On Jan 11, the FTSE STI Index took out the thrice-shy 3,240 points attempted last year. At the end of last week — against the odds and market belief (unless you were long on this column’s calls) — the index held above that level, with a gain of 4.7% year to date to 3,282 points on Jan 14. Indeed, since this column started last September, some readers have described the cautious and increasing optimism shown on the local market as “hope and fantasy”!
Pundits who have been unconvinced of Singapore are starting to buy the story of what I described as a “rotation to reality”. The three banking heavyweights, which make up nearly 44% of the index, are gaining (and pushing up the STI) in anticipation of higher profitability from rising net interest margins as interest rates gradually normalise. Meanwhile, the “platform with no profits yet” correction continues to play out. Grab Holdings, at just above US$6 ($8), is trading at almost half its Nasdaq debut price, while Sea, listed on the New York Stock Exchange, is at a one-year low with its US$175 close on Jan 14. The market is always right.
Perhaps these were a belated catch down to the travails that have sunk Cathy Wood’s Ark Innovation ETF, or the death by almost thousand cuts from the “Common Prosperity” policies inflicted on Chinese tech stocks as represented by the Hang Seng Tech Index — which has survived its early January “Tencent wobble” to stage an impressive “ten percent” rally from its all-time low on Jan 5.
Technicians, whose craft is as much an art as science, have postulated that the STI break heralds a potential attempt at 4,000 points — above its 3,831-point all-time-high, whilst trying to figure out what else, beyond DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank (plus Citibank’s regional consumer business acquisition last week), could carry it there.
There are different trading and investing preferences. Some like the parabolic exponential, heart-stopping rock-and-roll volatility seen in other equity markets. Others prefer the typical slow and steady Singaporean way. If you are in the latter group, there are a few ways to be carried with the potential tide — buying the dip (following each wobble in Hong Kong, Nasdaq and Bitcoin) seems to have worked, at least for the first two out of the 52 weeks in 2022.
Old with a polish may be gold
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The STI might see some changes, given the initial flush of Catalist, REIT and special purpose acquisition company (spac) listings gathering momentum. If so, we may be in for some long overdue excitement of rebalancing from direct entry into the index, or as a result of corporate M&As. Nevertheless, if we assume no changes to the index this year, we can still look at the next group of index constituents to figure out whether they will rise with the tide or be the balancing item.
First up: Singapore Telecommunications or Singtel (6.32% of STI, as of Sept 30, 2021), Jardine Matheson Holdings (5.08%) and CapitaLand Investment or CLI (2.99%) form the next trio which may have an impact. Singtel, for one, pulled back from $2.60 twice last year, no thanks to the long-running Bharti saga and an adverse tax ruling in Australia. Nevertheless, a $2.30–$2.45 reboot recently has shifted investors’ focus onto the telco’s potential divestments and other corporate activities.
Jardine Matheson’s 10% run to US$59 appears relentlessly backed by share repurchases — a similar tactic used by its subsidiary Hongkong Land Holdings. Newly-formed CLI received quite a few votes of confidence. On Sept 20 last year, the day it listed, its chairman Miguel Ko bought shares from the open market, first at $2.9349, then at $3.4279 three days later. The company itself bought back shares at $3.35 on Dec 21. And on Jan 4, DBS Group Research initiated coverage with a $4 call, which helped drive CLI’s trading band spike from $3.40 to $3.70.
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Both Jardine Matheson and CLI have been subjects of significant corporate activities last year: Jardine Matheson acquired subsidiary Jardine Strategic Holdings, while CLI was restructured out from the original CapitaLand. Are institutional investors on the street buying the new directions taken by these counters? Well, some appear to vote with their feet.
Next are REITs: CapitaLand Integrated Commercial Trust and Ascendas REIT follow at 3.31% and 3.49% respectively, and Mapletree Logistics Trust and Mapletree Commercial Trust (MCT) are at 2% and 1.76% respectively. While paying out steady returns and functioning as a balancing item by lowering the volatility of the index, MCT’s premium has been eroded by its offer to acquire Mapletree North Asia Commercial Trust.
