Since the last post, the STI did indeed fell further forming a trough by early June. By this week, the STI regained some of its lost territory, landing at 3214.85. Banks are still lagging as the fall out of the US-China trade war began to infiltrate into smaller economies. It is a situation that when giants fight, all the others feel the ripples. For the 1st quarter of 2019, the actual GDP growth of 1.2% fell short against the forecast of 1.9%. Economists are now downgrading Singapore’s yearly growth rate from 2.5% forecast in March 2019 to 2.1% for year 2019. Certainly, the banks stocks are not going to fare well when the state of the economy worsens. Just months ago, it was widely expected that the FED would continue to increase the interest rate well into 2020. This would help mop off the liquidity in the system, resulting in higher net interest margin (NIM) for the banks. Right now, more and more are expecting the FED to lower the interest rate in response to the slowdown due to the on-going trade war. This would inadvertently slacken the interest margin again. Banks, which have been increasing their deposit rates recently, in preparation for higher interest rates may find their efforts come to naught if they are not able to lend them out efficiently.
As mentioned in the last post, perhaps, it may worth not to take the dividends and to sell the stocks pre-dividend and then buy them later. The descent in May, indeed was more than selling the stocks pre-dividend and paying for the brokerages in both directions. To date, the bank stocks are still below their pre-dividend prices, but they could be up again possibly soon. In fact, for those who had bought around end May/early June should have gained a little bit by now.
Manufacturing stocks, like Venture Corporation, that were beaten down hard during the month of May have already seen their stock prices rising sharply in the last two weeks. In fact, their stock prices could have already gone above the pre-dividend prices. So those who have ridden through in May, especially those who were gutsy enough to swim against the tide to buy more during late May, should be sitting on some gains by now.
In the last quarter, banks and REITs were both moving in the upwards direction. Recently, they find themselves on opposite poles. The bank stocks were weakening but REITs were gaining strength. Bank stocks were weakening for the reasons stated above, while the REIT prices climbed after several weak quarters due to widely expected interest rates hikes. As the interest rate hike cycle is expected to end by 2020, and now with the increasing possibility that interest rate is moving down again, REIT prices are now picking up again. More recently, the property developer stocks are also gaining favour just as REIT prices continue their climb. This optimism should hold as long as the interest rate is expected to be on downtrend. Personally, I think if the FED were to decrease the interest rate in this or the next FED meeting, it is likely to be a symbolic action in anticipation of weak economic numbers due to the fallout of the trade war. It is unlikely to mark the beginning of a downtrend interest rate cycle, at least not for now. The FED has been working hard for the past 10 years to remove excessive liquidities, such as tapering off bond purchases and followed by a series of interest rate hikes, without causing too much turbulences in the financial market. As of today, the interest rate still falls short of their long-term target of about 3% to 3.5%. Certainly, it is not going to give up that battle that easily. So, in this respect, the REITs maybe at their peak by now.
At the first glance, shipping stocks like Yangzjiang (YZJ) appeared to be holding up well. In the month of May, it lost 20 cents. This, however, translates to a loss of more than 12%. In fact, in percentage terms, it lost more than Venture Corporation whose loss was about 8% for the same period. But still, it had gained 6% in the last two weeks. While the recovery from a loss territory is expected, the speed of price recovery appeared extremely sharp especially given the weakening US dollars due to the widely expected interest drop going forward.
Sector rotation is now at play.
Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell out of the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.
Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.