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The Long March — market hops up and down in the first quarter

Chew Sutat
Chew Sutat • 10 min read
The Long March — market hops up and down in the first quarter
Under President Xi Jinping, China is quickly re-establishing international links post-pandemic lockdown / Photo: Bloomberg
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In 1934, the Red Army — under Mao Zedong and Zhou Enlai — trekked more than 9,000 km over difficult terrain to escape from encircling Kuomintang troops under Chiang Kai Shek, who then held the upper hand in the civil war.

Out of 100,000 at the start, just 8,000 Communists made it to the destination at Yan’an, now lauded as the birthplace of the revolution. Along the way, the year-long endeavour, now known as The Long March, forged legends of hardships, courage and persistence, lending both mystique and prestige to the party, leading to its eventual triumph.

The world has changed much since, but this past month of March seems especially long, given the long list of geopolitical and market events.

Taiwan’s President Tsai Ing-wen capped the month with her visit to the US, emboldened by Nancy Pelosi’s visit to Taipei last year. Tsai’s visit was nothing close to the warm welcome extended in 1943 to Soong Mei-Ling, equally well known as Madame Chiang Kai Shek.

Besides appearing on the cover of Time, Soong made a historic address to a joint session of the US Congress. This time, the Biden administration publicly disengaged from the visit and made soft, polite noises about keeping channels open with Beijing. China, as expected, kicked up the necessary umbrage. Presumably, no balloons were shot down as a result.

In China, former KMT chairman (and therefore deemed China-leaning) Ma Ying-Jeou declared that “We are all Chinese”, as he made history by being the first former Taiwan president to visit the mainland since the Civil War.

See also: Traversing the Silk Road and revisiting a frontier market

Back in November 2015, Ma similarly made history when as the standing (but outgoing) president, he shook hands with President Xi Jinping in Singapore for a full minute. That moment, ancient history by now, gave the world hope that peace would prevail across the Straits of Taiwan. The ingredients were seemingly all assembled for then-President Barack Obama’s “pivot to Asia”.

Unfortunately, we are all confounded by the escalated and expanded trade war between the US and China instead and treated to sideshows such as the five-hour bipartisan grilling of Chew Shou Zi, TikTok’s CEO, by grandstanding US politicians. Despite his steadfast reminders — “First, I am a Singaporean” — the ethnic Chinese Chew was bashed on behalf of China.

Singapore, carefully walking its path between the two superpowers, drew itself closer to China. Among the slew of bilateral agreements covering trade, food security, legal, arts and scientific R&D, the headline from Prime Minister Lee Hsien Loong’s six-day-long visit to China last month was an upgrade of bilateral ties to “All-Round High-Quality Future-Oriented Partnership”, where he met both Xi and newly-appointed premier Li Qiang.

See also: UK’s Chancellor of the Exchequer gathers executives to pitch for more London listings

Singapore, declared China, is a partner to work together as it executes an “ambitious blueprint” for modernisation and development. Unlike their Russian friends, we were not asking the Chinese for arms.

Taking stock

Business people from both sides salivated at the potential new opportunities following China’s emergence from the pandemic restrictions. Unlike the US (and its close European allies and Japan) with their curbs on chips, China has shown its keenness to re-establish links with the rest of the world, including joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Digital Economy Partnership Agreement, which has a strong focus on Asean member countries.

Indeed, as Chew On This has suggested in February, the market was green in the first month of the year. However, with all the geopolitical tension, 2023 would never be a straight line in equity investing. As countries posture and bicker, there’s a long list of real economic woes related to food, energy and inflation.

That little bit of Kung Fu Hustle as described had been critical if one were to have thrived in the first quarter’s markets — spiced with episodes in March ranging from US bank runs to the shotgun nuptials between UBS and Credit Suisse.

For all its fairly opaque nature, the top-performing asset amid all volatility, on much lower volumes and liquidity, was Bitcoin, up 71%. This steady comeback has given hope that the long Crypto Winter is finally thawing, as a lot of speculative interest has been taken out following last year’s spectacular collapses of FTX and Terra Luna, amongst others.

Binance, the largest crypto exchange, was charged by the Commodity Futures Trading Commission (CFTC) last week, but crypto bros remain emboldened as they continue to rail against traditional finance and regulation, ignoring how the Federal Reserve (Fed) saved their pants by guaranteeing all deposits at Silicon Valley Bank, where around 10% of USD Coin’s (USDC) cash was parked.

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By doing so, the Fed saved a wobble that saw the “stablecoin” trade 89 cents to the dollar for a few days in March. If the USDC had failed, that could have been the final nail in crypto’s coffin. It is ironic then that crypto promoters used that Get out of Jail card to resell the idea that Bitcoin was a safer bet than the shaky banking system.

