Now may be the most dangerous time the world has seen in decades, declared Jamie Dimon, CEO of JP Morgan, in the bank’s 3Q report. He was expressing concerns about geopolitical risks to the global economy because of the war in Ukraine and Israel’s impending attack on Gaza which could hit food and energy prices.
Like the US Federal Reserve Board’s strategy on interest rates, the risk may stay higher for longer too. Managing investor expectations is an art at best but Dimon has been very successful at this for 20 years. The cautious guidance was provided right after the bank declared US$13.2 billion ($18.1 billion) in 3Q profits, up 35% from last year. After the announcement, JP Morgan’s stock rose.
To be fair, Dimon was just calling what he saw — especially when the tinderbox that is the Middle East may already have been lit by Israel’s response to Hamas, all but scuppering the detente between the Saudis and the Israelis. Given Joe Biden was jawboning threats to scare The Living Daylights out of other state actors like Iran so they would not get involved in the conflict, sent two carrier groups to the region and ordered Anthony Blinken to crisscross capitals to shore up support for friendly governments with domestic Arab populations over the humanitarian crisis unfolding in the Gaza Strip, the fear of terrorism in other parts of the world is real.
It even affected my first trip this quarter, which was to the City of Lights, Paris, where I watched some World Cup Rugby. The restaurant at the Eiffel Tower cancelled my booking only an hour before on the day I arrived due to a “political event”. This certainly was not because of a last-minute visit by Marcon but perhaps related to a general transport strike on the day. However, despite banning pro-Palestinian protests in France, there was an incident on the day which cost the life of a teacher and raised the republic’s security level to the highest level.
The day after, visitors to the Louvre Museum were evacuated. Fortunately, there was no incident there but extra gendarmes were deployed to bolster large public events. Convoys of police, military and emergency services vehicle went with sirens blaring around the city. To enter the Stade De France for the quarter-final between the Kiwis and the Irish, spectators had to be frisked by police officers in Kevlar vests.
Likewise, while French hearts were broken by their team’s quarter-final exit, the World Cup village in Place de la Concorde was surrounded by legions of security personnel, providing an extra layer of protection to screen supporters before they could enter the square. Heavily armed, they must have provided enough deterrence for would-be perpetrators.
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Although most people seemed unperturbed, I was getting more worried the longer I stayed. Still, the party continued and Paris, being a much more cosmopolitan city for non-French-speaking visitors than in 1994 when I first visited, continues to hold its charm, thanks to its warmth and welcoming people.
Waiting for Skyfall
As Israel continues to prepare for a ground incursion into Gaza, the oil price has ticked past US$90 from US$80 before the crisis. Blindsided by the spike and with No Time to Die, speculators who shorted on the way down had to cut their losses fast. Bullish investors may have the momentum for the time being but this may not last should the violence and instability not spread to the wider Middle East as the flurry of diplomatic activity de-escalates the crisis and energy prices begin to normalise. This predictability was postulated in last week’s column. As investors had little idea how to react, the impact on equity markets was minimal thus far.
The Straits Times Index (STI) did not fall out of the bottom range for the year although certain trending news continued to reward stockpickers. Given the slight risk-off mood in global markets, the risks of growth stocks being punished by a miss in expectations, a founder selling, or simply by a change in its outlook, have increased.
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This was the case for Sea which has seen its stock fall by 45% in the last six months even after better bottom-line numbers twice failed to convince investors its growth was not slowing down. At US$45 a share, it is still a long way off its heady 2021 prices which were closer to $400 even if investors at IPO times are still almost 2.5x in the money. With a P/E of 105x, one could hold a Quantum of Solace now that it at least has an “E” for earnings and can be measured using more conventional metrics as the stock normalises, which is to its detriment.
In comparison, Grab was up 15%, thanks to better performance in the last six months although at $3.42 each, it is still a far cry from its spac combination valuation of $11 three years back. With no “E” to be spoken of but a cash hoard from the IPO, its path to profitability seems to be more hopeful, according to the analysts who cover the stock. It remains to be seen what will happen to its attempt to consolidate through an acquisition of Trans-cab even though the anti-competition watchdog of Singapore has raised its concerns.
