As we entered into the year of the Tiger, a curious phenomenon appeared to be brewing in the market — and I am not referring to the hops in Tiger Beer we drink when visiting relatives (up to five visitors a day per household). Neither am I referring to the tea we drink to “wash away” the copious amounts of festive snacking.
Rather, it is the US market: The awe-inspiring, all-powering hoover that has been sucking in capital from across the world for several years. This mighty bull has started to falter.
This in itself is not new, as this column had been pointing out. The “rotation to reality”, which started in the second quarter last year, had already left the Covid-19 rally in tech stocks reeling. At the more fantastical ends of meme stocks, Cathay Wood’s Ark Innovation ETF, components of the Goldman Sachs non-profitable tech stock index and the leading names of China tech labouring from Xi Jinping’s “common prosperity” moderations — they have all corrected 50%–70%. Over-inflated de-spacs in the US, encapsulated by one too close to home Grab Holdings, traded as low as US$5 ($6.73) — more than half below its US$11 debut — are struggling to find their footing.
Next came the “Zuck shock”, as Meta Platforms guided for a slowing outlook on Feb 2, which promptly vaporised US$230 billion, or 26%, off its market cap. Just like how users are starting to leave Facebook for newer social media platforms such as TikTok, investors fled — but not before sending the Nasdaq down 10% into correction territory. To put the size of the carnage into another perspective, the market cap demolished was roughly the equivalent of the entire Intel Corp, or a third of the whole of Singapore’s market value.
In its wake it side-swiped the S&P 500, whose top eight stocks are big tech names, representing more than a quarter of the index market cap to drop by more than 6% down year to date by early February. Conversely by the end of the first week this month, the Straits Times Index (STI) was up 6.65% to 3,332 points, sitting pretty above the 3,240-point technical breakout, seemingly immune to the gyrations in global volatility — East or West. Perhaps that is now base camp.
Marching to its own beat?
Since January, market participants have observed muted mark downs whenever there are volatile drops overnight on Wall Street at the Singapore morning open, with seemingly inexplicable resilience followed by new attempts towards the 2018/2019 highs of 3,400 and 3,600-point levels. Occasionally, we swoon to the gyrations up north in China intraday, only to find our own footing by days’ end after Hong Kong closes at 4pm.
For sceptics who have been waxing lyrical about the better performance of Hong Kong, our own STI is up 14.8% versus the 13% drop in the Hang Seng Index (HSI) since January last year.
Over the same period, the Hang Seng Tech Index is down 36%. With its traditional lower volatility and higher dividend carry, naysayers when presented the facts often appear to be in a state of cognitive dissonance almost in disbelief given the misconceptions long held about our local market.
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Granted, STI’s gain came in no small part from the three local banks (who represent 40% of the index) hitching a ride from prospects of higher rates. But, is there really nothing else behind STI’s out performance?
Up till now, it is fashionable to lament about losing money in small caps here, while with all the wealth that has been generated in the fully democratised financial markets of the West, where the mantra was “we only trade US stocks”. We have stopped hearing this in recent months. Or, more recently, “we have made money in crypto and NFTs”. Hang on — maybe that has paused for now as well.
For those who argue STI is lifted only by the banks, Tech(tical) reboot (Issue 1019 of The Edge Singapore) covered the different ways one could ride up the STI elevator. In the consolidation pre-Chinese New Year back to 3,240 points, a group of counters outperformed the index’s 3% growth to help the index breach above 3,300 points. They included Keppel Corp, which was up 12% (after turning in FY2021 earnings of $1 billion); Hongkong Land Holdings, up 8% on its steady buyback; Sembcorp Industries, up 15% to $2.41 as its sustainability proposition takes hold. Meanwhile, Jardine Matheson Holdings and Singapore Telecommunications continued to accreted.
Perhaps the reinvigorated primary market, with a smattering of recently-listed spacs, global REITs and Catalist IPOs, plus rumoured secondary listings of large US-listed Chinese companies (such as Nio) and other multi-billion Mainboard deals (such as Saudi Aramco) being cooked, are signs of institutional money voting with their feet slowly but surely.
