Last week, I headed up to South Korea (again). Readers of this column may recall last September, I took the Train To Busan only to experience a tail end of a typhoon. I suggested back then that being prepared and flexible was a way to enjoy a holiday, survive choppy markets and avoid the pitfalls of zombie stocks.
This time, instead of heading south from Seoul to Busan, I went north. I was careful not to stray too near the demilitarised zone, given how North Korea’s Kim Jong-Un and his generals have been firing missiles recently. In response, my Korean friends merely shrugged at the international headlines. Life has to go on.
However, China’s simulation of a Taiwan blockade in response to US Speaker Kevin McCarthy’s meeting with Taiwan’s President Tsai Ing-Wen should be more concerning. Similarly, my Taiwanese friends, when queried, also shrugged their shoulders. I guess if you have to live under the shadow of nuclear war and total annihilation, you just get out of the foxhole and get on with life.
Given that it was spring, the only thaw in the relationship between the West and China came about with an effusive President Emmanuel Marcon of France trying to cosy up to China’s President Xi Jinping and say good things about China’s Ukraine peace proposals. It was left to Ursula von der Leyen, president of the European Commission, to reiterate the red lines, which included no sending weapons and ammunition to the Russians. This is not quite the love fest that Perez Prado’s song — the title of this week’s column — had hoped to inspire.
While I did not go as far as Pyongyang, I did visit Chungcheong, a couple of hours outside Seoul. Another unheralded, remarkably beautiful part of the Korean south with mountains, lakes and cherry blossoms.
We were very lucky. No thanks to global warming, the season arrived 10 days early, and it had rained the week before we arrived. In Chungcheong, we were treated to beautiful trails of pink and white blossoms, and the gradual emergence of spring flowers from azaleas to tulips and dandelions. I had my lovely wife with me to share a juicy and sweet kilogramme of local strawberries costing just $5. The experience was even sweeter as she was able to identify all the flowers I am unfamiliar with.
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Coming from Singapore, we are not so accustomed to the seasons changing, but just like sectors and stocks rotating in the market — they happen, but with less and less predictability than in the past as black swans and grey rhinos inhabit the “Trumpy” world of politics and markets or the “weather balloons” that dominated headlines in February. Such oddities, I’m afraid, have made the 2023 investment universe harder and harder to call, even if we got 1Q mostly right with a bit of luck.
Not yet out of the woods
In the surreal traditional finance market, the S&P 500 and Nasdaq 100 continue to enter 2Q on a positive momentum. This is alongside a daily litany of announcements of job losses that have spread from tech to banking and even the consumer staple sector — including the job cuts at McDonald’s. This will start filtering into Main Street soon, although Janet Yellen vehemently dismisses the idea of a recession.
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Bulls cheered April’s employment numbers which showed a slowdown in the growth of wages and hiring, hoping that could bring back cheap easy money that fuelled the 2021 asset bubbles. However, any hope of a soft landing may just be that. The adage that hope “springs eternal” is reflected by the consensus bulls on Wall Street — who keep talking up the markets as there is a lot of equity to sell, bonds to refinance and appearances to keep up for the US economy and the US dollar. We often forget that Uncle Sam is the largest sovereign debtor in the world. Let me explain my pessimism, and my view to sell by May, stocks in the US.
First, the immediate financial crisis seems to have abated in the US, after the European contagion that took out Credit Suisse. Until the crisis of confidence — caused by the collapse of Silicon Valley Bank in the US — the second-largest Swiss bank was more in accordance with Basel III compliance given it was a systemically-important global financial institution compared to SVB and the almost 4,000 other banks in the US, which American regulators exempted from the same standards they demand on everyone else!
This is in part due to the unprecedented moves of the Fed to lend at US$100 ($133.13) face value for securities that are marked-to-market at US$70–US$80 today to US banks, because of rising interest rates and falling bond prices and mortgage-backed securities — led by the Fed itself. At the end of March, an estimated US$164 billion of liquidity has been extended to US banks on values higher than the collateral held. Imagine this happening anywhere else in the world.
There are estimates that the mean and median US bank has less than 10% Tier-1 equity, even if not marked-to-market with present securities-holding values. As they tide through this rate cycle with the backstop of the Fed, would they be constrained from further lending, or worse, reduce lending into an impending slowdown?
It is hard to envisage America — the centre of financial innovation and excesses — not finding a way to generate the next subprime, especially with the moral hazard provided by the Fed’s post-SVB lending above collateral value promise. However, with JP Morgan, Citigroup and others being given the keys to prime commercial property in hollowed-out tech cities like San Francisco — from blue-chip real estate names like Brookfield or Blackstone who walked away from refinancing bank loans — stress from high rates from overvalued assets are starting to boomerang back to the same few banks and regulators.
The local investor is familiar with the commercial real estate issue now that several REITs listed here including Manulife US REIT and Prime US REIT have taken severe hits on their stock price. Whether these present bargains with heavily discounted entry prices depend on the excesses leading to 2021 asset bubbles from meme stocks and coins to real estate having deflated sufficiently to find a stable base. However, as this has not happened, are comparisons to Japan’s three lost decades after the bubble burst in the 1980s or Europe’s anaemic economic performance since 2010 where zombie financial institutions and real estate sucked the life energy out of the whole economy, too far-fetched?
More importantly, underlying the headline-grabbing US index performances, it is worth observing that the broader market is not catching up. A few market leaders like Apple and Alibaba Group Holding are carrying the index up, whether due to short–covering or institutional investors and private wealth hugging indices for Fomo reasons. Allocation to a few crowded trades has never resulted in a good end.
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In Singapore, the Straits Times Index’s (STI) steady performance is supported through corporate transformations, earnings improvements and, more importantly, sector rotation. In 1Q, the banks lagged but caught up in early April, leading the STI to potentially test the 3,400 level again. Unlike in the US, there is no debt-ceiling cloud hanging over the Singapore markets in July.
When chips are down
Last week, Samsung Electronics announced a plan to cut back memory chip production as it warned of a 96% fall in 1Q profit, to a level not seen since 1Q2009. Apparently, global macroeconomic slowdown, memory chip oversupply and sluggish demands required them to adjust production to a meaningful level. This was a reversal from January’s bold statement that they were hoping for a recovery in 2Q, while Micron Technology, Kioxia and SK Hynix already took measures to counter oversupply.
As the market leader with a 40% and 31% share in DRAM memory chips and NAND flash memory, a 20% and 15% fall in 1Q does not suggest a rebound in global (the US being the main driver) consumer spending. After overstocking seen in 2H2022, reflected by slow Chinese export numbers since 4Q, optimists see some silver linings as empty containers in Chinese ports start to move across the Pacific again in 2Q2023.
The fact is that these cycles and seasons are now even more unpredictable. The wisdom of globalisation and investing in global companies — mostly found in the US markets, or Japanese, Taiwanese and Korean exporters — is difficult in practice to implement when geopolitical issues and friendshoring trump the economics of comparative advantage. In this regard, sticking closer to home and the 700 million consumers in Asean seems a safer bet.
As rumours surface of Korean or Hong Kong consumer companies looking to list on the Singapore Exchange Group, which generally has higher P/E multiples for this sector compared to other regional exchanges, it is probably worth a look at locally-listed regional consumer stocks which have lagged the STI this year such as Thai Beverage, Wilmar International and DFI Retail Group Holdings. After all, if we can’t afford the latest and largest Samsung TV or Tesla due to inflation or a potential recession, bread, butter and beer are still staples, alongside apples and the spot of cherries when they are in season.
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
