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Simulation model projects loss of 37% if war breaks out

Jeffrey Tan
Jeffrey Tan • 6 min read
Simulation model projects loss of 37% if war breaks out
(Sept 11): In the wake of destruction wrought by Hurricane Harvey in Texas, the US is set for another storm. Hurricane Irma, which is said to be one of the most powerful Atlantic hurricanes ever, is expected to hit Florida this weekend. At the same time,
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(Sept 11): In the wake of destruction wrought by Hurricane Harvey in Texas, the US is set for another storm. Hurricane Irma, which is said to be one of the most powerful Atlantic hurricanes ever, is expected to hit Florida this weekend. At the same time, North Korea successfully conducted its sixth and largest nuclear bomb test on Sept 2, leading to fears of a US military strike.

Those events collectively roiled equity markets around the globe. In the US, the Dow Jones Industrial Average, Standard & Poor’s 500 index and Nasdaq Composite Index fell 1.1%, 0.8% and 0.9%, respectively, on Sept 4 from last week. UK’s FTSE 100 index declined 0.9% on Sept 5 from last week. Similarly, Japan’s Nikkei 225 tumbled 1.6% and Hong Kong’s Hang Seng Index shed 0.8%. At home, the Straits Times Index fell 0.8% on Sept 5 from Aug 31.

Our Singapore Market Portfolio, too, was not left unscathed. It fell 0.3% in the week from Aug 29 to Sept 5. We fear that things could get much worse if there is an escalation of conflict over North Korea. How badly could our portfolio be hit? It is hard to predict. However, there are mathematical models that seek to simulate the impact of certain event risks on different portfolios. For instance, Bloomberg has a scenario model for turmoil that arose from Russia’s war with Georgia, for the period spanning Aug 7 to Nov 20, 2008.

Using that scenario, our portfolio would have lost about 37%, according to the Bloomberg model. The biggest hit would have come from our holding in gold miner CNMC Goldmine Holdings, which the model says would have collapsed 94.5%.

Of course, no two military conflicts are exactly the same, and there is a big difference for investors in Singapore between conflict in North Asia versus trouble in Eastern Europe. Still, it illustrates why analysts in Singapore are now on tenterhooks. “If tensions escalate further and eventually trigger US military intervention, then we have to carefully assess the changes in strategic equilibrium in the region and potential impact to trades and businesses,” CMC Markets analyst Margaret Yang tells The Edge Singapore via email.

Yet, most analysts figure that cooler heads will ultimately prevail, because an actual military conflict does not appear to be in the interest of any party. Singapore equities will probably not be too badly affected amid the escalating tensions in the Korean peninsula, given negligible revenue contribution from South Korea, according to Kum Soek Ching, head of Credit Suisse’s private banking research in Southeast Asia. In fact, the flare-up in tensions could give investors a “good buying opportunity” to accumulate stocks with sound fundamentals and reasonable valuations, says Yang.

So, what stocks should investors watch? Carmen Lee, head of OCBC Investment Research, favours a diversified portfolio comprising defensive blue-chip, high-dividend-yielding companies and growth stocks. Her top picks include DBS Group Holdings and UOL Group.

As it happens, our portfolio is already holding these stocks. It also still has 22% in cash, which gives us lots of capacity to buy stocks that may get battered down in the weeks ahead.

DBS strengthens foothold in India

In the meantime, shares in DBS rose nearly 1% in the past week to close at $20.69 on Sept 5, after the banking and financial group strengthened its foothold in India. The bank announced that its existing India franchise, DBS Bank India, will convert to a locally incorporated wholly-owned subsidiary, following an in-principle approval from the Reserve Bank of India (RBI).

Via DBS India, DBS says it intends to build a “scalable business” using a combination of digital and physical formats. This will allow the bank to cater to the convenience of its target customer segments, such as large corporates. DBS says it will offer them “financing solutions across their entire value chain”. It will also offer competitive transaction banking and supply chain solutions, through specialised offerings that span both cash management and trade finance. In addition, DBS intends to target retail customers and small and medium enterprises (SMEs).

According to DBS, the bank was the first Singapore bank to set up a representative office in India in 1994. It was upgraded to a formal bank branch in 1995. Rival United Overseas Bank also has a presence in India, but not Oversea-Chinese Banking Corp. DBS is currently the largest Singapore bank in India and the country’s fifth-largest foreign bank by assets, the bank says.

Shareholding activity at Chew’s and UOL
Meanwhile, egg producer Chew’s Group has entered into negotiations with “third [parties] to explore a possible transaction involving the shares in the company”. In a statement on Aug 24, the company says its controlling shareholder had been approached and was involved in the discussions.

Fenghe Investment Holding is the biggest shareholder with a 68.1% stake in the company, according to its 2016 annual report. Fenghe Investment is 40.3% owned by Chew’s Farm Holdings. Both companies are controlled by the Chew family.

According to Chew’s, no definitive agreements have been entered into between the parties and the shareholders. The company stresses that there is “no certainty” that the negotiations will result in any transaction. “Further announcements will be made by the company as and when there are any material developments on the aforementioned,” it adds.

For now, we intend to keep our holdings in Chew’s. Though the stock fell 0.8% in the past week to Sept 5, it is still our top performer — returning 92.3% — since it was added to our portfolio.

Over at UOL, the property developer says it has completed its share swap transaction with Haw Par Corp for a larger stake in United Industrial Corp. This came after conditions pursuant to an option agreement were fulfilled, the company says in an Aug 31 statement.

As such, 60 million shares in UIC were transferred to UOL Investments, a wholly-owned subsidiary of UOL. At the same time, 27.3 million shares in UOL were allotted and issued to Haw Par Capital, a wholly-owned subsidiary of Haw Par. UOL now has a larger interest in UIC of 48.96%, up from 44.71% previously. UOL is not obliged to make a mandatory general offer as the Securities Industry Council of Singapore has waived it as long as the company does not cross the 49% threshold.

OCBC Investment Research is positive on the deal. “We believe UOL’s move makes strategic sense and has enabled it to acquire shares that are otherwise not available, given the lack of trading liquidity,” OCBC analyst Eli Lee writes in a note dated Sept 4. “More importantly, the transaction is accretive for UOL, which will deepen its effective ownership stake in desirable UIC assets, such as Singapore Land Tower and Marina Square, which it already understands well.”

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