This summer’s hot streak goes on unabated. Headlines were dominated by two elements: Fire, which devastated forests in Hawaii and Canada, and water, which led to flooding in China.
In the Chinese zodiac calendar, this is the Year of the Water Rabbit and not the Fire Rabbit but one can hardly wait for the summer of nature’s discontent to clear, which also kept investors away and knocked markets East to West down a tad.
Sadly, I wish it was as simple as fengshui but the climate crisis that is upon us and no matter how many times Trump denies it, is not going to go away. More worryingly, companies and governments are meandering, or in the case the UK, walking back their net-zero commitments.
For the coming two months, I can only hope that El Niño will not again bring transboundary haze over. If so, hundreds of thousands of spectators will be watching Singapore’s annual F1 night races through a dusty yellowish cloud — a visual reminder of how the investigation on F1 ex-boss Bernie Ecclestone has entangled our city-state. Personally, I think it is a good thing that questions are raised. By doing so, they can be examined closely rather than being swept under.
It was also rather amusing to receive some belated 101 via YouTube, from the Prime Minister, no less, on Singapore’s reserves — just as the election for a new guardian is impending between two former stalwarts of MAS and GIC respectively. There is some distraction though from a so-called “independent” third candidate making a second attempt while constantly surrounding himself with figures associated with the non-white political parties.
Indeed, some Singaporeans did get hot under the collar for reasons other than the changing weather: George Goh, who launched his campaign earlier than all, was not deemed qualified to run as the PEC did not accept the argument to aggregate his five different companies to meet the $500 million for one company criteria, which is specified in the rules.
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Among the five companies was SGX-listed Ossia International, of which Goh is the group executive chairman. In its most recent annual report, Goh’s younger brother Goh Chin Huat, executive director and CEO, was listed as “the most senior executive in the group”.
Perhaps until the next foray into politics, investors will take comfort that our successful entrepreneur will now refocus his energy on his SGX-listed stock which had almost doubled from 11 cents to 20 cents this year at its peak. After all, it still has a $40 million market cap, a single-digit PE ratio and a good historical payout dividend yield of 11%. Oh, but it needs to try and get out of the SGX Watch-List — its Dec 4 deadline has been extended four times already.
The recent midsummer pullback for the Straits Times Index from 3,400 points to below 3,200 could present good opportunities for adding back any blue chips sold at higher levels.
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Perhaps, it is the thinner liquidity of this period when many index stocks go ex-dividend or when markets were adjusting during a quieter period. A case in point was Singapore Telecommunications (Singtel), where the timing of some market concerns about its Indonesian business (which was later clarified by the Citi analyst who first wrote about it), came right on the ex-dividend date. As Singtel fell from $2.67 to $2.34, I caught some on the way down and may yet add as it is through the bottom of its recent range.
Unfortunately, my hopes for making some money quickly off tech plays via Venture Corp and AEM Holdings fell through, as both 1HFY2023 earnings ended June missed expectations. At least for Venture, there is a decent dividend of 25 cents per share to look forward to. Sembcorp Industries continues to be well supported in anticipation of its inclusion into the MSCI index in September while Sats took a reality check coming back to $2.50s. I am looking to repurchase STI ETFs using my CPF, having sold in late July on the way up, as highlighted in an earlier column. Fortunately, with my head, I took some, but not all the profit, while with my heart, I am hoping the 3,400 level will break out.
Cool cucumbers
After my last two columns on China, I was asked if I was “too optimistic” in my prognosis. I thought I was circumspect because I did point out that one had to be selective in sectors and cautious in gradually buying on dips depending on the macro environment. Perhaps, the negative news flow all through was disconcerting for many.
For some time, China Evergrande, one of China’s largest and most indebted developers, was in the news. Last week, it finally applied for Chapter 15 (for non-US companies) bankruptcy protection in New York.
Eyes are now on Country Garden’s Yang Huiyan, a one-time richest woman in Asia with a net worth of US$30 billion ($40.71 billion), thanks to the transfer of shares by her father, company founder Yang Guoqiang. The Guangdong province-based developer, behind projects such as Forest City facing the Tuas Checkpoint, recently issued a profit warning, missed two bond payments, and scraped a shares placement. All these events took place right after Yang donated 20% of Country Garden’s separately-listed services group worth almost US$1 billion to a Hong Kong-registered foundation set up just a few weeks earlier by her sister.
