Some like it hot, but I don't

Many folks might complain about REITs driving up rents, but that is what makes Singapore a Mall Nation — and the mall is where I have been seeking free refuge from the heat. Perhaps this weather pattern is just what the commercial REITs are hoping for, since there will be less inclination to work from home.

At the Blackpink concert in the Sport Hub last Saturday, even the effervescent Jisoo complained that her make-up was melting in the heat. Somehow, she and her teammates, Jennie, Rosé and Lisa, managed to keep up the hot and pink tempo for just over 100 minutes, including encores. The audience of tweens lapped it up in the mosh pit, while some of the dads and moms in the air-conditioned suites were still trying to figure out what the fuss over the Korea-based quartet was about.

What we learned for sure is that a good brand sells itself and creates a premium globally. There are rumours of Korean companies coming to Singapore to list this year, if only YG Entertainment, Blackpink’s agency, was one of them. That will surely heat up the local market.

However, on the SEA Games couch, I was just happy that Shanti Pereira was hot in Phnom Penh, smashing records along the way to being Asia’s fastest in the 200m this year.

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… and some sweat when the heat is on
As it is evident, even though I was back in Singapore for the last three weeks, there appeared to be not a lot to do in the markets. The three local banks posted yet another quarterly record, but investors remained cool as they braced for lower net interest margins ahead. Meanwhile, the heatwave weighed heavily on everything else, as seen by how the Straits Times Index was pulled back to 3,208 points last Friday.

Sure, part of the drop was because of the large index stocks going ex-dividend. For many investors, May is their traditional bountiful harvest time for dividend income, which has helped them fund many a June holiday.

Only the STI ETF continues to “decouple” from the spot index, staying higher. This as the ETF accumulates the dividends until it too pays out normally in January and July, the reliable 4%-plus carry that blue chips have yielded.

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Global indices, meanwhile, meandered down on lack of momentum as investors remained sidelined as postulated in Chew On This way back at the end of March — when we suggested to ride April but sell into May. The looming US debt ceiling has yet again made it into the financial pages. Hopefully, it will be able to stay off the front pages come June.

Even Tesla, which popped a tad on Elon Musk hiring someone else to blame for Twitter’s future (hence investors cheered the stock on the assumption that the Chief Twit will have one less day-to-day distraction), succumbed to the inevitable called gravity, the day after. The prospect of weaker unemployment or inflation numbers — and their signal to the US Federal Reserve to stop rate hikes — did not keep equity indices buoyant as well.

Indeed, when market directions are negative, all the Cassandras come out of the woods. The signals are there, they herald. Gold is stubbornly back about US$2,000 (about $2,678). Oil prices have fallen in volatile trading down to the US$60s, before settling at around US$70 — signalling an impending recession as Opec cuts failed to rally the price.

What happens if we need energy and oil prices to fall to curb inflation and not choke markets when they stay stubbornly above US$80? That narrative, I am afraid, is not fashionable anymore, and it is once again interesting to see mainstream commentators use both sides of price movements to make the same fear argument when it suits them.

The fact is, liquidity is thin. The short-covering that extended into a rally in the West was focused on a narrow handful of index stocks, and rebound from the abysmal depths of last year’s sell-off of bellwether techs like BABA. That 7% S&P and double-digit Nasdaq gain till April were not supported by a broader-based rise in stocks.

Private equity and IPO markets generally are still not clearing as there is a mismatch between expectations of sellers and where public markets are pricing lower. True, a couple of small caps from Singapore did find the Nasdaq a home for a listing this year. And one of them did have a 500% first-day pop. Not as dramatic as AMTD Digital’s meme stock like the 18,000% rise there post-listing last year. But these mirages often are just that. If one is not nimble enough to exit when the stock is on the run, it is often inevitable that one will not have anywhere to run soon after.

Still, the signs are encouraging, with Sea going counter-trend to mainstreet companies and tech companies which are still laying off staff, by giving a 5% pay rise to employees after a brutal round of cost-cutting late last year. While stockholders who bought at multiples of Sea’s current price hope it will continue its turnaround, the deadweight for the next few weeks is still the immediacy of the debt ceiling.

