SINGAPORE (Aug 19): On Wednesday, US markets plunged on recession fears after the yield on the 10-year US Treasury Note broke below the two-year rate, producing an inverted curve, an indicator of economic recession.
The Dow Jones Industrial Average fell 800.49 points to 25,479.42, a 3.05% plummet that is the worst percentage drop of the year and the fourth largest of all time. The Standard & Poor’s 500 Index and Nasdaq Composite Index also fell 2.93% to 2,840.6 and 3.02% to 7,773.94 respectively.
The financial sector was the hardest hit as banks led the declines, dropping more than 10% from a recent high.
Some observers have been quick to say that recession fears are overplayed. Former Federal Reserve chair Janet Yellen says the yield curve inversion may not be an accurate indicator, and that the US economy still has the strength to avoid a recession.
Kelvin Tay, regional chief investment officer at UBS Global Wealth Management, echoes her opinion. He thinks the US will avoid a recession next year. “But we expect growth to remain muted, and it’s likely that rates will remain lower for longer as central banks try to support growth,” he says.
Jeffrey Halley, senior market analyst for Asia-Pacific at Oanda, notes that the inversion has wiped out any good that the US tariffs postponement has brought on. “Autumn arrived early in Europe as Eurozone and German GDP missed badly to the downside. Winter came blizzard-like to North America as traders took fright at slowing growth in two of the big three, stampeding for the exit door on stock markets,” writes Halley in a note on Thursday, referring to the US, China and Europe.
“With trillions of dollars of government debt now in negative- or zero-yield territory, stock markets have been blissfully denying reality for some time. Negative yields and a procession of central bank easing around the world are not an indicator of positive future growth — a reality that global equity markets are now having to accept,” he adds.
Active stocks
On the domestic front, some local stocks have turned active after new developments. Yangzijiang Shipbuilding announced that executive chairman and controlling shareholder Ren Yuanlin had taken a leave of absence since Aug 9 to assist in a “confidential investigation” by Chinese government authorities. The company says none of its directors are the subject of investigation, and none of the other directors are assisting or involved in the investigation.
Yangzijiang asserts that its business and operations are unaffected by Ren’s absence. In what can be interpreted as a warning shot to short-sellers of the stock, it also says it is aware of rumours being spread about Ren and the company, and has engaged lawyers for legal advice.
“The company reserves the right to commence any proceedings and take any actions for any and all causes of action arising from any falsehoods spread, in order to protect the reputation of the group and its directors,” said Yangzijiang in a Singapore Exchange announcement on Aug 14.
Shares in Yangzijiang saw a steep drop, with the company initiating a share buyback of two million shares, costing $1.7 million. Its share price dropped to below $1 on Aug 15 before closing 17.31% lower at 86 cents, after hovering around $1.50 last month.
Another company with new developments is KrisEnergy, which has filed for a six-month bankruptcy protection. In an SGX filing, the oil and gas company revealed that the total debt on its balance sheet was US$476.8 million ($662 million), with gearing at 110.8%. Its revolving credit facility provided by DBS Bank will mature on June 30, 2020, and the US$117.4 million already drawn has been classified as a liability.
KrisEnergy has been battered by a prolonged slump in oil prices, worsened by geopolitical and economic factors. “The group continues to tightly manage its liquidity position and take all measures to reduce costs and curtail discretionary expenditure. Managing liquidity while progressing development projects remains the group’s primary challenge,” it says.
ST Engineering was one of the better-performing blue chips in this volatile market. Yet, even as it announces another quarter of earnings growth, some analysts have turned conservative. For the three months ended June 30, ST Engineering recorded an 18% y-o-y gain in earnings to $138.2 million on the back of an 8% y-o-y growth in revenue to $1.8 billion. It also had a record-high order book of $15.6 billion as at June 30, with another $3.8 billion expected by year-end.
Maybank Kim Eng analyst Lai Gene Lih sees the spike in depreciation and amortisation from the integration of a recent acquisition, MRAS, as muting the upside from the counter. Though optimistic about ST Engineering’s growth prospects, he thinks the share price performance in the past year leaves little room for upside. An all-time-high backlog, and integration and execution risks of new investments mean that amortisation expenses are likely to increase further.
The week ahead
With the 2Q earnings reporting season underway, attention will revert to the slew of macroeconomic indicators. Data to be reported this coming week includes the July consumer price index by the European Union and the US net Treasury income flow for June.