Gold, the traditional haven asset class — rallied 8% for the quarter — steadily accreting amidst fears of another Lehman crisis, while the US dollar gave up some of its strength by quarter end. As is typical, MSCI World, which has over 60% of its weight in US equities, tracked US indices and finished almost 7% higher, somewhat below its February top of 9.5%. It did pull back to par before an end-quarter rally, hoping that central banks will end their rate-rising cycle to stem an emerging financial crisis.

However, to put the movements into proper context, Bitcoin’s big 71% rally sees it sit 60% below its top. The S&P “coincident” 7% return (like MSCI World) helps investors recover a third of last year’s losses. Likewise, Nasdaq, catalysed by announcements of US tech layoffs and Alibaba Group Holding’s plan to create six AliBabies remains about a third of 2021’s high. The adage makes hay whilst the sun shines still holds. Markets live on hope, and investors continue to try to discount when the Fed signals a stop and to ease.

With persistent inflation, it is hard to see what will pause the central bankers even if forward rate curves are inverted short of a repeat of a global financial crisis. If the forward rate inversion prices the market correctly, that ironically signals a recession upcoming. Bankers are certainly good with their narratives to sell a good “buy” story, but I fear when economic reality bites — along with the politics of extending the US debt ceiling coming up by July, April — like February — is a good month for US equity investors to sell into before May, before making a comeback after the summer on the US bear rally.

Asian exceptionalism

Similarly, the first quarter equity gyrations played out in most Asian markets. A rally into post-Lunar New Year was followed by a mid-February correction culminating in a mid-March morass before the quarter ended with a relief rally — just in time for money managers to send out their 1Q updates to clients.

This was consistent except for Japan — which Chew On This in early January suggested could be a standout market this year. The Nikkei 225 flatlined following the January to mid-February rally, then had a second wind at the start of March, dipping slightly in the middle of the month amid the global sell-off before trooping back where it was. With the relatively strong US dollar and an even stronger Singapore dollar, currency adjustments will set 8% gains in the Nikkei 225 back by 2%, but still a respectable steady outing.

The Hang Seng Index (HSI) and the Straits Times Index (STI) finished the first quarter steady as turtles with marginal increases. Considering that the STI was the best-performing market in 2022 and HSI one of the worst, this was a surprise as one would have expected a better return from Hong Kong, given its lower base. After all, it would have been boosted by China’s economic reopening.

However, like the Hang Seng China Enterprises Index and CSI 300, the rebound from oversold October 2022 lows was too sharp and premature economically. Correcting from Lunar New Year 2023’s four-month high allowed Chinese equity indices to rebase and create the illusion of a positive market recovery seen just as Xi was “crowned” at the annual “Two Sessions”.

The different characteristics of Hong Kong and Singapore markets were reflected in the intra-quarter volatility. The HSI rallied close to 13% in a month, then proceeded to shed it all and, indeed, was negative around 5% by mid-March before coming out flat.

The STI’s less impressive 5% rise was more muted following last year’s strong performance, and at its low, shed 4%. Nominally it finished flat. Coupon clippers collected their dividends. Some, like me, went on holidays without fretting about the market and returned without heart attacks. One could easily have bought very high and sold low in Hong Kong trading on short-term news flow.

Our thesis that this was a stock-picking year in Singapore holds. The rationale elucidated in January and February was that given that banking stocks had been the driver last year, being almost 40% of the STI, they are likely to lag this year. Should the STI deliver a positive return following post-pandemic Singapore, Asean recovery — coupled with China’s re-emergence — the leaders were to be found outside of the big four index drivers, the three banks, plus Singapore Telecommunications. One had to look at big caps on the wider tail of the STI, especially those with successful corporate transformations.

Indeed, DBS Group Holdings and United Overseas Bank finished around 3%, and Singtel was down 3.5%. Only Oversea-Chinese Banking Corp held onto a 1% gain as it was a relative laggard last year. For the index to be above water, it required standout performances from the relatively smaller constituents. Our perennial favourite Sembcorp Industries delivered 27.3%, and almost up in the two weeks since Chew On This highlighted this five-bagger from the pandemic lows. Keppel Corp, including the distribution of Sembcorp Marine shares (which had similarly added 17% since the said article above), returned 11%. This was similar to Jardine Cycle & Carriage’s 10.8% — an oldie but goodie flagged in February. Singapore Technologies Engineering’s 8.6%, Singapore Exchange Group’s, and Singapore Airlines’ 6% were also rewarding.

I got lucky being hit with GTC orders on the Straits Times Index ETF left with my broker, purchasing with my CPF monies when away in Africa. They are in the money and returned more than the annual CPF OA interest rate in a month. April looks like the time to make more equity hay as spring re-emerges from a long and volatile March on multiple fronts. But I will continue to sell into strength, hop and recycle between the leaders and laggards in the index come May. It is, after all, the year of the Rabbit, and I wish all a Happy Easter.

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

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