Internet meme: If stocks fall solely due to the threat of nuclear war, buy the dip.
1. If nuclear war doesn’t happen, then you make some profits.
2. If nuclear war happens, then you won’t need the money.
As Russia intensifies its “special military operation” in Ukraine, shelling cities and commandeering nuclear power stations, President Vladimir Putin’s aggression was met with unprecedented Western response of sanctions, with Singapore, South Korea and Taiwan joining the fray in this region.
Global businesses, ranging from Apple to Visa to Prada, have suspended their services or withdrawn their businesses. With this level of geopolitical crisis front and centre, a toll has been taken on the markets.
By March 7, around two weeks after hostilities started, MSCI Asia Pacific had lost 20% from its record high on Feb 17, 2021 — a level beyond a correction, portending a bear market. Consumer discretionary stocks from Toyota Motor Corp to Samsung Electronics weighed on fears of everything including Armageddon of sorts.
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Popular (non-Russian) media cheered the ejection of Russian banks from Swift, the interbank messaging platform; headlines were made out of the populist move by various European countries of impounding yachts belonging to oligarchs who have not yet fled to neutral Maldives; and Boris Johnson’s UK belatedly started taking action on “Londongrad” — a nod to how London has been the secondary base of Russian billionaires — helpfully distracting from further lambasting of Downing Street garden parties. Traditional bastions of neutrality — Sweden, Switzerland and Singapore — responded strongly too.
Co-existent side-swipe
Market optimists who expected a quick roll into Kyiv by the Russians — which explains some intraday rallies in the early days of the war on Wall Street — have been disappointed.
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To be fair, major indices like Nasdaq and the S&P were already in correction territory, down more than 10%, as what this column calls “rotation to reality” was well underway. Cases in point: Cathie Wood’s Ark Innovation ETF suffered big bruising, and, closer to home, there was the underwhelming performance of the world’s largest despac, Grab Holdings.
Investors like innovation and future growth as espoused by Wood. But, as a fund manager quoted in Financial Times describes, “she tells a whole story that is almost impervious to facts”. When cash is no longer as cheap, with rising rates and less certainty of the future, the discount factor goes higher — and there goes the ex-post explanations for the continued levelling of the pandemic-fuelled excesses.
More practically, with financial sanctions, investors overseas who have exposure to Russian equities, sovereign debt (which has been cut to “junk”) and the rouble, have had to deal with the trouble and the wobble with up to 80% sell-off in Russian equities offshore.
Russia’s leading bank, Sberbank, had to close down in Europe; and the Micex exchange onshore is still shut. Others affected include European banks like Deutsche Bank which maintain tech teams in Russia, the financiers of Russian oligarchs who may have to deal with the messiness of loan collections and margin calls, and some hedge funds that have to raise capital and sell out of fundamentally sound positions.
In the short term, the correlation of risk assets is 1. This includes Bitcoin, which staged a spectacular 15% gain intraday in late February, as punters speculated that the use of such “alternatives” will grow as Russians seek alternatives, but that speculation has remained short-lived so far.
Diversification pays
The perceived risk of other assets may be greater than 1. China, under President Xi Jinping — who shook Putin’s hand just before the Winter Olympics — has been neutral and somewhat equivocal. China’s official comments thus far have focused on the human tragedy unfolding in Ukraine. It is neither voting for or against Russia in the United Nations Security Council, but is still reluctant to condemn.
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The irony of Putin uniting Nato and the West, which have banded together in economic warfare through financial sanctions (so far), creates a perception of heightened sanctions risk for Chinese tech and markets.
So far, China has failed to live up to its 2022 promise for a slow recovery leading up to the March Two Sessions, and the Seventh Plenum and 20th National Party Congress later this year, as the wind in the sails of stability in February was blocked by sanction contagion fears. This is not exactly the script that Xi wanted the West to write in response to Putin.
The Hang Seng Index (HSI) has likewise succumbed in its attempt to form a base at 24,000, down 15% since. The Straits Times Index’s (STI) technical breakout from 3,240 points did reach 3,430 points before the war and Oversea-Chinese Banking Corp’s negative surprise in its results took some lustre off the banking momentum that carried the STI up.
Despite the global sell-offs, STI remains one of the few indices that are up year to date. Burnishing its resilient reputation as a port of call in a storm, its relative outperformance since 2021, not only to HSI but other global indices as well, could continue. This occurs as the biggest index heavyweights, the three local banks, continue to benefit from a rising rate cycle and a post-Covid regional economic recovery.
This column, with the headline “Tech(tical) Reboot”, on Jan 24 talked about alternatives to banks for investors to consider. Well, tech as a sector is currently under the cosh, as markets reprice risk.
However, the themes of cyclical recovery, corporate Singapore restructuring and corporate actions post-pandemic have done well. Sembcorp Industries is up 34% year-to-date as it pivots more to clean energy and rebounded in profit. Likewise, Keppel Corp and Wilmar International have risen 15%, and Yangzijiang Shipbuilding (Holdings) 12%.
There will be protracted uncertainty for a while, but the host of large to small caps in consumer discretionary, shipping and energy, including Thai Beverage, Olam International, Del Monte, RH Petrogas, Samudera Shipping and Sembcorp Marine, are worth a watch.
After all is said and done, nuclear obliteration excluding, some fundamentals remain. And should we be successful, navigating the volatility, or profiting from it, in the safe haven of Singapore, let’s not forget the lyrics from 1985: “We are the world We are the children We are the ones who make a brighter day So let’s start giving.”
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 multiasset exchange and he was awarded FOW’s lifetime achievement award in 2021. He also serves as vice chairman of Community Chest
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