China's dismal PMI triggers mixed trading among S-chips

Singapore

SINGAPORE stocks with China exposure pulled in a mixed-bag performance that was by no means drastic on the first trading day of the year, after fresh statistics from China revealed that the country's manufacturing sector had suffered a worse-than-expected December.

Within the property sector, shares of CapitaLand lost 4 Singapore cents or 1.3 per cent to finish at S$3.07, while those of Ying Li International lost 0.3 Singapore cent, or 2.6 per cent to end at S$0.113.

But others such as CapitaLand Retail China Trust, Mapletree Logistics Trust, Mapletree North Asia Commercial Trust, EC World Reit and Yanlord Land eked out slight gains.

Other stocks that lost ground included BreadTalk (down half a cent), China Aviation Oil (down one cent), China Sunsine Chemical (down one cent), Citic Envirotech (down half a cent) and SunPower (down one cent).

At the same time, others such as investment holding company Hwa Hong Corp, Perennial Real Estate Holdings, Jiutian Chemical and Yangzijiang Shipbuilding ended flat by the closing bell.

The Caixin/Markit Manufacturing Purchasing Managers' index (PMI), a private survey released on Wednesday morning, showed manufacturing activity to have fallen to 49.7 in December, from 50.2 in November.

The figure signals a contraction in the manufacturing sector for the first time since May 2017, on the back of its trade dispute with the US.

The Straits Times Index lost nearly 30 points or 1 per cent on the news. It was not alone; other Asian markets also dived into negative territory following the data release.

The Hang Seng Index tumbled 2.8 per cent, its worst start to a year since 1995, as safe-haven flows fuelled the rally in gold and Japanese yen, both of which reached their highest level in over six months.

China stocks fell, with the Shanghai Composite losing 1.15 per cent to hit a new three-year low; the Shenzhen component declined 1.25 per cent.

KGI Securities analyst Joel Ng observed that the effects of the trade war are starting to show in the macro numbers - not just in China's latest PMI, but also manufacturing and export numbers from Taiwan and Korea, two countries hit by collateral damage from the Sino-US trade feud.

"The Chinese data is just reaffirming the trend. The numbers are more obvious in the fourth quarter of 2018, because if you recall, there was a lot of front-loading last year when (manufacturers and exporters) tried to beat the tariffs deadline. More numbers will be coming out in the subsequent months, and you should expect to see the data weaker."

Mr Ng added that besides the trade war, other factors have affected certain sectors of the market. For instance, China's property cooling measures have hit developers there, and slowing loan growth has affecting financial institutions. Consumer-goods companies, however, are expected to benefit from the government's planned stimulus measures to encourage spending.

In addition, the general low valuations of Singapore-listed, China-exposed stocks are generally also reflective of the undervalued Chinese A- and H-shares and Hong Kong equities. "If the valuations there are low, you can't expect that much upside for shares of Singapore companies too," he said.

Margaret Yang, market analyst at CMC Markets, said that China's manufacturing PMI is falling faster than economists' forecasts, suggesting that the global economic slowdown and trade war could be hurting the country's manufacturing activities tangibly.

"Confidence is hurt before material impact kicks in, as companies and businesses are holding back capital expenditure spending and recruitment, or considering shifting their factories out of China to South-east Asia to mitigate trade uncertainties. This brought negative impact on the broader business sentiments and further dampened investment activities."

She added that China faces a challenging 2019 as the Chinese economy is seeking stability after a two-year deleveraging campaign, which hurt companies' growth and the broader financial market as loan growth slowed.

The country will soon have to contend with a slower GDP growth as the "new norm", as the economy becomes less investment- and debt-driven, and instead more reliant on consumption and high-end manufacturing and technology development, she said.

At a media briefing in London in November, Stephen Kam, co-head of product management for Asia-ex-Japan equities at fund manager Schroders, had also advocated a bottom-up investing approach for China A-shares, focusing on the fundamentals of individual stocks, as opposed to a top-down approach that emphasises macroeconomic and market cycles.

Asked if Chinese shares will suffer an impact from trade tensions, he told reporters: "Certainly it does have an impact on profits, but we tend to look at the impact of trade tensions more from a bottom-up perspective ... so it depends on whether the increased cost of manufacturing can be shared (between the manufacturers and exporters as well as the end-customers)."

He added that if a manufacturer produces goods for discount department stores such as Walmart where margins are razer-thin, then the manufacturer or exporter will likely have to bear the hit from the higher tariffs.

A bigger concern for him is the fact that uncertainty surrounding the trade war is affecting companies' capital expenditure: "The impact has been quite quick and we see this across the world, in particular some of the automation and robotic companies in Japan and China. Their orders are very quickly slowing down ... and if forward growth is a little bit more uncertain, they will pull back on their capex."