As the US and European summer holidays ease and the Hungry Ghost Festival (or Seventh Month) ends in Singapore, equity markets and risk assets have recovered from the early August “flash crash”. The madness of 20% or more collapses in stock price and even indices, in one to three days from late July, have been erased, with institutional investors coming back from the beach, retail investors keeping faith with US tech, and even keeping the sun rising on Japanese stocks.
To be sure, the very crowded trades of the AI-related stocks and Japanese equities, which have been flavours of the last two years, have not recovered above mid-year highs recorded before the sell-off. For Japanese equity index investors, the strengthening of the yen has kept the retreat from the year-long highs more muted in Singapore dollar (SGD) terms. For US dollar (USD) investors, the strengthening of the SGD to $1.30 from $1.35 has reduced the gains from nominal price returns of USD stocks somewhat. For those in the red for stocks bought at the highs, it has exaggerated somewhat paper or actual losses incurred when cutting losses in the Nvidia downdraft.
Chew On This warned about this in July about the potential pivot of the USD when the Fed finally changes its cycle. The reverse of the Japanese carry trade may have given risk assets a bumpy summer so far. The depreciation of the USD against major currencies after a two-year bull run appears to have just started. The only surprise in September will be if the weakness does not continue. Equity investors in the money on US stocks could do well to take any profits (if still there) off the table and bring it home.
It is not just a patriotic National Day’s call that was suggested in last week’s “National Day” column. Our hypothesis is that it’s economically rational, given what may come where local stocks will outperform the West in this part of the cycle and in a more volatile environment.
The time has come…
“...For policy to adjust,” announced Jerome Powell on Aug 23 after its Jackson Hole retreat. This lays the groundwork for interest rate cuts ahead, starting September. In not responding to desperate calls from market participants to do an emergency rate cut in early August during the market mayhem, the Fed has kept its credibility — insisting that it is just responding to market data. Fortunately, markets found their balance on their own without a panicked intervention — which would have merely validated the short-sellers who suggested a recession was looming.
That “the direction is clear” was enough to send US equity markets into another near-term frenzy to try to recover steep losses in the summer. That “the pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks” is classical Fed-speak of keeping options up its sleeve in order to try to hold the cards even whilst speculation and markets across asset classes move first to try to force its hand.
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For now, as we had postulated, markets will stabilise into September. Irrespective of the final march to the US election, and whether Kamala Haris will win, or Trump — now with Robert Kennedy Junior throwing his “independent” anti-vaxxing agenda behind the Maga movement (perhaps on the promise of a role in the government, it is speculated) — US markets will be stable. Not rally, but be stable. Enough for some IPOs to get done and new issuances to be completed, perhaps, is our cynical view.
The presidential election debate in early September may see Kamala say nothing more than platitudes on policy if at all, and Trump fall into bullying a black-Asian-American woman if she frustrates him by not taking his insults as bait, but just ignores and eludes “joy” that her campaign has ridden on since her nomination. Or, she could simply just point to him and say, “isn’t he weird?” As for Tim Waltz — the coach will debate JD Vance, who calls himself the hillbilly although he is ironically from Silicon Valley. But it won’t matter. There will be one more month to go in October, which traditionally for the superstitious is a pretty freaky month with various black Mondays and crashes from 1929 to 1989. But in a US presidential election year — that is often irrelevant. The sell-off, when it happens, takes place after the polls have been cast.
For those still invested in the US, I would suggest not staying there after to find out. In fact, the market is already moving with its feet on the expected September rate cut. It will only be a surprise if it does not happen.
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If it is already expected?
If it does not happen, it will be a disaster. The Fed will be obliged to keep its promise. The currency markets reflect that move. Holidays in the US have gotten cheaper for Singaporeans. As the Fed reverses the cycle of rising interest rates since 2022, hope springs eternal for equity investors that they will engineer a soft landing in the US equity markets in the worst-case scenario.
Perhaps it might happen in the headline indices, but the leadership of sector leaders in the US markets, which had started to shift in March-April, then July-August, will continue. That is a moderation of the “Magnificent Seven” and AI hype, and a return to cyclical beneficiaries of lowered cost of borrowing. This will work if only there is no real consumer recession. There has been lots of research, with some data suggesting that notwithstanding the robust jobs measures that the Fed is looking at, consumer expenditure and confidence is already in a recession in the US.
This is not dissimilar in Europe where spending and along with it and stock prices of the luxury goods sector have eased. In Singapore, after the Taylor Swift bump, it has been a grinding summer for F&B businesses, and hospitality, as the industry waits for F1 to give local consumption and their stocks a boost. It will be a surprise if the expected boost does not materialise and show up in 3Q numbers for listcos. Perhaps one should not let hopes get ahead of reality, and a local rally in stocks in these sectors could create opportunities to take some profit before the news and results in October potentially disappoint. Then there is the US election in November.
Known unknowns
Given the preponderance of banking stocks and their weight on the Straits Times Index (STI), where our three banks are more than 40% of the index, if we do know that the direction of travel is south for interest rates, then notwithstanding the promise of growing fee incomes, upside hopes for the STI should not be dependent on just betting them but on other stocks. In fact, one of the largest SGD money market funds in Singapore had a drop in net asset value (NAV) in the last couple of weeks of August as Powell promised the pivot in interest rates. There were rumours of fund outflows from SGD investors who were taking advantage of higher interest rates in short-term money market funds.
Similarly, even whilst demand remained robust in the six-month T-bills offered by the Singapore government, the clearing prices have fallen to the lower end of 3% and continue to ease. In Singapore, the yield-hungry, who were happy for safety in fixed deposits rates north of 3% in a currency that is strong traditionally and stronger now, are now having to settle for 2% from local banks. We may be seeing the trickle of cash into the markets with the inflows, especially into local REITs trading deep discounts to NAVs. If refinancing is expected to be cheaper into 2025 for the REITs and the dividend is maintained or improved as a result, smart money appears to be shopping now. Long-suffering REIT investors may finally see some daylight in their red-inked portfolios since 2022 in this sector.
In corporate activity in Singapore, the re-rating of Sats from the $2.50 level just a few months back — when we highlighted it to above $3.00 comfortably even during early August volatility — got another shot in the arm as it took off to $3.70, with profits coming through after digesting its transformational M&A. This is a 50% return over a few months in the allegedly “boring” Singapore stock market. It looks likely to continue.
Similarly, Singapore Airlines C6L (SIA) has since see its stock price bounce back by more than 5% despite downgrades by analysts. Chew On This had suggested it was more reasonable to re-enter the stock below $6 in the wake of the sell-off after its results miss.
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As banking stocks get a bit less sexy and are less likely to drive the STI northwards, industrials like Keppel and Sembcorp are coming back, as beneficiaries of interest rates easing, and may re-rate back to last 12 month highs.
Together with Singapore Telecommunications Z74 (Singtel) — whose value in sum-of-the-parts has started to be more recognised since we flagged it in May — and another fallen angel Seatrium — which could be the next Sats be a turnaround story, this September’s surprise market may actually be Singapore.
A safe port in an impending storm, benefiting from a post-US election volatility — the Singapore Exchange S68 closed the week of Aug 23 at an auspicious $10.68, more than 10% higher than its trading range for the last three years. For international investors whose base currency of portfolios are in USD, the strong SGD will give an additional boost. For us locals, my perennial surprise is our own self-doubt. This September, it’s time to cast it aside.
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.
