SINGAPORE (May 22): Economists were quick to compare the current economic woes to the 1997 Asian Financial Crisis (AFC) and the 2008-2009 Global Financial Crisis (GFC) But Thilan Wickramasinghe, head of research at Maybank Kim Eng Singapore, says there are some differences.
During those two previous recessions, the Singapore market crashed by about 60% from start to end. This time round, the market had retreated just over 20% thus far.
One reason could be because of “unprecedented government support schemes and central bank policies that have been quickly activated — something that neither the GFC nor AFC had back in the day”.
The policy makers had likely learned from history and are adjusting their behaviour accordingly. “A number of schemes came in only after the GFC when central banks and governments became more comfortable in directly intervening in the markets,” says Wickramasinghe. “Given that we have had so much liquidity being pumped into the system, you can’t directly compare it to the AFC or GFC, but there are still downside risks,” he adds.
So, how can investors be better equipped to deal with risks? Since the outbreak, there has been a flood of reports and studies from market experts, full of statistical charts and technical predictions.
Maybank Kim Eng, the investment banking arm of Malaysia’s largest lender Maybank, is taking a different approach. It wants to give investors the answer to this question: What is really happening on the ground? “By understanding how the smallest building blocks of economies — individuals and businesses — are re-orienteering themselves provides valuable insights in building the bigger picture and fuelling conviction,” says Maybank Kim Eng.
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To this end, the brokerage firm recently published the “Living with Covid” report, which delved into the front liners “on the streets” ranging from senior managers of listed companies, SME owners, start-up founders, and even yoga teachers and taxi drivers, such as C Chan from Trans-Cab Services. Chan laments that he used to gross between $150 and $250 over a typical 12-hour shift. That has plummeted to just $20 to $30 since the Covid-19 outbreak. Based on Chan’s anecdotal account, the report is suggesting that ride-hailing apps are no longer as popular among taxi drivers.
“I stopped using them when their commission rate charge jumped from 60 cents to one dollar, and when other extra charges were added,” says Chan.
One of the SME owners also featured in the report is Ken Ooi of TenderBoard, a company which helps other SMEs do procurement.
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When the crisis hit, the company CEO says he saw a 40-50% drop in core procurement activities. However, with resources freed up, the company was then able to offer additional services such as outsourcing, reports and analytics. “When in war, you’ve got to eat stuff that you normally don’t eat,” Ooi adds.
He still expects a “significant” shortfall from his original projections of the two-fold revenue growth for 2020.
Maybank Kim Eng also featured Invictus International School, a subsidiary of listed developer Chip Eng Seng Corporation. While the education sector is seen as relatively inelastic, the Covid-19 outbreak has impacted the school’s operations as demand eases off from the traditional customer base. To make its offerings more attractive, Invictus shied away from charging high, all-in fees that other private schools did to only charge for what the students used. This makes Invictus offerings more competitive. Despite the on-going crisis, Invictus maintains its medium term ambition to expand into other parts of Asean and Australia.
Multiple risks
Many market players have no patience for such details of individual companies. They prefer to go with the flow, figuring that they are nimble enough getting both in and out. In fact, given the current volatility so it is an ideal opportunity for them to take this “time the market” approach. However, Wickramasinghe says that this tactic in the current market can prove to be extremely difficult. Instead, investors should take their investment horizons and risk profiles into account before making any investment decisions.
“Rather than trying to look for quick profits, I’d be very cautious with that sort of approach in this type of market,” he explains.
“You have this opportunity to invest in good companies that have structural growth stories, good management and balance sheets, and you should invest based on that rather than on short term gains,” adds Wickramasinghe.
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The Covid-19 outbreak is a healthcare crisis but also an economic one, which along the way, has created percolations on almost all aspects of the global economy. Risks, according to Wickramasinghe, will rear their ugly heads from multiple angles. That is why investors need to pay closer attention to the fundamentals of the companies, he explains.
“People need to be mindful that they’re entering the market at an extremely volatile period,” he says. “They need to be cautious in terms of how they view companies, and whether they can afford to trade the way they’re trading. Investors need to have conviction in what they should be buying and selling, and not blindly follow others or market patterns,” Wickramasinghe adds.
