US President Donald Trump claimed that the US is winning its trade war against China, comparing the 27 percent fall in China’s stock market against US equities that are still holding up well.
Healthy performance in the US stock market has helped to alleviate sentiments for local investors as the Straits Times Index finally managed to stage a rally in July after two months of decline. However, driving both the US and Singapore stock markets are in fact strong corporate earnings.
In Singapore, our three local heavyweight banks have posted rather healthy results. For DBS, net profit came in at $1.37 billion, growing 20 percent from $1.14 billion last year. UOB delivered higher growth as net profit rose 28 percent to $1.08 billion, while OCBC crushed estimates with a 16 percent growth to $1.2 billion in its bottom line.
As a regional financial hub, Singapore’s banking industry is the financial bloodline of the economy. The banks’ healthy performance is a good indication that corporations would deliver a strong earnings season.
A similar phenomenon is happening in Hong Kong’s stock market. Hang Seng Bank continues to make new highs while, CLP Holdings, Hong Kong and China Gas, and Link Real Estate Fund also rose to record territories. Meanwhile, Swire Properties came under slight correction after making multiple new highs. These handful of stocks are considered safe-havens in a full-scale trade war.
CLP and Hong Kong and China Gas are utilities conglomerates. During a market’s downturn, the utility sector sees stronger investor interest given its defensive nature. Utility companies receive a steady stream of income and hence investors can expect a stable flow of dividend income.
While Link REIT is not a utility company, its income is derived from the rent of its properties. Its rent rates continue to rise in land-scarce Hong Kong over the years, allowing Link REIT to raise its distribution payout substantially year over year. As for Swire Properties, while income fluctuates as a developer, its overwhelming financial performance was the reason why it won support amongst investors.
A sizeable group of investors believes that AIA Group (AIA) and HSBC Holdings (HSBC) are also safe-haven stocks. For one, the insurer continues to post healthy financial performance while HSBC offers a respectable 5 percent dividend yield. While both stocks were not spared from the recent broad-based selloff, their decline was more contained than the Hang Seng Index.
Over in the US, tech stocks have been the key driver for the US stock market. Recently, Apple became the first in stock market history to hit US$1 trillion in market capitalisation. The news eased concerns over Trump’s trade war with China and reignited the animal spirits.
The exuberance in US tech stocks resemble that in the 1999-2000 dot-com bubble. However, there is a fundamental difference between the hot tech stocks today than in yesteryears. During the dot-com bubble, most of the “hot” tech companies were not profitable. Analysts used the cash burn rate to value the companies and investors piled up on tech companies that were making large losses. The current situation is much more rational. Currently, speculation of tech stocks is concentrated on a handful of profitable companies that are displaying amazing growth rates. For example, e-commerce leader Amazon saw its earnings jump 11 times in the latest quarter. Naturally, the stock also rose to notch a new record high.
During the 1990’s, Warren Buffett chose to stay away from tech stocks despite public ridicule. However, he had the last laugh when the bubble eventually burst, and he drew even more admiration for his investing prowess and foresight. Fast-forward to 2018, Buffett who tends to shun tech names in the past, have finally gotten his hands on Apple. Explaining his prized acquisition, Buffett publicly said that tech products today have become commoditised and an inseparable part of human lives.
Facebook also recently made history when it dropped 19 percent on 26 July 2018. The social media giant lost US$120 billion in market capitalisation – the largest single-day drop in US stock market history. Closely following Facebook’s plunge, Twitter also declined 20 percent on the following day. With such astonishing declines, would it spell the end of speculation for US tech stocks?
In reality, many other US tech counters continued to make new highs during the selloff of Facebook and Twitter, meaning that the selloffs were due to concerns relating specifically to the two social media companies. Indeed, Facebook Chairman Mark Zuckerberg guided to poorer performance in the second half of 2018, while Twitter itself is experiencing a deterioration in its daily active users.
Undisputedly, technology has transcended to become an integral part of the new economy. To succeed, corporations must be creative or have a technological edge. For Facebook and Twitter, creativity has plateaued and competition in the social media space has become intense.
On the other hand, technological gaps are harder to bridge. In this aspect, the US clearly holds the leading position as displayed by the ZTE incident. Notwithstanding that, Google’s Android operating system is already close to monopolising the global mobile phone market.
In Asia, Singapore and Hong Kong stock market have a handful of tech counters and amongst them is Tencent Holdings. Recently, a major correction has emerged for Tencent, but investors would be greatly rewarded considering that it has risen multifolds over the years. The stock has grown 500 times since its debut on Hong Kong Stock Exchange in 2002!
Of course, it is improbable to predict which budding tech stock today would become future growth leaders. As such, the best strategy is to diversify your investments.
On trade war front, Trump has recently up his rhetoric against China after a series devaluation in the Chinese Renminbi. Over the past few months, the Chinese currency has depreciated 9.8 percent against the US Dollar. The move is widely believed to be a countermeasure against Trump’s 10 percent tariffs threat on US$200 billion worth of goods. However, it also provoked the US President who then responded by escalating the tariff threat from 10 percent to 25 percent.
The Chinese government could continue to devalue the Chinese Renminbi to match the new tariff threat but has chosen not to respond with any retaliatory remarks this time. More than likely, they are waiting to see the impact of tariffs on its economy, before coming up with a measured response.
Meanwhile, China is eyeing to boost infrastructure spending to cushion employment as trade war escalates. On 31 July 2018, after returning from 10-day overseas visit, Chinese President Xi Jinping convened a meeting with the Politburo to discuss on China’s economic work for the later half of the year.
Obvious changes in the external environment has brought new challenges to China’s stability. The meeting concluded that Politburo needs to fulfil the paramount tasks of stabilising “employment, financing, foreign trade, capital outflow, investments and expectations.”
The US Federal Reserve has kept interest rate unchanged after its meeting on 1 August 2018. However, the Fed will likely hike interest rate in September. To an extent, this would impact the US Dollar and competitiveness of US goods. As such, US equities may also come under pressure in the coming months.