Nevertheless, this takeover offer can help show that even at a more attractive price and a blended yield, big is beautiful when it comes to index weighting. Even if some air will be taken off MCT’s domestic-focused shine, there will, undoubtedly, be a part two to the valuation post-completion.
Across both the Temasek-lined companies and the privately-owned enterprises, there are transformations and corporate activities taking place. Keppel Corp (2.56%) maybe getting, or not, the jewels of Singapore Press Holdings; Wilmar International is (3.03%) spinning off a subsidiary in India following one done in China last year; Yangzijiang Shipbuilding (1%) and SembCorp Industries (0.57%) are both embarking on an environmental, social, and governance (ESG) remake.
For the “Covid will be over by April” believers, Genting Singapore (1.42%), Thai Beverage Public Co (2.19%), Singapore Airlines (2.19%) and SATS (0.9%) are there for them to test the extent of their conviction. For those looking for a bigger geographic spread, there’s a choice of City Developments (1.11%), UOL Group (1.15%) and Hongkong Land Holdings (2.58%) — which has enjoyed revaluation through an active, ongoing share buyback programme, and securitisation potentially on the cards.
And for the contrarians, there are always the relative laggards (ex-REITs) Singapore Technologies Engineering (1.98%) and Singapore Exchange (2.8%). They’ve done relatively well in the first 15 months of the pandemic, but are now taking a temporary step back in the re-rating.
Small is beautiful, but bigger may be better
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Much has been made of the lack of tech as a sector on SGX. Well, there is always Venture Corp (1.6%) — a robust survivor from the first tech cycle of listings in the 1990s. The contract manufacturer moved from a then-Sesdaq listing, to the mainboard and eventually inclusion as an STI component stock. Amid the wave of M&As in the early 2000s (which saw the likes of Omni Industries acquired), Venture has remained independent and is today one of the rare blue chip manufacturing plays.
However, there are a number of profitable tech companies, although they are small to midcaps, and thus seen as less sexy compared to big tech and digital platform economy companies who hog the headlines (including Elon Musks’ Tesla who has now decided to take Dogecoin as payment…). Some have been acquired over the years, including Hi-P International last year, or privatised and returned with a better focus (for example, having ditched its roast duck foray, Aztech Global relisted in 2021).
In capital markets size does matter. A $50 million company with 15% free float will have limited interest from institutional investors as traditional buyside cannot allocate even for smaller funds. However, things will get interesting when the market values start getting to $200–$300 million, $500 million and $1 billion and above.
It can become a self-fulfilling phenomenon as the larger free float and ability to attract more investors beyond high-net-worth individuals, family offices and small boutiques goes up to local, regional, then global funds. Liquidity improves correspondingly. Whilst $1–$3 billion is small in the global universe of choices available to investors globally, it is significant locally.
Take AEM Holdings, for example. It sailed above $1 billion market cap through well-executed mergers and acquisitions and not just organic growth. As more investors are drawn in, its liquidity improves too, drawing in even more trading interest. For private equity investors who invested through Novo Tellus Capital Partners when AEM Holdings was sub-$100 million, it has been an incredible ride led by Loke Wai Sun.
Novo Tellus, which has also invested in other Singapore tech companies including Grand Venture Technology, Procurri Corp and ISDN Holdings, now has a spac, Novo Tellus Alpha Acquisition, ready on the starting blocks. Market talk suggests that there are up to a dozen possible good individual companies or combinations that could be the subject of de-spac exercise as soon as this year. One hopes the Midas touch continues.
Irrespective, there are now a couple of profitable tech companies (AEM and Nanofilm Technologies International) in the $1–$3 billion range already in the market that can grow further. With other spac combinations to come in that market cap range, one hopes that the next Venture to be included in the STI will emerge later this year or next.
If so, then beyond banks and cyclicals, this icing might be the reboot to get us through the 3,813-point all-time high. Perhaps it is time to scour the market for the smaller and specialised gems before they get indexed, even whilst we enjoy its potential ride up.
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
