Is the market in trouble?

In this issue:

• Selloff has implications for Singapore’s stock market revival
• Is Dyna-Mac a blue chip in the making?

Greetings dear reader,

Last week was an unsettling one for anyone with money in the markets. The Dow Jones Industrial Average fell over 1,000 points last Monday (Aug 5), and Japan’s Nikkei had its biggest single-day decline since Black Monday in 1987.

The Japanese yen rose to its highest point in the last seven months as carry trades had to be unwound in the wake of economic data suggesting the United States is facing a recession.

Most equity and currency markets reversed direction the day after, but sentiment remains weak.

There is no consensus on what happens next, and the Japanese market – which has been the latest market to love – is now on shaky ground. As one consultant put it: “Japan is now at the centre of emergent worries – across everything, stocks, bonds, yen, credit, everything.”

I summarise some of the arguments on both sides below, with the implications for Singapore, and highlight one pocket of surprising resilience.

What’s happening?

First, the case for calm. The selloff seems to be the result of unemployment data that triggered what is known as the Sahm rule. (If you haven’t had time to read up on it, my top pick for the Big Reads section below is a piece written by Claudia Sahm – the rule’s originator.)

Investors should not read too much into one month’s jobs report, though, said George Brown, senior US economist at Schroders.

“We need to wait at least another couple of months to see if it’s a trend. The Q2 economic growth figures from the US were solid, with GDP up by an annualised 2.8 per cent. We don’t think the recent softness in US data warrants a selloff on the scale that we’ve seen in the past few days,” Brown said.

In periods of bullishness – as we have been enjoying in recent months – an equity market correction is also healthy and even desirable.

Graham Secker, head of equity strategy at Pictet Wealth Management, said the “risk-reward profile for Japanese equities has improved significantly, with valuations falling to their lowest post-Covid level at Monday’s close”.

On the other hand, it is difficult to shake the concern that the Japanese central bank’s agenda might interfere with a smooth recovery for the country’s stock market.

Japan’s ultra-low interest rate allows many traders to borrow yen and buy currencies with higher yields – such as the US dollar. Last year, the Bank of Japan (BOJ) was the only G10 central bank that was not raising interest rates.

Recent indications, however, are that the BOJ is on a rate-hiking path while the US Federal Reserve is on a rate-cutting path, which jeopardises the investment thesis for many of those bets.

To unwind them, traders sell their US dollar holdings and buy yen to repay their borrowings – pushing down the US dollar and pushing up the yen.

Currency movements affect stock prices too, partly because a weak yen had been providing a fillip to Japan’s export-oriented companies – which are major constituents of the benchmark index.

Vasu Menon, managing director for investment strategy at OCBC, said the unwinding of yen carry trades was a “key factor behind the recent turbulence”.

BOJ deputy governor Shinichi Uchida has pledged to refrain from hiking rates when the markets are unstable, but Menon said the central bank is “likely to continue its journey towards normalising policy in the coming months”.

Such concerns will be tough to shake off. In the end, markets are buoyed or sunk partly on fact and partly on sentiment.

Seema Shah, chief global strategist at Principal Asset Management, summarised a probable outcome: “Economic weakness concerns will likely prove overdone, but the depth of the negative narrative now implies that an imminent market turnaround is unlikely. A sustained market recovery needs a catalyst, or likely a combination of catalysts, including stabilisation of the Japanese yen, strong earnings numbers, and solid economic data releases.”

Why it matters?

The Monetary Authority of Singapore (MAS) announced on Aug 2 that it has set up a group to look at and recommend ways to revive the Singapore equity market and its ecosystem.

MAS’ decision follows calls by various market participants – including The Business Times – to step up efforts so as to keep up with other major economies.

The most successful example of a stock market revival has been Japan, which has gone so far as to shame companies into improving their valuations.

There have, however, been some questions of whether this revival is sustainable, and how much of that revival was attributable to government or industry initiatives rather than macroeconomic tailwinds. In short: How much of it was luck, and what happens when the luck runs out?

Should the Japanese story peter out, will Singapore’s ambitions follow it? Let’s hope not.

It is said that luck is what happens when preparation meets opportunity. Since we don’t know when Singapore will encounter its own tailwinds, it is best to do everything possible to prepare for that moment.

The big number: 283.9%

That is the increase in earnings reported by offshore services provider Dyna-Mac Holdings for the first half of this year.

The company’s revenue increased 42.5 per cent to S$259.7 million, and earnings rose to S$38.8 million from S$10.1 million in H1 2023. It was able to benefit from economies of scale, with gross profit margin improving to 27.6 per cent from 13.5 per cent.

Dyna-Mac’s shares rose as much as 11.5 per cent after the results release, and they closed Thursday (Aug 8) at an all-time high of S$0.60.

The stock now has a market capitalisation of S$627.9 million, putting it well on its way to becoming a powerhouse of the Singapore Exchange’s oil and gas sector.

Its free float is relatively low – slightly below 40 per cent – so the company may still struggle to win a significant following. With the right moves, however, it could become a stock to watch.

5 big reads

• My recession rule was meant to be broken CLAUDIA Sahm says the United States is not in a recession, even though the indicator bearing her name is saying that it is.
• Tan Su Shan is ‘continuity candidate’ pick for new DBS CEO, analysts say BANKING icon Piyush Gupta’s impending departure from DBS is unlikely to rock the boat for South-east Asia’s largest bank, according to analysts.
• South-east Asia’s private equity landscape demands more of managers INVESTORS who hope to profit from the Asean story may need to seek out specialist managers with the ability to close deals and even build market leaders from scratch.
• BlackRock leads big firms racing to put private assets into ETFs ETFs could open the closed-off world of private markets to investors of all stripes, and channel fresh cash into an asset class struggling to keep the boom alive after years of breakneck expansion.
• Should ThaiBev’s minority shareholders support the proposed FPL-F&N share swap? THAIBEV’S controlling shareholder is injecting F&N shares into the beer maker at a 232 per cent premium to F&N’s market price, and taking FPL shares at a 136 per cent premium.