SINGAPORE (Apr 15): Major central banks around the world have maintained a dovish stance, in line with a softer growth outlook by the International Monetary Fund.
In its latest World Economic Outlook on April 9, the IMF lowered its growth forecast for 2019 to 3.3%, from 3.5% previously. This is the third time in six months that the fund has trimmed its outlook. The IMF cautioned that unresolved trade disputes are a challenge for many countries. It also warned that China’s growth “may surprise on the downside”, while risks emanating from Brexit “remain heightened”.
“This is a delicate moment,” IMF chief economist Gita Gopinath said at a press briefing in Washington. “It’s very important that policymakers do no harm and work cooperatively.”
On April 10, the US Federal Open Market Committee released March meeting minutes suggesting a dovish stance. “A majority of participants expected that the evolution of the economic outlook and risks to the outlook is likely to warrant leaving the target range unchanged for the remainder of the year,” the minutes say.
While the US Federal Reserve is convinced by strong fundamentals of the American economy, external risks are present. “A patient approach to determining future adjustments to the target range for the federal funds rate remained appropriate,” the minutes say. Similarly, the European Central Bank maintained its monetary policy at its April meeting. The ECB kept interest rates on the main refinancing operations, marginal lending facility and deposit facility unchanged at 0.00%, 0.25% and -0.40% respectively.
ECB president Mario Draghi warns that data gathered by policymakers in recent weeks has confirmed “slower growth momentum” in the eurozone. Investors’ sentiment is being “negatively impacted” as well. Overall, the ECB signalled that it could take fresh action to shore up the eurozone’s faltering economy if the outlook darkens.
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Market observers are not surprised by the central banks’ dovish stance. United Overseas Bank is maintaining its view that the Fed will not raise rates further this year. On the contrary, “we expect the Fed to cut the policy rate by a nominal 25 basis points in 3Q2020 and will leave the door open to do more if the slowdown (especially externally driven) is exacerbated,” says UOB senior economist Alvin Liew.
Similarly, Lukman Otunuga, a research analyst at FXTM, believes US rates will not be “raised again in a hurry”. However, if the data indicates otherwise in the coming months, “the conversation might be reopened in the second half of 2019”, he writes in an April 11 note.
DBS Group Research says the ECB’s rates are expected to be maintained for 2019 to 2020, suppressing eurozone and German bond yields. Also, “[the euro’s] price action is likely to reflect the negative EZ and US rate differentials”, DBS economist Radhika Rao writes in an April 11 note. The euro could trade below the pre-normalisation range of 1.15 to 1.25 against the US dollar, she notes.
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Will the Monetary Authority of Singapore follow suit? DBS expects MAS to maintain the estimated 1% appreciation slope for the SGD NEER policy. “Bets of further MAS tightening have largely been unwound over the past several months as it became increasingly clear that downside risks to growth have materialised. In any case, with the Fed on pause, there appears to be little urgency for the MAS to tighten again,” says Rao.
Plantation stocks in focus
In the Singapore corporate scene, locally listed plantation stocks have attracted attention this week. For one, Indofood Sukses Makmur, the controlling shareholder of Indofood Agri Resources, wants to take the vertically integrated agribusiness group private and delist from the Singapore Exchange with a 28 cent a share offer to minorities.
The offer values Indofood Agri at $391 million. The offer price also represents a premium of 21.5%, 26.3% and 29% over the volume-weighted average price per share for the one-, three- and six-month periods respectively. For the 12-month period up to and including April 5, being the last market day on which the shares were traded on SGX, the offer price represents a premium of 23.1% over the VWAP per share.
As at April 11, Indofood Sukses Makmur holds a 74.34% stake in Indofood Agri via its subsidiary Indofood Singapore Holdings. If Indofood Sukses Makmur obtains control of at least 90% of the target, Indofood Agri will be delisted and privatised. Shares in Indofood Agri closed up 7.7% at 28 cents on April 11.
Over at Golden Agri-Resources, shares in the company ended trading on April 11 unchanged at 31.5 cents. It was among the most actively traded counters that day. The stock had fallen 40% from early 2017 to end-2018.
The recent trading interest can be attributed to anticipation of higher crude palm oil (CPO) prices, estimated by OCBC Investment Research to increase by an average of RM2,300 per metric tonne in 3Q2019 and RM2,400 per metric tonne in 4Q2019. The 4Q forecast is 13% higher than its current level.
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However, OCBC warns that CPO prices are historically volatile and are at the mercy of the weather, politics and regulatory policies. This includes Indonesia’s and Malaysia’s mandatory use of diesel containing locally produced biofuel. For now, OCBC is keeping its “hold” rating for Golden Agri, with a fair value estimate of 29 cents. This is premised on the fact that the stock has traded close to the +1 standard deviation level over its average price in the past five years, while CPO prices are at the -1SD level.
Meanwhile, Singapore Press Holdings’ 2QFY2019 results ended Feb 28 came below analyst expectations amid continued weakness in its media business. This is in addition to the company’s absence of divestment gains from its treasury and investment portfolio. Shares in SPH closed down 1.2% to $2.44 on April 11.
The week ahead
Companies in the Keppel group are expected to report their results this week, as the 1Q earnings reporting season kicks in. Keppel DC REIT and Keppel Infrastructure Trust will release their financial statements on April 15. Keppel Telecommunications & Transportation and Keppel-KBS US REIT will do so on April 16. Keppel REIT will announce its results on April 17, followed by Keppel Corp on April 18. On the political front, Indonesia will hold its general election on April 17.
