Great Wall of uncertainty
Meanwhile, geopolitics continues to hog headlines and not in a cheery way. First, in the wake of China’s military parade, Russian drones were shot down over Nato-member Poland as the Ukraine war spilt over. In the Middle East, Israel’s bombing of Hamas negotiators in the “safe” sanctuary of Qatar, where peace talks were held, escalated the international opprobrium of the humanitarian crisis in Gaza. The rising partisan rhetoric in the US reached a new tempo after popular right-wing Trump evangelist Charlie Kirk was assassinated, and the suspected assassin grew up in a conservative Mormon, Republican and Maga family.
Attendees at the JP Morgan conference were treated to a very serious and somewhat depressing talk by retired US general Mark Miley. The former chairman of the US Army Joint Chiefs of Staff candidly shared his personal views of the state of the union in geopolitics and working with his former boss, Trump, who had recently stripped Miley of his security clearances and access to information.
While we might see a whole lot of geopolitical economic competition manifested by a tariff war initiated by the US against the world, including its own allies, Europe, Japan and Nafta partners Canada and Mexico, the current temporary detente with China to make a deal largely came about as China is willing to play a war of supply chains, restricting rare earths and magnets.
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The renamed US Department of War has started pursuing a “mine-to-magnet” strategy to build a domestic rare earth supply chain, including a major investment in New York-listed MP Materials Corp to expand its mine in California, providing loans and price floors for rare earth products and magnets to reduce dependence on China in these critical materials for defence and commerce. US industrial policies, ironically driven by free-market Republicans, extended from Joe Biden’s supply-side subsidies and grants to climate tech projects, to now equity ownership in Intel Corp as America First policy goes on overdrive.
It is not clear how this strategy policy can be pushed forward, given the recent raid by the US Immigration and Customs Enforcement on a Hyundai plant in Georgia that is under construction. As hundreds of South Korean engineers and technicians were marched off in chains, other international companies were no doubt wondering when their turn might be if they supported Trump’s agenda. Corporate uncertainty is coupled with the lack of skilled labour in the US, as well as the rising cost of construction and imports due to tariffs.
Vladimir Lenin once said: “There are decades where nothing happens; and there are weeks where decades happen”. The dissonance in Western asset prices, where the S&P 500 notched another all-time high in September, versus the increasing frequency of political, economic, and policy risks and uncertainties, is unsustainable. The USD is paying the price. And gold continues to rise as institutional investors find few sizable alternatives to deploy outside of America.
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In Singapore, we are still awaiting the specific Trump tariffs on pharmaceutical and semiconductor products, which may affect our manufacturing exports if so. Hopefully, we can keep our heads down and stay put at the baseline 10%.
Aside from these industries at risk, funds dripping out of the US back home have thus far continued to keep the Straits Times Index (STI) on a firm footing. As described in our “September Surprise”, the index has broken through 4,300 points with DBS Group Holdings and Singapore Telecommunications leading the pack. While limited in size, both the SGD and its associated assets are in vogue among international investors. For those like me who plan to retire in Singapore, we are probably best to stay home or dollar-hedged in SGD for our investments for now.
In search of El Dorado
Having attended an earlier JP Morgan outlook event, I was pleasantly surprised and impressed that at the more recent edition, there was a candid review of their calls at the start of the year and views going forward.
In fairness, their selective sector bullishness of the US equity markets has borne out alongside their call on gold. Falling yields continue to drive moves out of cash, and there is a positive return from credit, notwithstanding economic risks, as liquidity is ample. All this is good from a USD base perspective. In SGD, most of the return is given back.
They have been surprised by the performance of Chinese equities, and left behind with a more pessimistic view early this year but remain unconvinced. The current exuberance is assessed as a liquidity-driven rally, not supported by corporate earnings or economic data, which remains anaemic. There is also no deal with the US on trade yet.
One of their strategists did point out that it is advantageous for China not to be forced into a “strategic” US trade deal for now, as the geo-economic game is a very long one. China has some leverage and is now willing to play it. A tactical deal with TikTok in the mix, promising to buy American soybeans for some chips, may allow for a Xi-Trump meeting by the end of the year. Even so, it may not move Chinese markets, which are moving to their own beat at present. We debated earlier in the year about how global stock indices underrepresent the size of China’s economy, the second largest in the world, versus the massive overweighting by this metric of the US markets.
