo.

KTMG Limited, a Malaysia-based apparel contract manufacturer listed last week on Catalist following its completion of a reverse takeover of Lereno Bio-Chem Ltd. It operates three manufacturing facilities in Batu Pahat, Johor and Phnom Penh with a combined total of 35 production. The counter ended the week at $0.22.