CFA Society Singapore
SINGAPORE (Apr 11): March was a month riddled with bad news. As a result, the benchmark Straits Times Index (STI) tumbled 2.6% during the month, even though it ended 0.7% up for 1Q18.
Last month, the US administration slapped tariffs on US$50 billion ($65.4 billion) worth of Chinese imports, mainly in machinery and equipment.
China then threatened to respond in the same proportion, scale and intensity.
Trump triggered further nervousness by attacking Amazon, threatening to exit NAFTA, appointing a new security adviser whose views included a pre-emptive strike on North Korea, and welcoming the visit of Taiwanese officials -- to the ire of the Chinese.
In a Tuesday report, researcher Paul Chew says, ”I guess that two-legged tail risk is unravelling. Only a de-escalation of reciprocal tariffs will calm the market, in our view.”
An upcoming May 15 public hearing on tariffs imposed on China could see the peak of punitive tariffs.
According to Chew, it is unlikely that the Republicans will want China’s targeted tariffs on agriculture and food products to hurt their red states, especially with looming mid-term elections.
Assuming a US$100 billion two-way trade and a 0.24 percentage point impact on GDP, the effect is less than 0.2% on the combined US and Chinese economy of US$31 trillion.
Nonetheless, the market is aware that the impact will be modest. The bigger damage is however the uncertainty over how far this trade war will go.
A positive from all the noise has been a decline in US Treasury yields and inflation expectations.
On the economy, there has been only a milder patch of data. US PMI has gone softer, but this is from multi-year highs. Retail sales have moderated, though still growing at 2017 rates.
Meanwhile, vibrant employment together with a pick-up in wages should provide upside to consumer spending in the US.
“We see corporate expenditure gaining momentum. Our Singapore indicators are mixed. Exports have trended down, but industrial production and PMI hold their ground,” says Chew.
On the other hand, the Fed have raised interest rates by 25 basis points, which came as no surprise. Four more rate hikes are expected this year.
Curiously, the inflation forecast was only raised marginally to 2.1%, only a tad higher than the Fed’s 2% target for 2019, having been priced in by the market.
Singapore’s REIT index was down 4% in 1Q18. The probability of three rate hikes in 2018 has climbed to 41%, according to Bloomberg.
Loan growth in Singapore is 4.6% below the research house’s estimate of 7%. The researcher expects significantly better NIMs from y-o-y rises in both the SIBOR and SOR during this quarter.
Property sales in Singapore are resilient, especially with the recent strong take-up in a residential launch by City Developments (CDL), at almost 40% over a weekend. And the product was priced more than 20% above transactions in the adjacent area.
Another sector the research house likes is coal. Coal prices have been resilient as China plans to cut supply while its power consumption is rising. Chinese imports of coal from Indonesia are up 55% YTD.
The research house’s top “buy” picks for this sector are Geo Energy and Golden Energy and Resources (GEAR), as production from both companies is expected to be up 33% in 2018.
As at 11.10am, shares in CDL are trading at $12.71; Geo Energy at 22 cents; and GEAR at 38 cents.