Given that US stocks account for almost two-thirds of global equity indices, it takes huge conviction to go to underweight and risk performance below the benchmark, ipso facto losing assets when it comes to the year-end. Punch-drunk retail investors in America, having been rewarded in “buying the dip”, see little risk in continuing the party, despite several traditional equity market valuation matrices that have exceeded even the dot-com era.
For those more sober, the returns have to be cast alongside the very expensive cost of hedging the US dollar, which has been down 10% this year and is the worst-performing major currency. It is more painful for a fixed-income portfolio where the hedges may wipe out the interest carry or more.
At least in the case of the yen and euro, the respective equity market performances have been supported by a strengthening currency, as anecdotally, some of their institutional funds have repatriated from the US to support their own smaller gardens. For Singapore-based investors, the euro has gained 7% against the Singapore dollar, giving some support to the likes of IREIT Global and Stoneweg Europe Stapled Trust. The yen’s gain against the US dollar has been slightly less than the Singapore dollar. I will thus be joining many other Singaporeans on another holiday in Japan in November, with a slight benefit if it stays this way.
I sold my last mutual fund with US equity exposure in September. It may well be 2am at the party, as US economic policy, featuring investment in Intel Corp and semi-nationalisation of TikTok, and economic data getting potentially less reliable, starting to resemble the often-derided central planning systems such as China’s.
See also: A great year for US stocks? Not compared with rest of the world
Ironically, with the relative valuations being night and day comparing the US and Chinese stock markets, and with another Golden Week upcoming, it is plausible that the mandatory market time-out will be a healthy break in the Long March of international investors returning to a market deemed uninvestable to Western capital in 2022. With domestic tourism numbers up, Singapore-listed Straco Corp, with its aquariums in Shanghai and Xiamen, may see record numbers.
I am not sticking around, however, for the October Effect or Mark Twain’s “particularly dangerous month”, even if some US investment banks believe that September’s post-Fed cut momentum suggests more upside for US markets, and one should put aside “Octoberphobia”. Perhaps they have more to sell. I will keep my investment capital at home in Singapore.
Like it’s 1999
See also: European stocks gain as investors shrug off Trump’s tariff plans
Back home, the conference party season timed with F1 is back, as are IPOs. Singapore is cranking up NTT Data Center REIT, and Centurion Accommodation REIT enjoyed a 9% pop on its trading debut. Even our smattering of Catalist listings has had some impressive (up to 40%) post IPO returns, and Nasdaq-listed AvePoint, backed by 65 Equity Partners, finally had its Singapore Exchange (SGX) secondary listing where it placed out US$260 million ($335 million) vendor shares after previous failed attempts.
There is a little ray of hope that some of the older deals, which have been “over-digested” and have been rolled from fund to fund internally or amongst PE managers when the capital markets were not conducive, may see some light. Will we see the return of formerly listed Hi-P International, or Neon (former City Neon), both of which are part of 65 Equity Partners’ stable, or other KKR or CVC-backed Asean healthcare and consumer companies exiting here soon? Or will there be more spin-offs from other listed construction companies emulating what Lum Chang Holdings did with its interior decorations unit, Lum Chang Creations, creating market value for the parent’s shareholders in the emerging construction super cycle that Chew On This highlighted in July?
Since then, on top of Terminal 5, Marina Bay Sands’ expansion, the Greater Southern Waterfront and the Jurong Lake District and Cross Island Line expansion, new HDB builds, including the Punggol Digital District on top of Tengah, were announced at the Prime Minister’s National Day Rally. The steady rise of stocks like BRC Asia and Pan United Corp, providing inputs of steel and ready-mix concrete, may be a sector re-rating on top of expectations of sustainable growth in revenues and profits.
Wee Hur Holdings is one that bet years ago on development and also student accommodation paid off like Centurion Corp, but has decided to return to its construction roots here in anticipation. Aside from potential spin-offs of different parts of some of the few listed construction companies’ business envisaged, corporate activity, including placements from KSH Holdings to institutional investors like ICH Capital and Lion Global Investors are sign of a healthy interest in the sector cranking up, and not just a flash in the pan of speculative small-cap activity leading to mean reversion.
In addition, since Lian Beng Group and subsequently SLB capital were privatised, well-timed before the start of this cycle, at fair historical, but modest forward potential valuations, investors who succeeded in mining gems before they were taken out have been scouring property companies with deep discounts to NAV, which may follow the paths of Amara Holdings.
