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Picking winners in a market under the Hand of God

Chew Sutat
Chew Sutat11/24/2022 11:57 AM GMT+08  • 9 min read
Picking winners in a market under the Hand of God
The 2022 Fifa World Cup kicked off with an opening ceremony at Al Bayt Stadium in Al Khor, Qatar, on Nov 20
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I grew up watching the World Cup. In 1982, as a teenager, I saw how Paulo Rossi picked up the Italian Golden Boot and Michel Platini missed his penalty, and, of course, in 1986, I saw how Diego Maradona beat goalkeeper Peter Shilton with his “Hand of God” and broke English hearts, again.

Dubbed the Greatest Show on Earth, the World Cup has given nations full of hope, inspiring young boys and now girls as well in the developing world. Fans rally for the underdogs and are mesmerised by the total football of the Dutch Orange even though they somehow never make it past the quarter-finals. Alas, the Teutonic Germans or the Brazilians will somehow blitz and samba their way to the finals respectively.

South Korea’s 2-1 win over Italy in 2002 and 2-0 win over Germany in 2018 got many of us cheering on “Korea Hwaiting”. In 2002, the quick Japanese also ran their socks off getting into the round of 16, a feat repeated in 2010 and 2018, while the Chinese made their one and only appearance and were unceremoniously dumped out with three defeats — a dismal result for the world’s most populous nation that is often blamed on corruption in its domestic league. This is also a problem that is also alleged at the highest levels in Fifa although this has not stopped the sport from growing in commercial value and popularity.

In 1998, amid firefighting the Clob (Central Limit Order Book) ban during the Asian crisis, I won the office pool by somehow randomly picking France as the winner and had to buy everyone in the office tea. Traditionally, market volumes during the tournament dry up as traders bleary-eyed from watching matches overnight in European or US time zones, wander late into the office.

In 2002, with matches played at Asian time starting in the afternoons, the Singapore Exchange (SGX) technically traded for just half a day. Running a prop trading book then was a relief after the messiness following September 11, 2001, when nothing happened.

In the buoyant pre-Lehman’s 2006, some banks wrote structured wealth management products with payoffs linked to the equity index performance of the World Cup winners. Unfortunately, like many expensive products with embedded options, they did not pay off as Italy, France and Germany finished top but their equity performances lagged behind the returns of Bric nations at that time.

See also: Stuck in time, the Mad Hatter lives for another day

For those who really need to bet on the World Cup, I would recommend they do it via Singapore Pools although the odds are not as good as OTC bookies. There is a key difference though — you will get paid if you are right and if you are wrong, the Tote Board contributes significantly to charity from the money made from you. Like investing, it is probably best to keep your emotions away from your bets, even if the long calls on Qatar, Iran and Wales may have higher payoffs, much like Leicester City winning the English Premier League in the 2015–16 season. I will cheer for the Asian teams in spirit and keep it at that.

An inclusive way forward

Sadly, in this polarised world, the beauty and business of sport is clouded by politics. Instead of the sports itself, much of the distraction before the World Cup were conversations around migrant workers, LGBTQ issues and the Muslim host country reversing its stance on alcohol just days before the kickoff, leaving sponsor Budweiser suffering from a dry season. The West seems to have forgotten the adage from St Ambrose of doing as the Romans do when in Rome.

See also: Southeast Asia's growth to wane but still outperform

The issues are real, with Fifa president Gianni Infantino declaring in his hour-long monologue on the eve of the tournament by saying he feels for all these at the start. But the world could do with a little more mutual respect and live and let live, especially when one shows up as a guest. After all, the Chinese cannot force Americans to sell them hightech chips and it is difficult for the Industrialised West, having first deforested, to tell the developing world not to urbanise, industrialise or exploit their natural reserves, just because we want to move to net zero by 2050.

The extended two days for COP27 in Sharmel-Sheikh before the start of the Qatar World Cup produced the most significant milestone since the Paris Agreement in 2015. After 30 years of waiting, rich nations even agreed to establish a fund to pay poorer countries for damage and economic losses caused by climate change, which is nothing short of a miracle, or the involvement of a Hand of God to make it happen.

Critics will complain that a clear commitment to phase out all fossil fuels was missing from the text. However, the agreement to pay Indonesia US$20 billion ($27.56 billion) to shift from coal appears to be a concrete step in the right direction to solving complex global climate trade-offs and opportunity costs of development and growth for the Global South.

