SINGAPORE (Aug 13): When The Edge Singapore started to put together an annual portfolio of 10 stocks for the Lunar New Year in February, we found ourselves in a quandary. While economies around the world were poised for synchronised growth, global equity markets saw a major correction. At that time, US President Donald Trump had begun his rhetoric on reversing the country’s trade deficit position with its trading partners, especially China. That had sparked fears of a trade war.
Fast forward to August, the trade war has become a reality as the US and China have imposed 25% tariffs on each other’s products worth US$34 billion ($46.4 billion) each. The synchronised global growth, as anticipated by economists, did not quite materialise in the first half of this year. Although strong growth was seen in the US, the same could not be said in Europe and Japan. In Singapore, new cooling measures were recently implemented to curb “euphoria” in the property market.
These developments did not go unnoticed by the local stock market. In the period of Feb 9 to Aug 7, the Straits Times Index tumbled 1.1% to close at 3,340 points. Including dividends, the benchmark index returned only 0.9% during the period.
The trade war, which seems poised to escalate, has caused investors to worry. Therefore, the recent selloff seen in the equity markets — including Singapore — should come as no surprise at all. “Singapore’s status as [an] open, trade-dependent economy exposes local asset prices to a greater vulnerability to global risk aversion in an environment of escalating trade war,” Prakash Sakpal, Asia economist at ING, tells The Edge Singapore via email.
Other factors may have played a part too. Eddy Loh, senior investment strategist at Credit Suisse, says the lowered earnings estimates in this current reporting season have consequently weighed down the market. In addition, there are concerns of slower domestic growth in the second quarter of this year, FXTM research analyst Lukman Otunuga points out.
In the same period, our portfolio managed to eke out a meagre 0.1% return, though it underperformed the STI. Among the counters that registered positive returns were Cityneon Holdings, The Hour Glass, HRnetGroup, Oversea-Chinese Banking Corp, ST Engineering and Wilmar International. The underperformers were City Developments, MindChamps PreSchool, Singapore Exchange and IFS Capital.
Will the trade war between the US and China escalate further? How will this affect economies and equity markets worldwide, especially in Singapore? Will our portfolio perform poorly?
More tariffs
In the past few months, the rest of the world were on the edge of their seats as the US traded barbs over trade with China and the European Union. With newfound financial muscle and political clout, China is not taking this lying down.
The trade war has ratcheted up another notch. On Aug 8, China confirmed that it would impose 25% tariffs on an additional US$16 billion worth of imports from the US with effect from Aug 23. This is a direct response to an earlier move by the US.
In a statement, China’s Ministry of Commerce said the US decision to impose 25% tariffs on Chinese goods was “very unreasonable”. China had to retaliate to protect its rightful interests and, in doing so, uphold the multilateral trading system.
Further tariffs are said to already be in the pipeline. The US is now reviewing the possibility of levying 10% duties on a further US$200 billion worth of Chinese imports, and could hike it to 25% as well. If that happens, China is likely to levy further tariffs on an additional US$60 billion worth of US exports.
Damaging consequences
The immediate impact of an escalating trade war is obvious. Arguably, China stands to lose more than the US, given the former’s trade surplus position with the latter, says Loh of Credit Suisse. The US economy will also suffer, with job losses already reported in specific sectors affected by the trade tariffs.
Naturally, if two of the world’s largest economies suffer, so will the rest of the world. Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye note that global growth is already slowing down as it is running on only two legs — the US and China — as the EU and Japan show signs of slowing. The Markit Purchasing Managers’ Index for manufacturing in most countries and regions is rolling back from the peaks seen last year. In Europe and Japan, imports of capital goods have turned negative, say Chua and Lee.
“A full-blown US-China trade war threatens to take global trade and growth down another notch,” they say. “Businesses are likely to hold back capital expenditure amid the rising uncertainty caused by the trade war.”
In Singapore, as a transshipment hub with through-trade valued at three times GDP, the impact can be severe. “We may see some tapering in export strength as the impact of the US-China trade war trickles down. Slower exports will undoubtedly drag GDP growth lower,” says ING’s Sakpal, who has trimmed his full-year growth forecast for Singapore to 3% from 3.2% previously.
What does this mean for our portfolio? Some of our picks, such as MindChamps Preschool, tend to be resilient, as parents have a strong propensity to pay for quality education. However, there are others exposed to the wild. China-focused companies such as OCBC and The Hour Glass could see more volatility ahead. The banking and financial giant is eyeing growth in China’s Greater Bay Area, while the luxury watch retailer is largely dependent on purchases by affluent Chinese customers. Wilmar could also be affected, as soybean is one of the products that are subject to Chinese tariffs.
Meanwhile, CDL is being weighed down by the latest round of property cooling measures announced in July. First-time buyers’ demand will be offset by investors deterred from getting their second, or third, properties, given the hefty additional tax that they now need to pay. “Consequently, sentiment on property developer stocks is likely to remain weak, although there remain selected opportunities within the sector,” says Loh of Credit Suisse.
The outlook certainly looks to get worse before it gets better.
Our top 10 stocks for 2018 and how they performed at half time
City Developments — Riding out headwinds with foreign projects
Cityneon Holdings — Sprinkled with Hollywood blockbusters’ stardust
HRnetGroup — Cash-rich and ready for acquisitions
IFS Capital — New strategy in place
MindChamps PreSchool — Income streams from fund JVs
Oversea-Chinese Banking Corp — Greater Bay Area to be growth driver
Singapore Exchange — Stellar results amid challenging times
ST Engineering — Banking on smart city push