There has been interesting market activity in a number of old-listed companies with these characteristics, including Banyan Tree Holdings, Chuan Hup Holdings, Huationg Global, Low Keng Huat (Singapore) and Tuan Sing Holdings. A couple of these highlighted in July and August have had spectacular returns, far outstripping indices both global and Straits Times Index (STI), and incredibly still trade at low forward PEs or deep discounts to book. They may not be flashes in the pan.
Still sober
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OCBC Investment Research’s piece last week, flagging that some SMID (small and mid caps) may have “run ahead of fundamentals”, calling for caution amid the launch of “Next 50”, was viewed uncharitably by some quarters of the market. One pundit said “party pooper, having already missed the boat”, whilst other apologists point out that OIR caters largely to the wealth management clients of Bank of Singapore, whose coverage traditionally is in global mega caps or big caps and REITs here, along with all the big banks and brokers. They may hence be unprepared or under-resourced to look at the SMID segment in depth, crunching historical data and numbers to conclude based on past performance.
The fair warning by OIR that “selected stocks are “starting to look unattractive” where “share prices have run ahead of fundamentals” is in part, also because “some SMIDs have limited research coverage, and the onus to conduct due diligence on the company lies with the investor” throws up some present issues in the market, and the windfalls that comes about from investors doing their homework.
This homework does not entail merely reading message boards on stock forums. It does mean looking at data easily available on SGX’s website and mobile app on company information, financial data and basic valuations, corporate announcements and annual reports. As this column has highlighted from time to time, many hidden gems are actually in plain sight if only we care to look.
The few brokers who venture to cover mid and small, including CGS International, UOB Kay Hian and Phillip Securities, have spotted, amongst others, Pacific Radiance (which has more than doubled); Nam Cheong; Samudera Shipping; Marco Polo Marine and Beng Kuang Marine — names flagged in this column since July. Even DBS Group Research has started digging deeper into the market, leaving JP Morgan to reinforce the big caps with an STI reaching 6000 points bull case call!
Unfortunately, many companies in the long tail of SMIDs do not have dedicated investor relations officers and do not proactively communicate with the market or lend themselves to coverage by brokers. The initiatives by the equity markets review committee are, therefore, rightly not just focused on the $5 billion that should be allocated. The GEMs grant for equity research, for instance, is a soft way for under-resourced local research houses to augment their bench. They can also help train a new generation of analysts who may have fresh ideas and approaches versus the tried, tested and in some instances jaded old timers who stick to big caps and REITs.
This was the path Japan went through in 2014 when its Government Pension Investment Fund increased domestic Japanese allocation through catalysing local fund managers, and with new money, the buy and sell side started re-hiring, and new talent was drawn into the market, as Chew On This pointed out last year, as the committee was deliberating. A virtuous cycle ensured, and other value-up and exchange-driven initiatives on governance and value creation from 2020, found an ecosystem starting to get on its feet with the infusion of domestic capital for a few years prior.
Companies do, however, have to do their part, in having a clear strategy and narrative articulated, constant and regular investor communications and build trust by saying what they do and doing what they say and getting investor relations officers trained through the new SGListcos — IBF courses or engaging better professionals. The stellar performance by DBS Group Holdings reflects not just the management performance of the business, but stellar investor and brand communications. They also need to have a reasonable float to enable institutions to support their growth strategies meaningfully.
In this regard, the next gems to spot perhaps would be those that just miss the Next 50 index criteria. There are a host of companies that meet the minimum size of $100 million market cap, and a very modest minimum turnover of $100,000 in the preceding 6 months, assessed quarterly. However, this is free-float adjusted and requires a min of 15% free float. Some notable liquid SMIDs do not feature in the initial 50, even if, by a technicality, suspended and soon-to-be delisted Fraser’s hospitality trust was included in the initial announcement.
Chew On This will be doing its homework. Market activity in this segment improved gradually since May, and started accelerating to a canter in August and September. This means the initial EQDP list, if it’s quarterly reviewed, will potentially change. In particular, my sweet spot will be those that are low PE and growing, having rising liquidity with just below 15% free float. A well-timed placement to key institutional investors may no longer be just about getting growth capital and increasing liquidity, such as Food Empire, which is already in the Next 50 index. It may increase its weight, or even better for others, get included.
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
