Treasury yields slip, stocks rise as investors continue to bank on COVID recovery theme

Date: March 29, 2021

  • Slip in US Treasury yields and official comments underpin market’s strength;
  • STI gained 23 points or 0.7% over the week at 3,157.95;
  • Index is on course for its best 1Q gain since 2012;
  • US 4Q GDP was revised up;
  • Singapore’s industrial production rose 16.4% underpinned by electronics;
  • CapitaLand to restructure;
  • AEM in play after Intel announced plans to build new plants

Fall in bond yields helps push stocks higher

The 10-year US Treasury yield, which recently rose above 1.7% for the first time in 14 months, slipped last week to around 1.6%, thus helping keep Wall Street and most other equity markets firm as investors continued to bank on a global recovery from the COVID-19 pandemic. It ended Friday at 1.65%.

Here, the Straits Times Index spend a firm week inching upwards, gaining momentum as the days progressed before finishing with a flourish, rising 16.24 points on Friday to 3,157.95 – ahead of Wall St’s record highs later in the day.

Friday’s surge capped a week in which the STI added a total of 23 points or 0.7%. Most of the index’s gain was led by the banks, SIA and CapitaLand, the latter rising sharply after it announced a major restructuring that includes a privatization.

The fall in the 10-year yield came on Tuesday, following comments from Federal Reserve Chairman Jerome Powell at a congressional hearing in which he warned the economic recovery progressing well but was “far from complete’’.

US Treasury Secretary Janet Yellen said prices are high, but she’s not concerned

Possibly equally important in helping stock markets stay firm was testimony by US Treasury Secretary Janet Yellen, who said although markets valuations may be high, she was not overly concerned.

“I’d say that while asset valuations are elevated by historical metrics, there’s also belief that with vaccinations proceeding at a rapid pace, that the economy will be able to get back on track,” she said.

“I think that in an environment where asset prices are high, that what’s important is for regulators to make sure that the financial sector is resilient and to make sure that markets work well,” said Yellen, “and that financial institutions are appropriately managing their risks.”

US 4Q GDP growth revised up

The US Commerce Dept last week in its third estimate of 4Q GDP growth for 2020 said the figure was an annualised 4.3%, up from the previous 4.1%. This year’s growth is expected to be 7.5% in the first quarter while the whole year’s figure is forecast to top 7%, which would be the fastest since 1984 and would follow a 3.5% contraction last year, the worst in 74 years.

Singapore’s Feb industrial production up 16.4%

Industrial production in the local economy jumped 16.4% in Feb year-on-year, the fourth consecutive month of expansion and better than the 15.8% that the private sector had expected.

The main contributor was electronics manufacturing, which grew 30.3%. “Growth of the semiconductors segment was supported by demand from 5G markets and a low production base a year ago’’ said the Economic Development Board.

CapitaLand to restructure, analysts raise target prices

Property giant CapitaLand last week announced an overhaul of its structure in order to sharpen its focus on strategic growth and shareholder value. It is planning to split itself into two entities – the first a private company which will look after the property development business and the second a newly-created asset management entity.

In essence, CapitaLand will be taken private whilst the new entity will be called CapitaLand Investment Management (CLIM) under which will be placed the managers of all the group’s listed Reits and business trusts as well as selected unlisted funds currently managed by CapitaLand.

Existing CapitaLand shareholders will be offered a combination of cash, units of CLIM and units of CapitaLand Integrated Commercial Trust. In its announcement, CapitaLand estimated the value of the total consideration to be S$4.102.

After the announcement, analysts reacted positively to the deal. CGS-CIMB reiterated its “add’’ call whilst raising its target price from S$3.42 to S$4.04, OCBC maintained its “buy’’ while revising its fair value from S$3.79 to S$4.03 and UOB-Kay Hian raised its target from S$3.10 to S$3.81.

CapitaLand’s shares ended the week at S$3.85.

AEM was in play after Intel announced plans to build new plants

US chip giant Intel last week announced i) plans to spend US$20b to build two new fabs in Arizona, US; ii) plans to reintroduce foundry services; and iii) 2021 capex guidance of US$19-20b. The news pushed shares of AEM Holdings up S$0.26 or 6.6% on Wednesday to S$4.18 as analysts said the company would be a beneficiary of the Intel news.

“If Intel makes HDMT (High Density Modular Test) available for foundry clients, AEM would be a structural beneficiary from technology and geopolitical perspectives in our view. As such we believe investors should overlook cyclical risks and focus on long-term positives’’ said local broker Maybank Kim Eng (MKE) in a 24 March Singapore Semicon Update.

“Intel had provided high density modular test (HDMT) to foundry clients in the past, and we do not rule out that it may do so again this time. If Intel’s foundry business is successful, and if HDMT/ system level test (SLT) is offered to clients, we believe this is positive to AEM’s structural prospects’’.

“This is because: i) AEM is poised to be a beneficiary of geopolitical protectionism as US technology players reduce reliance on North Asian foundries; and ii) AEM may be more immune to the potential rise in ARM vs x86 in high-performance computing, as Intel is also offering its services to ARM-based chipmakers’’ said MKE.

AEM’s shares closed at S$4.13 on Friday.

SGX – STI on course for best Q1 gain since 2012

The Singapore Exchange’s market strategist Geoff Howie was quoted in The Business Times on Friday as saying that the STI is poised to record its strongest first quarter since 2012. As of Thursday’s close, the index had risen 10.5% since the end of 2020, with dividends boosting the figure to 10.9%. He was also quoted as saying the rotation from technology to banks was a key theme of the quarter.