STI pares 2021 YTD total return to 9.1%

THE Straits Times Index (STI) ended the week down 4.5 per cent at 3,055.02. The week of declines saw the STI's accumulated total return for the Q2 2021 cross into the red with a 2.4 per cent decline.

With the 11.8 per cent total return in Q1 2021, the STI's total return in the 2021 year through to May 14 close is now 9.1 per cent. This means the STI remains among Asia's top three performing benchmarks for the first 20 weeks of 2021.

Prior to May, the STI had spent much of April trading in a comparatively tight trading range, so much so that by the end of April, the 30-day annualised volatility had returned to January 2020 lows, which as of Friday, had promptly returned to mid-March 2021 levels.

Banks still STI's cornerstone

As much as 40 per cent of the STI's day-to-day moves are determined by the bank trio DBS, OCBC and UOB. The trio reported strong financials for their Q1FY21 (ended March 31), with combined quarterly net interest income again surpassing S$5.0 billion.

Similar to their US counterparts, stabilisation of key operating metrics with net profit growth on resilient business investment met consensus expectations. The banks have averaged a 1.2 per cent total return in Q2 2021 though to May 14, after averaging a 15.4 per cent total return in Q1 2021 and a 21.6 per cent total return in Q4 2020.

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The trio have also been among the five STI stocks receiving the highest net institutional and net proprietary inflows proportionate to market capitalisation in the 2021 year-to-date.

On a side note, the three banks also make up more than 50 per cent weightage of the MSCI Singapore. With SEA Ltd ADR soon joining the MSCI Singapore, the trio are poised to see their dominant weightage decline at forthcoming rebalances. Scheduled to be included in phases, SEA Ltd ADR will initially be included in the MSCI Singapore at 5 per cent of its free float adjusted market capitalisation, effective the May 28 open.

Based on current constituents, capitalisation and prices, the combined weightage of the bank trio would fall below 50 per cent at the August 2021 MSCI Singapore rebalance, then below 45 per cent following the November 2021 rebalance and then fall to between 35 per cent and 40 per cent following the February 2022 rebalance. The MSCI Singapore weight of SEA Ltd ADR is expected to start near 2 per cent effective the May 28 open, and approach 25 per cent to 30 per cent after the February 2022 rebalance. However, do note these are theoretical estimates, based on current prices and sizes of constituents.

Two STI stocks that demonstrate the current K-shaped economy

Of the current 30 STI stocks, Yangzijiang Shipbuilding and Singapore Airlines were both the strongest performers in Q1 2021.

Yangzijiang Shipbuilding has also ranked as the STI's strongest performer in the first half of Q2 2021 with a 13.5 per cent total return. For both the 2021 year-to-date and Q2 2021 quarter-to-date, Yangzijiang was the STI stock receiving the highest net institutional and net proprietary inflows proportionate to market capitalisation.

Back on April 29, Yangzijiang reported that its Q1FY21 (ended March 31) earnings grew 89 per cent compared to Q1FY20, with the group maintaining the highest level in its outstanding order book since 2009. The order books include a large proportion of container ships, which maintain higher margins than dry bulk carrier ships.

Global trade has been on the upside of the K-shaped recovery. On March 31, the World Trade Organization estimated that global merchandise trade volume would increase by 8.0 per cent in 2021. The month of April then saw a strong set of China trade numbers, following a similar strong pace back in March. For shipping, the Shanghai Containerised Freight Index is up more than threefold from end of 2019 levels.

Looking back even further, China's total trade value with developing Asia has grown by close to 50 per cent between 2015 and 2020, with the rising regional middle class and increasing propensities to consume served by advances in technology and e-commerce, which in turn are strengthening regional supply chains.

On the other side of the K-shaped recovery is transportation services. As Singapore's advanced Q1 2021 GDP report noted, the wholesale & retail trade and transportation & storage sectors shrank 4.1 per cent year-on-year in Q1 2021, moderating from the 6.4 per cent year-on-year contraction in Q4 2020. Attributed to the continued weakness in the transportation & storage sector, the root of the contraction was the impact of the Covid-19 pandemic on the air, water and land transport segments.