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Technically, there is a very good reason. which The size of corporate earnings in the US markets justifies its global index weight and multiple. This, however, can be self-fulfilling. The US has won the war on capital for decades. Capital funds innovation and discovery, thereby providing a virtuous circle. However, if capital is at risk of being taxed on exit and global investors start to support their own economies, we could be seeing peak US weight in indices. As funds cut overweight to equal and or underweight, the reverse might also be self-fulfilling.
Similarly, the relative bullish case for the STI has been its outperformance over the last two years, a steadily increasing base, and a strong SGD. As relative performance for developed markets or Asian indices improves, some slight shifts in allocation will gradually keep it well supported.
JP Morgan’s forward views are interesting too. European equities are getting more interesting, and the bank is positive on India even though US tariffs are at 50%. The bank’s India and China views are opposite of this column’s. Well-researched with extensive data, JP Morgan’s view is that the current pullback from domestic retail frenzies presents a good entry point for institutional investors who are still underinvested in India. That, too, was our mild bullish view on China last October.
Underinvested institutional investors in Hong Kong and Chinese markets could see significant shifts as a result. The resurgence of initial public offerings in Hong Kong this year, driven by Western buy-side fund participation, has occurred.
It is a pity they did not talk about SGD markets. We are too small to matter in an institutional, family office or private wealth asset allocation, going by conventional asset allocation. If they did in real return SGD terms, our STI, plus dividends, will be at the top of the charts in performance, outperforming crypto!
Outside the STI, our own mid- and small-cap stocks have continued their rally, with many individual stocks benefiting from hopes of allocation from the $5-billion Equity Market Development Programme or EQDP, which is being carefully drip-fed by the Monetary Authority of Singapore. Following the $1.1 billion allocated to Avanda, Fullerton and JP Morgan Asset Management in July, there is considerable anticipation for Phase 2 to follow soon.
Mining at home
And, of course, gold mining stocks like CNMC Goldmine listed here have almost quadrupled since the start of the year to trade at nearly $1. The latter case is riding the gold rush but is also a beneficiary of value discovery in our small and mid-cap stocks listed on the Singapore Exchange. It is, after all, trading at 14 times P/E even after an already four-bagger return this year, a level that looks modest versus the S&P index’s forward P/E of 23.4, quarterly P/E of 25.9 times or 10-year P/E at 37.1 times.
There is a far longer tail of local gems waiting to be mined, which we have shared in this column before. Some of them, like Banyan Tree Holdings, Huationg Global, Nam Cheong, Samudera Shipping Line, SoilBuild Construction Group and Wee Hur Holdings, have started to show some glitter.
Rotational speculative fervour has ebbed and flowed for a motley crew of names, many of which I have not heard of for years or decades. These come up every week, leading to temporary spikes in liquidity and price. Then, some present real deep value, such as discounts to book value, and have been targets of special situation takeovers or engaged in corporate spin-offs, thereby creating value. The latter include LHN, Centurion Corp, Lum Chang Holdings and Thakral Corp. For the former, the upward price moves may be more sustainable provided they are not privatised and remain within sensible valuations. Two related mid-caps, UOL Group and Singapore Land Group, which are trading at over a 40% discount to net asset value, have also attracted more recent attention.
Punters now eagerly await SGX’s new index, aiming to track companies beyond the STI. There are, after all, already mid- and small-cap indices, just not that widely followed or having products like the exchange-traded funds created around them. It will seem likely that companies with reasonable free float and liquidity may benefit from those just outside the STI reserve list, like ComfortDelGro. Listed companies, however, have to do their part to provide visibility of their growth plans, communicate regularly and transparently and be willing to be covered by sell-side analysts, investing in investor relations and communications capabilities so that they can indeed benefit from fund flows and renewed interest and attention.
Assuming the local party that sprang alive in the second half of the year continues, like in all gold rushes, it may be worthwhile to look at the pickaxes. Not every stock one invests in may strike gold, but as volumes creep up and our local term “contra” finds new followers, it won’t only be the exchange that profits. The market has re-rated SGX up to 27 times P/E. However, at closer to 11 times and 4.5% dividend yield, our only listed local broker, UOB Kay Hian, will also benefit from more activity in the mines.
Chew Sutat retired from the Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange. He was awarded FOW’s Lifetime Achievement Award. He serves as chairman of the Community Chest Singapore
