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Brexit woes loom, IMF cuts global forecasts

Samantha Chiew
Samantha Chiew • 6 min read
Brexit woes loom, IMF cuts global forecasts
SINGAPORE (Jan 28): British Prime Minister Theresa May presented her revised Brexit plan to Parliament on Jan 21 after her previous Brexit plan, which took about two years to craft, was rejected.
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SINGAPORE (Jan 28): British Prime Minister Theresa May presented her revised Brexit plan to Parliament on Jan 21 after her previous Brexit plan, which took about two years to craft, was rejected.

The UK is set to leave the European Union (EU) on March 29 and without agreements in place about what their relationship would be like unless the Members of Parliament can come up with an alternative plan that Brussels would support.

On Jan 21, May presented several amendments in an attempt at a “softer” Brexit. Some have said the amendments try to take control of the Brexit process away from the government.

To avoid a huge economic disruption due to a no-deal Brexit, the government would have to accept May’s revised deal, or delay or revoke Article 50. “The right way for this house to rule out ‘no deal’ is for this house to approve a deal with the European Union,” May said.

At the end of the debate, 107 MPs questioned May’s revised plans. Conservative MP Sarah Wollaston tweeted, “It’s like last week’s vote never happened. Plan B is Plan A.” Parliament will be debating the amendments proposed by May before a vote on the motion is taken on Jan 29.

The pound sterling increased to 1.289 against the US dollar following May’s speech. On Jan 24, the pound sterling rose to US$1.307, its highest level against the US dollar. “Investors are still focused on how Theresa May will negotiate with the EU over the next few days,” says Tyler Griffin, currency specialist at OFX. “Looking ahead, if several ministers resign in response to being banned from a vote to stop a no-deal Brexit, as Amber Rudd has suggested, we expect further pressure on the pound. However, there is growing market confidence that a no-deal scenario will be avoided, which should ensure some buoyancy for the pound.”

Meanwhile, the International Monetary Fund (IMF) has trimmed its global forecasts, according to its outlook report released on Jan 21, the eve of the World Economic Forum meeting in Davos, Switzerland. It highlighted challenges facing policymakers as they tackled actual or potential crises, such as the US-China trade war and Brexit.

According to the report, the global economy is expected to grow at 3.5% this year and 3.6% in 2020. The IMF had earlier expected growth to clock in at 3.7% for both this year and next. This mainly reflects signs of weakness in Europe, as Germany is affected by new fuel emission standards for cars while the Italian market is facing pressure, owing to Rome’s recent budget standoff with the EU.

Furthermore, a possible no-deal Brexit, failure to resolve trade tensions and a worse-than-expected slowdown in the Chinese economy could worsen market turbulence, triggering a sharp global slowdown.

“After two years of solid expansion, the world economy is growing more slowly than expected and risks are rising,” says IMF managing director Christine Lagarde. “Does that mean a global recession is around the corner? No. But the risk of a sharper decline in global growth has certainly increased,” she adds, warning that that policymakers should brace for a “serious slowdown”.

In an attempt to avoid Brexit disruptions, several companies have decided to move their headquarters elsewhere. Among them is electronics firm Sony Corp, which will be moving its European headquarters to the Netherlands. Bank of America will be moving its European headquarters from London to Dublin.

British technology firm Dyson said on Jan 22 that it would be relocating its headquarters to Singapore. But the company, founded by James Dyson, one of the prominent voices supporting Brexit, said the decision had nothing to do with Brexit worries. The move comes on the back of Singapore signing a free trade deal with the EU.

Value in hospitality REITs

Local telco M1 will be releasing its FY2018 results on Jan 28. In a Jan 14 report, RHB says the takeover offer for M1 by major shareholders Keppel Corp and Singapore Press Holdings (SPH) is likely to become unconditional and investors should accept the $2.06 per share offer.

To recap, Keppel and SPH made a pre-conditional voluntary general offer for M1 on Sept 27, offering $2.06 a share. Bursa Malaysia-listed telco Axiata Group is M1’s biggest shareholder, with a 28.7% stake. Keppel Telecommunications & Transportation (Keppel T&T), a listed subsidiary of Keppel, owns about 19.3% of M1, while SPH holds about 13.5%. Bloomberg reported on Jan 23 that M1 had extended the closing date for the offer by two weeks to Feb 18, giving shareholders more time to tender their shares.

Axiata has yet to accept the privatisation offer. But Keppel and SPH have, through their joint-venture firm Konnectivity, obtained a waiver from the Singapore Exchange that allows it to take M1 private without Axiata, on the condition that the public float exceeds 90%.

Meanwhile, Maybank Kim Eng is positive on Singapore real estate investment trusts, as it believes that hospitality and industrial REITs are best placed for growth and yields. OCBC Investment Research is also keeping an “overweight” rating on Singapore’s hospitality sector, as it sees value in some of the hospitality REITs.

Ascott Residence Trust (ART), one of OCBC’s top “buy” picks, will release its FY2018 results on Jan 29. The trust announced on Jan 9 the divestment of Ascott Raffles Place Singapore for $353.3 million, representing a 64% premium over the property’s independent valuation of $215 million as at Dec 31, 2018. The buyer is said to be Cheong Sim Lam, whose family developed International Plaza and the Hyatt Regency Singapore.

OCBC believes the deal will boost the trust’s FY2017 net asset value per share by 4.8% to $1.31 pro-forma, compared with the actual NAV per share of $1.25. “We continue to like ART’s portfolio of assets with its strong brand recognition and high geographical diversification,” says analyst Deborah Ong.

Meanwhile, CGS-CIMB has a “hold” call on the trust to reflect the loss of income from its disposal of Ascott Raffles Place, which will be partially offset by interest savings. It also sees limited rerating catalysts for the trust unless it makes further acquisitions of earnings-accretive assets.

CapitaLand on Jan 14 announced that it would be acquiring all the shares in two subsidiaries of Ascendas-Singbridge from Temasek for $11 billion to create the largest diversified property group in Asia. Upon completion, the Ascendas group of REITs will be under the management of CapitaLand. Ascendas Hospitality Trust and Ascendas REIT will be announcing their results on Jan 29 and 30, respectively.

Other REITs and companies announcing their results this week include Fortune REIT and Parkway Life REIT on Jan 28; OUE Hospitality Trust, CDL Hospitality Trust and Starhill Global REIT on Jan 29; Frasers Hospitality Trusts, OUE Commercial REIT and Tuan Sing on Jan 30; and CapitaLand Retail China Trust, AIMS AMP Capital Industrial REIT and Singapore Post on Feb 1.

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