Meanwhile, the billions from the capital market support measures announced last September, even if they are not injected into the markets directly, are serving as backers of a healthy pipeline of activities. If the old adage of the rest of the year taking a lead from how January goes, improving corporate results, M&A prospects and revaluation should start seeing the spillover into the breadth of the second liners in Singapore as the broader market beyond the index stocks catches up.
What about tech?
Rising interest rates (more aggressively in the short-term) is equity positive for cyclical equities if it signals demand expansion. Beyond the banks, Singapore is chock full of cyclicals recovering and reinventing themselves. If that holds back wage push inflation as economies adjust to post pandemic distortions, and supply chains readjust, REITs that do not require immediate refinancing, plus revaluation gains of real assets, will be carried through.
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In addition, US market investors might go through a digestive pause. As investors from the rest of the world retreat home, plus US investors looking beyond their shores, the flow of recycled capital from US back “home” will be beneficial for Singapore as well. And if the air pockets that the likes of Meta and Netflix fall into help spark a repricing to reality and force investors to differentiate — and then rebalance — between “multiples expansion” of non-profitable tech enjoyed in the past two years, and re-rate profitable “real tech”, then the normalisation process presents opportunities too.
Consider this in the US tech reporting season over the Lunar New Year. Apple’s quarterly profit was up by 20% y-o-y in spite of the chip shortage. Alphabet was 30% up from digital ad spending gains, as Google’s business model has proven to be more all-encompassing than Facebook due to the way they captured data. Facebook’s weak spots were laid bare after Apple offered users a way to protect their data, whilst its foray into the wonders of the Metaverse has so far been illusive except for US$3.3 billion in red ink from that business unit.
Meanwhile, Amazon.com demonstrated its pricing power by raising prices for its Prime premium service, while exerting further dominance in the cloud. On the other hand, Spotify Technology and Paypal Holdings were both sold down as investors did not like the numbers indicating growth slowing down. Across the S&P universe and within US tech stocks, the message is clear: There is a rotation to reality.
Here in Singapore, Sea — which is included in MSCI Singapore — has corrected by almost 60% from its October 2021 peak. However, before the drop it has already raised good capital to hopefully see it through a path to profitability as investors put more emphasis on that.
Unlike the almost indiscriminatory sell off in China and US, the smattering of Singapore-listed tech companies are in the process of being re-rated to levels enjoyed by their global peers (which are themselves coming down from much loftier levels), as they extend their growth story either organically or via M&A.
Black Water Tiger
The pullbacks in Venture Corp, Nanofilm Technologies International, AEM Holdings, Grand Venture Technology and Aztech Global in late January have already started to reverse as we head into the results season. Relatively speaking, there is room to level up — just like Chinese tech (saddled with a political risk overhang that might clear up in 2022, however).
For the faint-hearted who may not understand the differentiated Singapore spac regime — or what a spac is — this has led to the three tech-focused spacs Vertex Technology Acquisition Corp, Pegasus Asia and Novo Tellus Alpha Acquisition to trade below their $5 IPO levels. Some investors sold their holdings in these spacs to raise cash following the US markets corrections, others sold to meet margin calls, or to take advantage of quicker opportunities on rebound following sell-offs in tech. Or, they were simply frustrated at the lack of an IPO pop!
Well, until there is a combination or de-spac, any pop will be based on conjecture and not fact. For the informed and patient, buying any of the spacs at (which traded to as low as $4.72 in the case of Novo Tellus Alpha Acquisition) since their debut, gives them a sure bet of 4%–5% return (excluding the detachable free warrants that are still to be credited), as they can always redeem at par if they do not like the eventual deal put on the table, as the funds raised are put in escrow. Sometimes, free lunches show up in the market.
Since March 2020 at the start of Covid-19, the STI is up 34% and HSI is flat (another cherry picked statistic I have used). Alright, perhaps it is because STI had been ‘left behind’ in what The Economist describes as “America’s epic bull run of the last decade” fuelled by Big Tech (which also left all markets behind) that it is now outperforming. It is more than fengshui however, as I have elaborated above.
Whilst there are no lack of views and sceptics out there for the relative out performance of late, water will always find its level. Right now in Singapore, the tide is rising, and I choose to go along with it.
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.