But traditional valuation metrics might not be entirely accurate and applicable to all companies.
In the current market, many counters are characterised by low prices and attractive yields in this low interest rate environment where liquidity has been forcefully raised by the central banks.
However, investors need to separate the wheat from the chaff and ask if a company’s structure as it is and the quality of the management will put them in a good stead to first survive, then thrive in a post-Covid-19 world.
Wickramasinghe has a few suggestions on what companies should be doing to see through the crisis — not an easy task by any measure, given how uncertain the duration of the pandemic can be. For one, businesses must execute a “fine balancing act” of managing costs while building capacity simultaneously.
Employers could be tempted to “knee-jerk reactions” like axing employees in an attempt to cut costs. But as Wickramasinghe warns: “[This] can be counter- productive, and come back to haunt you when you don’t have the necessary skill sets and staff strength to benefit from the recovery that’s coming. Given the fiscal and monetary support schemes that have been put in place, companies should explore these and make sure they’re benefitting the most from these efforts.”
The crisis is also a good time for companies to revisit some issues. Over the past decade, with generally buoyant markets, many have hitched an easy ride. Wickramasinghe says it is now time to focus on things that have been pushed aside during the hunt for growth figures. These include outsourcing capabilities and collaborations with other companies, thereby making themselves more focused and compete more effectively where they choose.
Defensive amid volatility
So, what is Wickramasinghe’s take of the current crop of Singapore-listed stocks? Over the years, Singapore has earned a reputation as being a “safe haven” due to stability and high yields. But as the global economy turns uncertain and bleak, the city-state offers a number of sectors which offer “significant yields” and while investors wait out the crisis. “We prefer to be defensive amid volatility,” he says.
As always, some sectors are more favourable than others amid the volatility. However, he believes that stocks with geographical diversification, strong balance sheets and dividend visibility are ones to watch.
Although the three Singapore banks — namely DBS, UOB and OCBC — posted declines of 29%, 19% and 43% in earnings respectively for 1QFY2020 ended March, Maybank is choosing to remain optimistic due to the strong levels of liquidity on their balance sheets and high levels of provisions. Wickramasinghe also says that the decline in earnings had fallen within Maybank’s expectations. “What I took comfort in was the fact that around 60% of allowances were either cautionary or general provisions, rather than specific provisions for a non-performing loan,” he says, adding that over the past decade, local banks have been moving away from lower quality client bases to higher quality ones such as larger corporate clients.
Wickramasinghe identifies DBS and UOB as his preferred picks due to a “clear sense of dividend policy” as well as the capital and flexibility to continue paying dividends for the year.
Industrial REITs, too, are hot favourites that have visibility and value. In particular, Wickramasinghe says demand for high-tech spaces could increase in light of the pandemic, as more businesses and individuals switch to remote working and communications. AIMS APAC REIT and Manulife US REIT are the brokerage’s picks due to their levels of visibility which is vital during periods of volatility.
Tech stocks have escaped the “circuit breaker” measures after being classified as essential services. With structural growth stories such as 5G, artificial intelligence and data centres backing them, Wickramasinghe says these stocks continue to offer investors opportunities to tap on.
On the flipside, some stocks have taken a bashing from the massive sell-off. While shares in Raffles Medical — which closed on May 19 at 92 cents — are down 9.8% year to date, Wickramasinghe notes that the stock has been hit most because of the lockdowns in China.
“China is already opening up and that’s starting to show in the company’s numbers,” he says.
“Medical tourism should start to ease in Singapore in the mid-term. The structural story will remain very much intact for the company,” he adds.
Another Covid-19 victim is ComfortDelGro, which has seen bleak business due to a plunge in ridership and the extension of rental rebates to its drivers. However, Wickramasinghe recalls how the counter shot up by some 70% within eight months following the SARS outbreak in 2003.
“A lot of the negatives are already priced in,” says Wickramasinghe, adding that more than 60% of the company’s revenues are completely independent of contributions from the public transport segment.
Looking ahead, he says the future remains optimistic for the company as private vehicle ownership is set to become progressively more restrictive. In addition, its incremental investments in developed markets such as Australia and the UK are expected to offer some upside to the counter.
