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The Battle of Midway

Chew Sutat
Chew Sutat • 10 min read
The Battle of Midway
People watching the presidential debate between US President Joe Biden and presumptive Republican nominee, former President Donald Trump, in New York City. Photo: Bloomberg
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Back in June 1942, six months after Pearl Harbour, what was described by military historians as “the most consequential naval engagements in world history, ranking alongside Salamis, Trafalgar …” took place. Good military intelligence enabled American cryptographers to determine the date and location for the planned Japanese attack to trap remaining US carriers in Midway. The resulting count of four Japanese carriers to one American carrier and 10 times the casualty rate of the Imperial Japanese Navy was widely considered the turning point in the Pacific War.

Sadly, as we cross the midpoint of 2024, there appears to be no end yet in sight to the Ukrainian quagmire notwithstanding the peace summit last month; the summit was boycotted by major powers like China with a number of those in attendance including India, US Saudi Arabia and South Africa refusing to sign the joint communique. Similarly, even as Israeli action in Rafah winds down along with its war cabinet, the northern front with Lebanon threatens to open up as Gaza starves. Not far from us, Myanmar’s civil war continues for the third year, as some of its citizens find work here to fill service, healthcare and domestic gaps in our economy.

Middle America ready to turn

The state of the world mid-2024 continues to have its fair share of uncertainties. Not least the “reality TV show” of the first US presidential debate.  It would be hard to imagine and rather unnerving if one were to consider the impact of either being at the helm of the most powerful economy and military force in the world after November’s election. For now, the US markets continue to power up on all things AI, as analysts invent new metrics for the brave new world. The hope is that any disaster will be protected by the US Federal Reserve having to cut interest rates.

As Goldman Sachs, Citigroup and UBS upgraded year-end forecasts for the S&P 500 (squeezed up 15% by a few AI stocks narrower than the Magnificent Seven stocks last year), the few Wall Street bears and contrarians who believe bulls are embracing “fanatical thinking” are “increasingly isolated”, opines The Financial Times as we once again see hedge fund bears shutter their shops. The only Cassandra out there among the big boys appears to be Mario Kolanovic, JP Morgan’s chief global markets strategist, who believes the S&P will tumble by almost 25% by year-end from here.

Hindsight will eventually prove 20:20 but if we continue to bubble through the summer and he is proven eventually right, then the catalyst may come after the Nov 5 presidential election. Assuming US President Joe Biden still runs and stumbles into a victory miraculously against all odds or if Michelle Obama saves the Democratic Party’s day by standing, ex-President Donald Trump may not recognise the results once again as he refused to be committed on this issue in the recent debate. Having missed the AI melt-up thus far, I am content to sit this one out.

See also: Kakao billionaire arrested in K-pop market manipulation case

Across the Mid-Atlantic ridge

The UK general election will have been completed by the time this column goes to print. Labour’s Keir Starmer, having shed the extreme left of his party and Jeremy Corbyn, will win. The question is by how much and whether Prime Minister Rishi Sunak will even keep his parliamentary seat. After years of fractious infighting, the Tories look set to set an ignoble record losing their “super majority” as their supporters fracture to join the Reform right and centrist Liberal Democrat. At least, this is unlike the disastrous short-lived former Prime Minister Liz Truss and her sidekick Chancellor Kwasi Kwageng’s tenure which wrecked the pound and sent borrowing costs soaring, the new likely Chancellor Rachel Reeves, a former Bank of England economist, will have more credibility with markets.

Perhaps after years of scandals culminating in election date betting by insiders in Rishi’s circle, it is time for a change in the UK and one can hope that a new consensus will be formed with closer trade links (without open immigration) with Europe to lift the UK out of its economic slumber — much like Tony Blair and New Labour did in the 90s.  Even so, with the rising taxes on “Non-Domiciles”, I have already come across a fair number of former expats in Singapore announcing their re-entry here. If a new dawn is heralded from the anticipated change, it may be worth relooking at companies and REITs here with UK assets including property stalwarts like Frasers, GuocoLand F17 -

, Ascott and Elite — all of which are in the mid-cap range.

See also: Should we stop aiming for economic growth?

Missing European middle ground

As broad European elections last month lurched to the right, a tempestuous French President Emmanuel Macron called a snap election in hope of stemming the tide of the French National Front led by Marine Le Pen. The election held over two rounds on June 30 and July 7 runoff looks likely to marginalise his own enfeebled coalition in the centre, running a distant third in the polls at 20%.

