Third quarter 2022 half-time market wrap

FOR the 6 weeks since the end of June, the STI has gained 7 per cent with reinvested dividend distributions boosting the total return to 8 per cent. This coincided with Singapore stocks attracting S$220 million of net institutional inflow, taking total net institutional inflows for the 2022 year to Aug 10 to near S$70 million. The comparatively buoyant 6 weeks followed on from the STI generating a 1 per cent total return, with Singapore stocks attracting S$150 million of net institutional outflow, for the first 6 months of 2022.

During these past 6 weeks, the STI stocks that led the net institutional inflows included DBS, OCBC, Singapore Airlines, Ascendas Reit and Keppel Corporation. All 5 stocks have also recently reported quarterly or semi-annual results. For Q2 2022, DBS and OCBC reported respective net profit growth of 7 per cent and 28 per cent, with both banks reducing their NPL ratio to 1.3 per cent from 1.5 per cent a year ago. On the Industrial side, Singapore Airlines reported its second highest quarterly operating profit in the group's history, Ascendas Reit reported its H1 2022 net property income rose 7 per cent year on year (yoy) and Keppel Corporation's H1 2022 net profit rose 66 per cent yoy. This accounts for the average total returns of the 5 stocks at 9 per cent from Jun 30 through to Aug 11.

STI's YTD 2022 outperformance largely driven by one sector

While banks make up more than 40 per cent of the STI, the technology sector's direct impact on the Index is around 2 per cent, through constituent Venture Corporation, which coincidentally has generated a 2 per cent total return in the 2022 year to Aug 11. Venture Corporation also reported its H1 2022 net profit rose 24 per cent yoy, with demand expected to remain 'unabated' in H2 2022. Meanwhile, global technology benchmarks have declined close to 20 per cent in the 2022 year to Aug 11 and make up more than 20 per cent of the FTSE Developed Index. While technology stocks have led the global stock market over the past 6 weeks, they are still the laggards in the year-to-date period.

The FTSE Developed Index has declined 11 per cent in the 2022 year to Aug 11, and should the outlook for the technology sector improve, the FTSE Developed Index would be potentially poised to outpace the STI. Key drivers for the technology sector are at the same time also growth and inflation drivers, whether they are demand associated with 5G and automotive markets, cloud services or data centres, or potential supply chain disruptions and labour costs on the inflation front.

Broader market drivers

During these past 6 weeks, global hawkish interest rate expectations have consolidated and energy prices have declined, while employment has continued to see broad growth, as have earnings in Singapore and the US.

At the same time, the pace of globally confirmed Covid-19 cases began to subside in late July. However, despite such progress, there has been no retraction in potential downside risks in the external environment and market outlooks remain anchored to the impact of the 2 mega drivers, slower growth and higher inflation. Then there are also the potential for escalations in the Russia-Ukraine conflict, in addition to regional geopolitical tensions.

For global growth, last week Singapore's Ministry of Trade and Industry noted that while China's GDP growth is expected to pick up in the second half of 2022, supported by infrastructure spending, its property market downturn and continued adherence to a zero-Covid policy amid recurring outbreaks are likely to weigh on real estate investment and consumption activity.

On the inflation front, 2 very general questions for central bank policymakers and investors in H2 2022 are firstly, what needs to be done for global GDP and inflation numbers to return to sustained paths of respective quarter-on-quarter growth and month-on-month declines, and secondly how long it will take. This is not straightforward as investors are well aware that there are multiple factors ranging from re-opening demand, supply chain, labour market pressures, to higher energy prices that are behind inflation in 2022.

Tentative answers may start to appear at the Jackson Hole 2022 Economic Policy Symposium taking place between Aug 25 and 27, to reassess constraints on the economy and policies. The FOMC places much value on transparency and market signalling, and recent FOMC press conferences have seen the Fed chair saying that the target neutral zone for interest rates is more of a judgement call than a line in the sand, and that it would be appropriate to slow the pace of rate hikes should they become too restrictive. However, as the policy hawks have maintained, US inflation is still at 8.5 per cent yoy, and not yet on 'a sustained path' back to the 2.0 per cent yoy level.

Meanwhile, recent employment and earnings reports have been relatively positive even though there are signs of a global trend of technical recessions. For investors, the earnings season has also provided a timely opportunity to consider sector and country outlooks, which continue to be somewhat diverse, given uneven global economic developments.

The writer is the market strategist at Singapore Exchange (SGX).

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