While Singapore Airlines was the second strongest performer of the current STI stocks in Q1 2021, it has been the weakest performer of the 30 constituents in the first half of Q2 2021 with an 18.9 per cent decline. This has reduced the national carrier's 2021 year-to-date gain to 5.1 per cent, with its FY20/21 (ended March 31) financial results due for release after the Wednesday close.

Across the region, Cathay Pacific Airways and Qantas Airways have posted similar Q2 2021 quarter-to-date respective declines of 12.0 per cent and 11.8 per cent. While global airline stocks performed comparatively well in Q1 2021 on expectations of returning to new norms in airline travel sooner than later, the Bloomberg World Airlines Index has declined by 10.0 per cent since its March 17 high.

Sembcorp's sustainable solutions

Sembcorp Industries ranked as the STI's second strongest performer in the first half of Q2 2021 with a 5.7 per cent total return. For both the 2021 year-to-date and Q2 2021 quarter-to-date periods, Sembcorp Industries received the second highest net institutional and net proprietary inflows proportionate to market capitalisation within the STI, after Yangzijiang Shipbuilding.

Sembcorp Industries has continued its focus on growing its renewable energy capacity, and continues to operate an international portfolio of wind, solar and energy storage assets. Within its balanced energy portfolio of over 12,700MW, there is more than 3,200MW of renewable energy capacity comprising solar, wind and energy storage globally.

For its sustainable urban developments, Sembcorp Industries maintains a project portfolio that spans over 11,000 hectares across Asia.

On May 11, Sembcorp Industries announced the launch of the Sembcorp Green Financing Framework. This means that it may now issue Climate Bonds Initiative-certified green bonds and other green financial instruments to support the financing and/or refinancing of eligible green projects.

It is approaching a year since Sembcorp Industries and Sembcorp Marine proposed the recapitalisation of Sembcorp Marine, and demerger to focus the companies on their growth segments.

Strategic reviews continue

On Friday, another STI constituent, Singapore Telecommunications, announced a strategic review to sharpen company focus, and better deliver growth, while also warning that its H2 FY21(ended March) and FY21 results expect to include net exceptional losses of S$839 million and S$1.21 billion respectively owing to impairments. The objective of reviewing both Amobee and Trustwave is to identify ways to increase the probability of successful execution.

Strategic reviews and subsequent strategic restructuring have continued to be a theme in Singapore, which has long ranked highly in surveys of places to do business and business efficiency.

Global vaccines, fiscal & monetary buffers

While global momentum in daily Covid-19 vaccines administered had shown signs of consolidating somewhat in April, ourworldindata.org recorded a new high of 26.2 million doses administered on May 7.

The same day saw weaker than expected April jobs reported in the United States with 266,000 jobs added. With the report, President Joe Biden reiterated that the American Rescue Plan fiscal support would stay the course for the year. Strong job reports in the preceding two months have seen more than 1.5 million jobs created in the US over the past three months.

The annual growth rate of the Federal Reserve balance sheet showed signs of relaxing in April yet remains at US$7.8 trillion, while the European Central Bank balance sheet stands near 7.5 trillion euros. Global inflation concerns, further fuelled by the 0.8 per cent month-on-month and 4.2 per cent year-on-year April CPI increases in the US, may see more demand for targeted fiscal support measures, rather than a call for new heights in money supply growth.

Singapore's fiscal effectiveness was revisited by the International Monetary Fund (IMF) which noted that Singapore had "implemented a bold, comprehensive, and coordinated policy response to cushion the impact of the pandemic", with the current policy mix appropriate. The IMF added that should downside risks materialise, as a first line of defence, Singapore could further draw upon its ample fiscal buffers.

• The writer is the market strategist at Singapore Exchange (SGX). To read SGX's market research reports, visit sgx.com/research.