SINGAPORE (May 20): Tensions between Washington and Beijing continue to rise as US President Donald Trump shows no inclination to de-escalate the country’s trade war with China. Trump believes his clash with Chinese President Xi Jinping is boosting his popularity ahead of next year’s election campaign.
Trump is also calling on the US Federal Reserve to cut rates. “China will be pumping money into their system and probably reducing interest rates as always, in order to make up for the business they are, and will be losing”, he tweeted. “If the Federal Reserve ever did a match, it would be game over, we win! In any event, China wants a deal.”
His disregard for the short-term economic effects of this move is yet another example of his determination to pressure the central bank into stimulating the US economy. It is believed to be a tactic to help deflect blame onto the Fed if the trade dispute wrecks the US economy as he seeks re-election.
The Fed has raised interest rates four times in the past year but has signalled an extended pause as it waits for a tighter labour market to lift inflation, which has been persistently low. Financial markets await further rate cuts next year, but chairman Jerome Powell sees no strong case for a move. Eugene Leow, rates strategist at DBS, corroborates this, saying that “conditions are not yet in place for Fed cuts, although expectations are shifting in that direction”.
The escalation in the trade war has unsettled markets across the world. Singapore was no exception. While the Straits Times Index opened at 3,273.50 points on Monday, May 13, slightly higher than the previous Friday’s close of 3,269.70, it dived between Tuesday and Wednesday. It closed at 3,230.26 points on Thursday, one of the lowest levels it has traded at in the past week.
“We expect volatility to continue over the near term as the market continues to digest heightened trade risk, particularly as a key driver for the market rally this year has been trade optimism. We believe it is still too early to buy on weakness for now,” says Eli Lee, Bank of Singapore’s head of investment strategy. However, he warns investors that it is too early for bargain hunting. “They should switch from high-beta stocks to high-quality names as a defensive move.”
Singtel’s earnings drop
Several companies experienced active trading this past week as investors reacted to their earnings reports. Singapore Telecommunications, Southeast Asia’s largest telecoms operator, reported a 43.5% y-o-y drop in earnings to $3.09 billion for the year ended March 31, 2019. In the previous year, the company booked one-off gains from the divestment of Netlink NBN Trust. Singtel has been affected by losses at its associate company in India, while its other regional associates have not been performing as strongly as before. Despite the lower earnings, Singtel plans to maintain its final dividend payout of 10.7 cents — the same as last year. Singtel closed May 16 at $3.14, up 0.32% for the day.
NetLink NBN Trust, meanwhile, reported earnings of $20 million for the fourth quarter to March 31, up 30.9% y-o-y. Revenue in the same period grew 8.9% to $87.9 million as more people switched to fibre for internet access. The company plans to pay a distribution per unit of 2.44 cents for 4QFY2018, bringing the total payout for FY2018 to 4.88 cents, compared with 3.24 cents in the previous year. NetLink NBN Trust closed at 84 cents on May 16, up 0.6% for the day.
Steel supplier BRC Asia’s 2QFY2019 earnings surged eightfold to $5.4 million from $0.66 million the year before as it received a lift from its acquisition of Lee Metal. As at end-March, the group’s cash and cash equivalents stood at $39.8 million. BRC Asia closed May 16 at $1.34, unchanged for the day.
Finally, Eagle Hospitality Trust, which had lodged its IPO prospectus on April 25, registered it on May 16. The trust is launching 580.56 million shares at an issue price of 78 US cents per stapled security, and is expected to offer an initial distribution yield of 8.2% for FY2019. The offering is expected to raise US$453 million in gross proceeds. The portfolio is valued at US$1.27 billion. Trading will start on May 24.
The week ahead
With the 1Q earnings reporting season over, investors will be turning their attention to economic factors and political events. Elections to the European Parliament are scheduled for May 23. The expected victory of Nigel Farage’s Brexit Party has sparked panic among the Labour Party and the Tories — two of Britain’s largest parties. Incumbent UK prime minister Theresa May has rebuffed recent calls for her to step down, saying the Labour Party was likely to make changes to the political declaration to include a customs arrangement, workers’ rights and environmental protections. DBS’s analysts say May is “likely to be caught wrong-footed in believing a victory by the Brexit Party at the EU Parliament elections, at the expense of the Conservative Party and the opposition Labour Party, would drum up support for her agreement”.