In the interim, low-profile investment group ZhongRong, which operates many wealth management trust products under a web of entities including Zhongzhi Enterprise, has been missing payments on dozens of products since July. Its liquidity troubles allegedly relate to its more than US$80 billion of products sold to investors which are tied to shadow lending to property developers. The writing was on the wall when it was discovered that the “pooling of funds” model of issuing new products has been co-mingled together to pay old ones, which was technically disallowed under 2018’s asset management rule changes in China.
The shadow banking sector is estimated to be US$3 trillion but China’s businesses require more liquidity. Despite relentless pronouncements and cajoling from the top, including August 20th’s concerted urging by the People’s Bank of China (PBOC), China Banking Regulatory Commission (CBRC) and China Securities Regulatory Commission (CSRC) to boost loans to support the economy and reduce local government bond risks (Chew on This, Issue 1100), banks are still reluctant to lend. As such, is this China’s Lehman moment, as vividly described by strategist Christopher Wood of Jeffries?
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When China introduced the infamous “Three Red Lines” in August 2020 in an attempt to rein in unbridled leverage by the developers, it was probably timely. However, the ongoing pandemic made the contraction far more severe, despite subsequent relaxation. This has engendered the biggest downturn in the residential property market since privatisation in the 1990s, argues Wood, who, for decades, has observed and influenced markets.
He is not alone in an increasingly pessimistic forecast of the deceleration this summer seen in China. Some have postulated that China is just about going into a Japanese-style balance sheet recession. This occurs when high levels of private sector debt cause individuals or companies to collectively focus on saving by paying down debt rather than spending or investing, causing economic growth to slow or decline.
Interestingly, Nomura Institute economist Richard Koo, who coined this term using his observations of Japan’s multi-decade slump that began in 1990, had also observed data points in China pointing towards a similar occurrence. While a possible cure would be a massive fiscal stimulus, this could put further pressure on the renminbi which has been in a downward fixing spiral by PBOC of late. But what else could heat up the wok?
The heat is on
“Reports of my death have been greatly exaggerated” — that was what Mark Twain wrote in a cable from London to the US, where his obituary was mistakenly published. Since Deng Xiaoping opened up China in the 1980s, there has been a series of ominous proclamations that its economy will implode, no thanks to unsustainable growth rates, unbridled corruption, persistent unemployment, lack of domestic consumption, opaque regulation, unchanging rules, or rules that changed too quickly.
BNP Paribas Asset Management’s Chi Lo acknowledges that “some classic symptoms” of a balance sheet recession exist. This includes “high debt, a loss of confidence, a poor property market, high risk-aversion cutting consumption and bank lending, and (pressure for) system-wide deleveraging.”
However, China it appears, has persistently defied predictions of falling into a debt currency crisis because its debt is self-funded with a relatively closed capital account. Beijing is pursuing a selective “implicit guarantee” policy to uphold confidence. As mentioned in last week’s column, there is even talk of a local government plan to backstop debt.
On the asset side, there is a limited wealth effect from stock investments on spending by the private sector. The stock market is not at a 1980s Japan bubble economy level with lots of cross-shareholdings among corporate Japan. The financial assets of Chinese households range between 20% and 30%, with mortgage loans about 20% of total bank loans presently. A US-style subprime housing crash leading to massive wealth destruction, therefore, appears unlikely. In pursuing debt reduction rigorously since 2020, China may have preempted a much sharper Western-style boom-and-bust after the pandemic. This even if stories of individuals and small groups protesting to get their money back from failed trust products or housing projects that don’t get built make good headlines for the wires.
Finally, the report concludes that investors “should reassess China’s growth outlook based on the new direction of its structural reforms, rather than dwelling on past problems”. These include new infrastructure, inter-city railways, R&D on energy and environment technology, 5G/6G networks, AI and IoT, and reviving industrial migration to interior provinces to tap cheaper resources. A more productive economy and sustainable growth momentum could result if this development strategy is implemented well.
I am not sure what the catalyst will be to give the self-fulfilling private sector confidence challenges a real shot in the arm. Hopefully, it is not an eventual great power war as a distraction for economic malaise instigated by either the US or China.
But given where markets have already priced, there are companies with cash, paying high dividends and also trading well within the NTAs having been so heavily discounted. Even for those who believe that China is grappling with a balance sheet recession, there are always the prospects of steadier, longer-term returns and no need to get too hot under the collar. A strategy of investing in a “dividend index, with a presence in the longer end of the government bond market” might just be one, suggests Wood of Jefferies.
Chew Sutat retired from Singapore Exchange 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
