US recession worries sent STI below 3,300

Date: August 12, 2024

• Wall Street’s volatility rocked global markets, sending STI 3.5% down
• Average daily volume spiked up to S$1.96b versus S$1.37 in previous week
• Unwinding of “carry trade’’ could mean more pressure: analysts
• Probability of 50-pts cut in Sep hit 80% but ended week at 49%
• All eyes on US inflation, producer prices, and retail sales this week
• DBS announced Tan Su Shan as next CEO in signal of continuity
• SGX’s H2 profit up 10.5% to S$316.3, proposes Q4 dividend of S$0.09 per share
• Overweight Singapore for defensive reasons: OCBC Investment Research

 

STI fell below 3,200 intra-week before closing at 3,261.83

It was only a few days ago that hopes were high that the Straits Times Index could regain the 3,500 level, consolidate above it, then push on to higher levels.

Instead, sudden fears that the US economy could be headed for a recession dashed those hopes, dragging the STI not just below 3,400 but also 3,300 and 3,200.

Following large selloffs on Monday and Tuesday that came with high volume of S$2.88b and S$1.99b respectively, the STI on Tuesday closed at 3,198, a four-month low.

A Wall Street rebound on Tuesday helped the index climb above 3,200 on Wednesday and Thursday but it wasn’t sufficient to prevent the index registering a nett 120 points or 3.5% loss at 3,261.83.

Average daily volume done over the four trading days was S$1.96b compared to S$1.37b the week earlier.

Wall Street’s recession fears were the cause

The source of the selling was the US market, where stocks and bond yields plunged after the release of weak July manufacturing and jobs numbers that reportedly has prompted a re-think of the “soft landing’’ scenario for the economy.

On Friday 2 Aug after release of the jobs report, the Dow Jones Industrial Average plummeted 1,034 points or 2.6% to 38,703, the S&P 500 160.23 or 3% to 5,186 and the Nasdaq Composite lost 576 or 3.4% at 16,200.

The impact on this part of the world on Monday was swift and harsh – Japan’s Nikkei 225 crashed 12.4%, its largest loss since 19 Oct 1987. Malaysian’s KLCI lost 4.6%, Taiwan’s Taiex Index 8.4% and Korea’s Kospi 8.8%. Here, the STI fell 4.1% that day.

Unwinding of “carry trade’’ could mean more pressure

The Straits Times on 10 Aug quoted Goldman Sachs’ strategist Peter Oppenheimer saying that the unwinding of “carry trades’’ where investors borrow money from low-interest rate countries such as Japan to fund investment in higher-yielding markets could take several more days.

After the recent selloff, valuations have moderated but remain elevated, particularly in the US. The global equity market is still up about 20% from Oct 2023 lows and the tech-heavy Nasdaq is up 8% in 2024.

“At this stage it seems likely the unwind has further to go in the short term’’ said Mr Oppenheimer.

In the same Straits Times article reported Goldman Sachs as upgrading Malaysia to “overweight’’ while downgrading Singapore to “underweight’’.

But probability of 50-points cut first rose to 80% but ended week at 49%

In the federal funds futures market, the probability that the US Federal Reserve will cut interest rates by 50 basis points shot up from 5% before release of the manufacturing and jobs data to over 80% immediately afterwards.

By the end of last week, this had fallen to around 49%.

In a report published on Monday, DBS Group Research noted that the US’s gross domestic product, trade and labour force numbers are “not alarming’’ even as signals from hiring, retail sales and the purchasing manager’s index are negative.

“It is crucial to maintain perspective’’ said DBS. “We are not joining the herd in pricing in rate cuts of 75-100 basis points in the second half of 2024. Fifty basis points would be adequate’’.

On Wednesday, the Dow Jones Industrial Average fell 234 points, or 0.6% to 38,763 after rising as much as 480 points in the morning. The S&P 500 closed down 0.8% while the Nasdaq Composite dropped 1.1%.

The Dow, which was up 1.2% at its session high, blew its largest gain since Nov. 2, 2022, according to Dow Jones Market Data. The S&P 500 and Nasdaq, which were up 1.7% and 2.1% at their respective highs, both marked their largest reversals since March 8, 2022.

For the week, the S&P 500 slipped -0.04%, the Nasdaq Composite retreated -0.2%, and the blue-chip Dow fell -0.6%.

All eyes on US economic reports this week

The next big test for markets will come this week, when more economic data are due, including reports on inflation, producer prices, and retail sales.

DBS announced Tan Su Shan as next CEO in signal of continuity

DBS announced that the board has appointed Tan Su Shan as deputy CEO, in addition to her present role as group head of institutional banking. She will succeed Piyush Gupta as CEO when he retires at the next annual general meeting on Mar 28, 2025.

Tan will be DBS’ first female chief executive, and the first home-grown staff member hired from internally to take the helm at the bank.

Maybank said she had been a frontrunner for the position and that the appointment signals continuity and stability given she is already a major contributor to the Group’s current culture and business mix.

“Driving growth in North Asia amidst a structural slowdown, pursuing new growth in India and staying the course on capital returns should be key priorities, we believe’’ said Maybank.

It added that it expects headwinds amidst Fed rate cuts though a strong balance sheet, high common equity tier1 ratio and a focus on returning capital to shareholders will keep dividend visibility high. It maintained its “buy’’ on the stock although lowering its target price to S$38.76.

“Given the extended transition period and Tan’s extensive experience working with Gupta for 14 years at DBS (and before DBS at Citi), we view Tan as a continuity candidate,” said Lorraine Tan, director of Asia equity research at Morningstar.

SGX’s H2 profit up 10.5% to S$316.3, proposes Q4 dividend of S$0.09 per share

THE Singapore Exchange’s (SGX’s) net profit for the second half ended June 2024 rose 10.5% to S$316.3 million whilst earnings per share (EPS) for the half-year period stood at S$0.296, up from S$0.268 for H2 FY2023.

Its board has proposed a final quarterly dividend of S$0.09 per share, up from S$0.085 per share in the same quarter a year ago.

If approved, this would represent an annualised increase of 5.9 per cent, which SGX said was in line with its target of growing its per-share dividend at a mid-single digit percentage compound annual growth rate (CAGR) in the medium term.

The proposed final quarterly dividend will be payable on Oct 25, upon approval by shareholders at SGX’s upcoming annual general meeting on Oct 10.

Operating revenue for H2 grew 2.6% to S$639.4 million. SGX’s net profit for the full year stood at S$597.9 million, up 4.7% and translating to a full-year EPS of S$0.559.

Overweight Singapore for defensive reasons: OCBC Investment Research

In an article published in Business Times’ 10-11 Aug edition, OCBC Investment Research’s head Carmen Lee said for the STI, projected earnings growth for 2024 is 4.8% and 3.3% for 2025, which is reasonable for the local market as it has several well-established companies.

She said whilst volatility is likely to remain in the second half of the year, the fundamentals remain intact. “In terms of current valuations, the current price-earnings ratio of 10.3 times is also undemanding versus historical trends and regional peers. We continue to be overweight the Singapore market as heightened risk aversion will favour defensive blue chips here’’.

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