The Straits Times Index (STI) as represented by the STI ETF continues to languish below its 50-, 100- and 200-day moving averages, reflecting the doldrums that local stocks are in. The languorous sentiment around the local market was underscored by the resignation of Mohamad Ismail, Singapore Exchange’s (SGX) global head of equity capital markets, who is reported to be departing. At the same time, the SGX is focusing on derivatives.
Based on SGX’s equity performance, it appears that equities are somewhat neglected. This is clear when the STI’s performance is measured against the S&P 500 Index (SPX).
Local investors have access to the SPX via the SPDR S&P 500 ETF. The chart pattern looks somewhat like a head-and-shoulders top formation with the neckline at US$437.1 ($596.5), which is also a potential breakdown level.
The SPDR S&P 500 ETF is currently at US$450. Resistance is at US$452. If this level is breached on the upside, then the ETF would make a significant upmove to a new high.
In comparison, the SPDR S&P 500 ETF has greater relative strength compared to the STI ETF and the Lion-OCBC Securities Hang Seng Tech ETF (HSTECH). HSTECH is the most liquid among the ETFs. HSTECH reflects the movement of the Hang Seng Tech Index. Although it is the strongest among the China ETFs, HSTECH is weak compared to the SPDR S&P 500 ETF.
What is holding back HSTECH?
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According to Björn Jesch, global chief investment officer at DWS, a few factors continue to stymie the Chinese economy. Jesch adds: “Economic growth in the second quarter disappointed. For the first time since 2017, more investor money is flowing into Asia ex-China than into China itself. The stock and bond prices of many real estate developers have collapsed, in turn causing imbalances among other financial services providers.”
Despite the weak property sector which could spread to the financial services sector, New Economy industries continue to strengthen. “China retains significant strengths in some high-tech industries,” Jesch notes. In addition, China’s domestic market is large, private homeowners’ indebtedness is low compared to other economies, foreign debt is low and the services sector continues to grow.
Still, Jesch wonders if Beijing will give the private sector and financial markets the leeway they need to establish themselves in higher-value sectors and allow the New Economy to gain in importance.
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For the time being, China continues to struggle with its real estate overhang and the financial problems of local governments. “Part of the vicious circle is that 90% of apartments for sale were pre-financed by their buyers. With (interest-free) payments, project developers in turn financed further land purchases from the municipalities. This model suited everyone so long as prices rose and the apartments were completed,” explains Jesch. By some estimates, house prices in Beijing rose tenfold between 1998 and 2021. The downside? Debt in China as a percentage of GDP has doubled in the past 10 years, DWS estimates.
According to a September 2022 study by S&P Global, state-owned enterprises (SOEs) accounted for 45% of non-financial corporate sector debt. The study also sets out how poor the balance sheets and earnings power of the SOEs are and that corporate debt, at 160% of GDP or the equivalent of US$29 trillion, is twice as high as the US and is equivalent to the US national debt.
These issues may stymie HSTECH despite the advances made by Huawei which is not listed yet.