Having said that, most of us are just watching car COE prices continue to break records, which appears to be a more certain bet. One wonders if fleet buyers and dealers are having an outsized impact and hence making ride-hailing transport costs in Singapore possibly No 1 in the world — an honour we would rather not claim, given how competition from the likes of Uber and others has lowered sky-high cab prices in New York, London, Paris and even Shanghai. This has not happened in Singapore since Grab knocked out Uber, although Gojek and Ryde, which is trying to list in the US, provide alternatives to taxi services.
In the long term, for climate change reasons, it may be good for both our wallets and Planet Earth if we ditch cars for Singapore’s excellent public transport services. With transport operators mostly in the red, MRT and bus fares are still catching up to cover the rising cost of operations and are comparable or lower to that in larger cities even when we do not enjoy the economies of scale as they do.
Elsewhere in Indonesia in the same unforgiving public market for listed companies with growth-at-all-cost business models, one of GoTo Group’s founders, William Tanuwijaya of Tokopedia, sold 0.05% or 332.2 million of GoTo shares, reducing his 1.77% stake to 1.72%. GoTo promptly sank 19% on the news, leaving it 70% lower from last November’s high as the prospect of more fundraising to sustain growth unnerved investors.
For now, the STI continues to be a haven of stability compared to the MSCI Singapore benchmark which includes larger Singapore companies listed overseas such as Grab and Sea. The two tech stocks saw their prices move in opposite directions in the first half although this trend appears to be reversing in the second half. Still, investors who are less keen on the volatility may miss the “growth” as expressed in the MSCI SG but are also more likely to avoid the Spectre of “growth” risk.
Playing in the Casino Royale
Back in Paris, while Diamonds Are Forever, it was noticeable that the queues at the new Goldeneye of LV were a tad muted. This might explain the 24% decline in LVMH stock in the last six months as there are signs of a slowdown in high-end consumer spending in the wake of the pandemic. The new low for the year coincided with Friday the 13th (whose urban myth of horror actually came from the massacre of the Templars ordered by King Phillip IV of France in 1307). This resulted from a 9% growth in sales in 3Q, down from 17% previously. A slowdown of LVMH revenue growth signals the end of a global luxury bubble it was declared. And so did US$245 billion vanished from the total market caps of Europe’s seven biggest luxury trading firms.
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In the US, card spending for luxury fashion likewise appeared to be on the decline for six quarters in a row with spending on luxury fashion brands down 16% y-o-y according the Bank of America Data. The World is Not Enough for markets hungry for growth, especially if Chinese consumer spending on luxury goods failed to pick up the slack even as outbound travel resumed. I did notice the lower presence of Chinese tourists shopping along the Champs-Élysées compared to the last time I was there before Covid-19 struck.
In Singapore after September’s FI night races and conference activities, we have also hit a pause as high-end tourists changed to package tours and become more visible on the streets of Chinatown close to where I live. Assuming that the Fujian Gang whose exposed money laundering tab now has reached $2.8 billion did spend a fair amount on luxury and wined and dined at their favourite restaurants, we also might be in for a slowdown in consumer sectors in Singapore during the year-end school holidays.
That said, the ultra-high-net-worth, who will largely go unscathed as energy and food inflation hit the mass consumer harder, behave the same way no matter which global city they are in. The real estate record for an apartment on the island near Notre Dame was EUR75,000 psm or roughly $10,000 psf. True, it may be nice to walk along the banks of the Seine any time one fancies, visit the museums, enjoy the flea markets and savour the extraordinary cuisine in the city.
But as an investor, I would rather shop around back home where stocks like Frasers Property TQ5 and Wing Tai trade at up to 70% discounts to book value and low single-digit P/E ratios. After all, in some instances, the principals are buying back their shares. However illiquid these “value traps” — as momentum traders call them — may be in the near term, it is still easier to trade it in the market than transact physical property. In the meantime, my trip continues and I will hopefully glean more insights into the economy and investing environment in Europe from the friends and professionals I continue to meet. What is clear, however, from the View to a Kill on top of the Eiffel Tower, is that I had watched too many James Bond movies on my flight to Paris.
Chew Sutat retired from Singapore Exchange S68 after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
