SINGAPORE (May 27): The US’ decision to include Huawei Technologies on its US Entity List has added fuel to the trade tensions between itself and China.
The markets were unsettled by the escalation, as investors digested the wide-ranging impact on not just China’s economy but also a long list of US technology parts suppliers.
The US markets have been on a roller coaster ride, going up one day and down the next, with the Standard & Poor’s 500 index falling 0.3%, Nasdaq 0.45% and Dow Jones Industrial Average 0.4% on May 22.
Minutes from the latest US Federal Open Market Committee (FOMC) meeting did not yield new insights into its view on the US-China trade war ratcheted up by US President Donald Trump. The US Federal Reserve appears to be maintaining its patient stance for the moment. No rate increases are planned, as a lack of inflation pressures will allow the Fed to wait and see how events play out.
“The Fed will react appropriately once both [the unknown and known unknowns] become known. Markets could possibly take a leaf from their book,” says Jeffrey Hailey, senior market analyst at OANDA, in a May 23 report.
However, the softness in recent prices is likely to be “transitory”, according to the FOMC minutes. The Fed also seems more upbeat on the US economy. However, the meeting was concluded before Trump intensified the trade war with China. On May 5, he announced increased tariffs, which was in response to China’s retaliatory move in the form of higher tariffs on US goods.
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Meanwhile, UK Prime Minister Theresa May saw her latest Brexit proposal shot down in the house before it even reached Parliament. The British pound continued its decline, sliding to a four-month low at 1.2625 to the US dollar before bouncing back to 1.2660 on May 22.
Closer to home, Singapore’s 1Q2019 economic growth has been disappointing. The local economy only managed a 1.2% y-o-y expansion rate, down from the advance estimate of 1.3%. The slowdown was due to the contraction in manufacturing of 0.5% y-o-y, while construction has turned the corner and expanded 2.9% after 10 consecutive quarters of contraction. Unsurprisingly, the US-China trade war was seen as the cause of the drag.
“Similar to Hong Kong, Singapore’s total trade as a percentage of GDP is significant at over 200%, and a further slowdown in trade momentum would further drag overall economic growth,” says UOB economist Barnabas Gan in a May 21 report.
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“Still, we continue to see bright spots, as domestically driven services industries such as information and communication should continue to expand, given domestic firms’ demand for IT and digital solutions. There is also continued expansion in education, health and social -services. Meanwhile, the uptick in construction growth to positive territories is expected to sustain into 2019 after 10 consecutive quarters of negative, on the back of higher contracts awarded since 2H2017,” he adds.
The Straits Times Index has reflected these sentiments, opening 0.3% lower at 3,199 on May 21, and closing at 3,186.30. While it rose to 3,197.33 on May 22, it fell to a low of 3,152.22 before bouncing back to 3,158.78 at May 23’s close.
SATS tumbles, Sabana REIT strikes deal
On May 17, SATS reported that despite revenue growth, earnings fell for the financial year ended March 31, 2019. Its top line was up 6% y-o-y to $1.8 billion, while earnings fell 5% y-o-y to $248.4 million.
SATS says the drop was due to a one-off disposal of assets and finalisation of a valuation for an acquisition. In the absence of these one-off items, SATS earnings for FY2018 would have been up 2.2%.
However, investors appear to be spooked by the results. On May 17, after the results were announced, SATS’ share price opened lower. It continued to tumble to as low as $5.01 on May 23 to close at $5.03, down 0.2% for the day.
On May 22, Vibrant Group announced that it had struck a deal to sell its 51% stake in Sabana REIT’s manager to subsidiaries of ESR Cayman — which is a subsidiary of ESR REIT’s manager, ESR Fund Management. The ESR subsidiaries are also purchasing about 8% of the total issued units of Sabana REIT. The transaction is expected to net $21.75 million for the sale of the 51% stake as well as $40.37 million for the sale of the 8% stake.
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The rationale behind the transaction is to realise the value of its investments, and to redeploy capital, reduce debt and focus on Vibrant’s core business of providing integrated logistics solutions and freight and logistics services.
Analysts noted that this deal would give ESR REIT a 78% stake in the REIT manager and pave the way for a merger with ESR REIT. This would allow the REIT to scale up meaningfully.
Investors reacted positively to the move, with Sabana REIT’s unit price rising after the announcement, which was made at noon. The unit price had dropped to 40 cents at lunchtime on May 22, before rallying and closing at 42 cents. It closed at 42 cents the next day, flat for the day.
The week ahead
The number of REITs listing on Singapore Exchange looks set to continue. Australia’s Lendlease Corp appears to be gearing up to list a REIT on SGX. The trust could be seeded with shopping centre assets worth A$1 billion ($949 million). These assets could include some Australian shopping centres, 313@Somerset in Singapore and the SKY Italia headquarters office building at Milano Santa Giulia in Milan, Italy. The REIT could tap Lendlease’s A$28 billion pipeline of commercial properties.
This potential listing follows the recent IPO of ARA US Hospitality Trust and scheduled listing of Eagle Hospitality Trust on May 24. ARA US Hospitality Trust, which started trading on May 9, was offered at 88 US cents. On May 23, it closed at 86 US cents. Eagle was sold at 78 US cents per unit.