Practical “market” solutions will result in commercial outcomes. In Singapore, several listcos involved in energy transition and low-carbon tech including Sembcorp Industries or Sydrogen, a joint venture between Temasek and Nanofilm Technologies to enable widespread adoption of hydrogen energy, look promising. Likewise in the agricultural sector, potential subsidies or opportunity-cost reductions and the ability to monetise carbon credits for eligible land may become the future focus for businesses and analysts as elevated commodity prices provide a bedrock floor to the P&L and value gets unlocked and priced in over time.

It is probably useful this time of the year to dig into the reports and make our forecasts for the sector here — from the big: Wilmar International and Golden Agri Resources to the mid: First Resources and the small: Kencana Agri or Bumitama Resources. With P/Es in single digits or low teens, should they shake off the sustainability discount fears through robust practices, the “just transition” signals from COP27 suggest the potential for profitability tailwinds.

Forex fixes

This has been a year of the US dollar. Backstopped by a belatedly aggressive US Federal Reserve, the mighty dollar has left the yen, the euro and even the kiwi well in its wake by 30% or so. The won, through competitive pressures, and the pound, through self-inflicted wounds, have fallen with the UK slipping into a recession. Imported inflation is exacerbated, punishing consumers and businesses alike when energy, food and commodity prices are generally priced in US dollars.

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Fortunately in Singapore, the strength and stability of the Singapore dollar against the US dollar has kept imported inflation more or less contained while our travel shopping dollar goes further. This is heads and shoulders above our Asean peers, including Malaysia, whose ringgit sank to 3.4 to the Singdollar recently. The Straits Times Index’s (STI) positive return year to date — a rare unicorn in the global bear market — closed last weekend above its 50, 100 and 200-day moving averages. Coupled with its 4% yield, the STI has kept US dollar-based international investors positive on total return.

For many local investors of stocks overseas, the rising US dollar has not offset the bear market returns suffered by various popular US stocks. Worse, in most international markets, it has been a double whammy with currency loss. No, this is not another argument to stay invested in sunny Singapore, because the evidence all year has proven the point. But it is worth pondering where the greenback will go in 2023.

Bank of America, citing a recent survey of fund managers, says that 92% of them believe stagflation in the US is looming. Notwithstanding this column’s predicted equity rally to the year-end from October lows, big financial institutions like Blackrock and Citigroup expect the Fed to continue to use its blunt interest rate tools to deal with stubborn inflation as a hard landing for the economy sets in. This will probably give US equities another leg down in the first quarter or half in 2023.

However, as markets discount the forward interest rate differential, the US dollar will continue to weaken as it has recently started to. Nonetheless, it will not fall precipitously as it maintains a high-interest rate disparity versus the yen and the euro, whose rates will not catch up. But there is more downside than up. Traditionally inversely correlated with US equity markets, we can expect to give some equity rebound return away with a weakening US dollar in the second half if you are still holding on to the tech stocks you bought in 2021.

As the World Cup kicks off, hope springs eternal for yet another all-star UK team to win, especially for fans of the English Premier League. Or South Korea and Japan, for us East Asian supporters. The odds of the USA winning versus that of a European team, which has won the last four World Cups, are low. There are also the South Americans to contend with. But maybe, like the US dollar, they may outperform this year.

But, with Singapore interest rates tracking the US (up and then down recently as STI rebounded) and the Singdollar generally in a tight band against the US dollar, it may be time to look at bombed-out REITs and business trusts with overseas assets denominated in yen, euro or even the pound. These include Daiwa House Logistics Trust, Parkway Life REIT, Cromwell European Trust, IREIT Global, Elite Commercial REIT and Frasers Hospitality Trust. Some are well covered with long-term borrowings secured at lower financing costs. Some have also hedged the forward rental yields back into Singdollar while others have done so to a lesser extent.

The market may be overly punishing an entire sector without being discerning. True, the Fed Funds rate, wielded over financial markets like the Hand of God, has not peaked yet. However, we are now closer to the top and the forward curve has flattened. If this is borne out next year, well-managed REITs may continue to extend the recent rebound. Those assets, significantly impacted by a weak currency this year, may have a forex fix into the new year, with or without Maradona.

Chew Sutat retired from the SGX 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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