The possibility of a far-right victory or a revitalised left-wing alliance, called the nouveau front populaire (galvanised in reaction to Macron’s pro-business labour policies and tax cuts), has already led to market jitters with the equity index down and bond yields up. With both promising higher spending and the rolling back of business-friendly policies, wealthy French themselves are exploring relocating or domiciling themselves and businesses to Italy, Switzerland and Spain to avoid potential wealth taxes. Our previous assessment from last year’s visits — that the economic dynamism and proliferation of start-ups that can exploit and export French technology and the opportunities in French logistics real estate and infrastructure — has not changed but warrants a pause to reassess the situation.

If France locks up and joins the German economic drag, then European growth is left to the Spanish and Polish economies to lead. That is not very inspiring.

What about the Middle Kingdom?

It does not take a lot for China optimists looking for silver linings to find them. Double-digit gains and up to 50% returns of indices and stocks, especially from a revival in Chinese tech from March to May, have emboldened market participants to imagine a stealth bull in the making. Indeed by technical indicators, Chinese and along with them, Hong Kong stocks even after a June pullback have found a period of stability and sustained highs from what looks to be hopefully the final bottom in February after the 2020 “anti-corruption, common prosperity and Covid correction”. The decision to let some private property developers fail and then nationalise some projects through “social housing”, has rebooted construction.

There is a spring in the step of hopeful bankers and brokers who are tentatively touting deals and even IPOs in Hong Kong. Whether forgotten deliberately or selectively blocked from memory is the fact that this year’s gains leave many headline indices and stocks half to two-thirds below their highs, unlike their US tech cousins which had reinvented themselves and bubbled up from the 2022 collapse. After all, they are unconstrained politically and not subject to Western industrial policy and protectionism.

Sink your teeth into in-depth insights from our contributors, and dive into financial and economic trends

The latest protectionist incarnation from the US now tries to cut off import routes via Mexico of Chinese goods, for example. Friend-shoring which serves as mere arbitrage for Chinese exporters will see its taps shut. It is no wonder that Chinese factory production numbers in 1H2024 continue to decline. The Third Plenum, to be held from July 15–18, is touted by Xinhua to “ examine issues related to further comprehensively deepening reform and advancing Chinese modernisation”. Hope springs eternal that state-funded investment will morph into high-tech innovation and domestic consumption, although that will take a long time to realise.

Analysts are not convinced that a massive stimulus is on the cards as the People’s Bank of China head talked about “exercising moderation”. However, “a more coordinated housing destocking programme to contain the negative property spillovers” could be on the cards, according to UBS Global Wealth Management’s Hu Yifan. The bottom may have been found in Chinese equities and the first part of any long-term bull which is the steepest has passed. It will slowly climb out with the path muddied with Western economic containment policies.

Buying ETFs on dips and taking quick profits along the way may be a way to stay nimble and average out portfolios purchased at higher prices. In addition, mid-cap stocks trading at a fraction of NAV like Yanlord Land Group Z25 -

, which has corrected in line with the broad Chinese markets after a rebound in May, and even others that are trading below cash value, could be worth accumulating.

Middle Earth and mid-caps

Safe in the haven of sunny Singapore with nice boring habits like stability and trust, the Straits Times Index (STI) has held above 3,300 and is testing 2023/2024 highs again. This may not be exciting for those who like equity rock-and-roll — even if US$550 billion ($746 billion) of Nvidia’s market cap, which is almost the entire market cap of Singapore listed stocks, was wiped out in one trading session in late last month, could be a bit hard to stomach for the adventurous. The higher they go, the harder they fall, so goes an old saying.

Forgotten amid the rotational play among our three banks are some mid-caps that deserve a look as we head into 2H2024. These include Keppel and Sembcorp, which are in nice trading ranges, and the revival of recent favourites including Singapore Telecommunications Z74 -

, which is heading past $2.75 now. If JP Morgan is right about a 25% correction in the S&P,  there might also be a retreat in our main blue chips. It is conceivable that a sideswipe from a potential US market fall may cause the STI to once again give back 5%–7% and fall to 3,100 points in tandem. It would not collapse, because it never bubbled up to the stratosphere since 2023, unlike the US markets.

Being shallow in its volatility and having a 4-5% dividend yield will compensate for the carry somewhat. Thus, I am not panic selling. On a relative valuation basis, it might even continue to hold or break out.

Nonetheless, as Chew On This looks into  2H2024, I will be looking to selectively take profit off the table for large-caps and more globally exposed companies. I will revisit strong domestic and regional mid-caps with healthy balance sheets and attractive valuations. Last year’s mid-cap gem spotted was BRC Asia BEC -

, which aside from an attractive high single-digit dividend yield, has also risen 25% from when it popped up on our radar with its low P/E and post-Covid construction recovery. Staying safe in the middle of the road might be rewarding for 2H2024.

Chew Sutat retired from Singapore Exchange S68 -

after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s Lifetime Achievement Award. He serves as chairman of the Community Chest Singapore.

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