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Happy birthday, Mr President
For those who recall, Some Like It Hot was not just the 1985 song from Power Station. It was the classic Marilyn Monroe movie from 1959. At the Democratic National Convention in 1962, she also sang the lullaby to John F Kennedy. This all in the midst of the Cold War, the Cuban missile crisis where the abstract values of freedom the US championed stood in stark contrast to the concrete evil of the Soviet Union. The Pax Americana was then taken as the hope for millions everywhere if they were not supporters of Fidel Castro and holding Che Guevara in deity-like status.

Today, we have Europeans tying down Vladimir Putin in Ukraine and Joe Biden trying through Jake Sullivan and Wang Yi’s meeting at mid-May in Vienna, without balloon distractions, to at least start a conversation, if not a full detente on the geopolitical front. But will my birthday gift in June from the American president on markets be quite a different one?

May has played out to our expectations as indices meandered down on lack of momentum, as investors stay sidelined mostly on the debt ceiling excuse – of a potential US default by early June. The most recent Bank of America fund managers’ survey showed exceptionally high weightings in cash, not so much because cash is king — like King Charles in the UK whose long wait finally was realised — but because it pays decent interest.

Even incremental allocations to fixed income were light, mostly in refinancing deals. Perhaps we will know by early June. Janet Yellen has after all proclaimed that her emergency measures for US Government payments, starting in January (as highlighted in Chew On This in February on taking profit for the Chinese New Year run), will start to run out by the first week of June.

Well, they are not really running out, since US printing presses are still hot and able to print, but we need to see whether the polarised government in the US can pull us from the brink of that disaster scenario, rising above partisan politics to strike a deal, or take all markets and investors through the coals of navigating the unthinkable of a partial or cascading US default. If the world does not know what is the Fed risk-free rate, then how is everything to be priced? At a number of different investment committees, this unthinkable, even if it is known, is a known unknown. There is no silver bullet for risk management, and many are just hoping that the US politicians will compromise and get a deal done (like they have before) rather than ruin America’s reputation and financial hegemony. That is sadly more a prayer than a plan.

Cold comfort
Still, the volatility (especially in Hong Kong and China) from the first five months of the year and tech stocks on the way down in the US may prove too hot to handle. On the macro front, Chew On This’ first column in 2023 talked about the potential of Japan being the dark horse this year. The Nikkei is up more than 14% year-to-date, with the yen giving back 2%–3% of equity market returns for a relatively low-volatility 11% return in SGD terms. Japan’s reopening, a bit of overdue inflation with a change in the Bank of Japan governor, and Chinese tourists seem to support this outlier in the Asia Pacific region.

I am off to Tokyo to see, hear and smell for myself, if it will continue to stand tall as other Western markets falter. Perhaps I may glean some insights which I will share in the following weeks, or I may just run into a host of Singaporeans fleeing from the heat here.

Then again, I will probably hear their lamentations of why the market here continues to shrink with privatisation offers that pundits of all shapes and sizes complain that is below value. Take, for example, Lian Beng Group, which we highlighted last year. Trading at barely 50 cents then, it was valued by the market at a deep discount to its net asset value of $1.54. Yet, like other contractors, Lian Beng is a potential beneficiary of the reopening of the construction industry. Its 50-cent partial offer in June 2021 did not garner much interest. A 62-cent privatisation offer was put forward on April 11 and following the usual howls of protest, a “final” offer of 68 cents is now on the table.

Naysayers complain that the offer is still below its asset value. Well, for those who did not complain, these offers are still a partial jackpot 30%–40% above should they have put money where their mouths were. Instead of just moaning why the price is so cheap and value for small and mid-caps are often unrealised, take a view and you might still get a decent uplift.

This too was the case of Penguin International, which on May 4 announced that a group of investors advised by W Capital is mounting a second privatisation attempt with an offer of 82 cents (revised a fortnight later to 83 cents), versus the June 2021 offer of 65 cents. Thanks to industry upcycle during the pandemic, the current offer is at a discount of less than 10% off the book value, but at a premium of nearly 20% off the last traded price. Some might point out that the first offer of 65 cents was made at a bigger premium of 30%. It is impossible to make everybody on both sides of any transaction happy, but the current offer should be more palatable than the first.

These stocks may be cold and boring — and there are many more like these. With a bit of patience, a windfall awaits. In my book, making gains where I can is certainly better than being left with the hot potato when the high volume, volatility and liquidity run out.

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