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Dear readers,

Hope all is well during this period of time with increase covid infection ongoing. I am serving my quarantine order at a hotel in Singapore now with my daughter. She was the close contact of a covid case in her school.

Thought it will be good for me to give my readers weekly updates on market happenings and news. Hopefully, this will give my readers a better understanding of what is happening and make better informed investment decisions, positioning for the next moves in the market.

So let’s go!

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1. Caught between a rock and a hard place

Here it goes, for the first episode.Market is concerned with the emergence of delta variant covid infection globally. This surge in infection may cause a slowdown or even a return back to tighter movement control which investors believe, will slow down the economy. Market data has already showed signs of this slowdown. With the FED expected to taper off sometime near to the end of this year, investors are worried that this may come too early with the ongoing rise in covid cases. As such, they are concerned that the economy will be caught between a rock and a hard place. On one hand, there is evidence that is pointing to a slowdown in the recovery, on the other hand, FED may pull the plug on monetary policies.

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My Views:

I believe that the FED still has room to play regarding monetary policies as they have always argued that inflation is transitory. They are not ignorant of the recent slowdown in the economy. Historically, they would only tighten when they are very sure that the economy is able to withstand the tightening.

As for the increased covid infection, global new cases has been rising since the beginning of July. That explains why the travel and hospitality stocks like DAL, HST, LUV, RCL, CCL, etc have been pulling back. Singapore’s stocks related to travel and hospitality were not spared either. We see price depreciating for stocks like SIA Engineering, SIA, Genting, Ascott Reits; just to name a few. However, one thing that i am observing is that though the cases have been increasing, the death rates has been declining at a steady pace, indicating the efficacy of the vaccines rolled out. I think we should see the infection rates hitting a lower high compared to the last high established in April this year, with the deaths rates continuing to decline.

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With this, i believe that the recent pullback allows us to build positions in the travel and hospitality stocks. The recovery may take longer than expected, but history has shown that the world has always been able to overcome any crisis that came along. The global financial crisis back in 2008 is definitely worse than the covid crisis, but we manage to get out of it and emerged stronger. The banking and financial industry is a testimony to that. Today, the banks are much better capitalised to withstand any economic shocks. US banks have also started increasing dividends and share buyback programs.

Global New Cases
Global Covid Deaths
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2. Ascott Residence Trust

Last week, we see some M&A activities from the company. They secured a third student accommodation asset in the US for US$70 million within a 7-month time frame. This acquisition is expected to increase ART’s pro forma FY 2020 Distribution per Stapled Security by approximately 1.5%. The EBITDA yield is expected to be 5.1%. The company has initiated a private placement of additional shares to raise S$150 million, of which S$89 million will be used for this acquisition. The remaining S$2.3 million or 1.5 per cent will be used to pay the estimated professional and other fees and expenses in connection with the private placement.

The private placement saw participation from new and existing institutional and other accredited investors, the managers of the real estate investment trust (Reit) said in a bourse filing on Friday.

Its issue price of S$0.983 represents a 5.5 per cent discount to the volume-weighted average price (VWAP) of S$1.04 per stapled security and 5 per cent discount to the adjusted VWAP of S$1.034 per stapled security based on trades in ART’s stapled securities on Sept 8 up to the time the placement agreement was signed on Sept 9.

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According to Miss Beh Siew Kim, Chief Executive Officer of Ascott Residence Trust Management Limited and Ascott Business Trust Management Pte. Ltd:

The acquisition of our third student accommodation asset is in line with ART’s strategy to acquire assets with longer length of stay and diversify our portfolio from traditional hospitality assets, further increasing ART’s resilience and stable income. Leases are typically for a year and Wildwood Lubbock will start contributing income immediately. Despite COVID-19, Wildwood Lubbock is 100% leased for the 2021 Academic Year and there is minimal upcoming private student accommodation supply.

With Wildwood Lubbock, ART will expand its longer-stay portfolio to about 11%, keeping us on track to have student accommodation and rental housing properties constitute about 15-20% of our total property value in the medium term. Since the expansion of ART’s investment mandate to include student accommodation assets in January 2021, ART has committed to invest a total of about S$379 million on three prime student accommodation assets in USA and three rental housing properties in Sapporo, Japan at an average EBITDA yield of about 5%. Following this acquisition, ART’s gearing would remain unchanged at 35.9%. ART continues to be in a strong financial position to seek accretive investments in more longer-stay lodging assets and create greater value for our Stapled Securityholders

Ms Beh Siew Kim
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My Views:

I believe that the covid crisis has caused the management to re-look into their business strategy going forward. By adding student accommodation assets into their portfolio, they are working towards a more predictable revenue model, which is positive for shareholders.

Share price declined and hit a low of S$0.98 after the trading halt was lifted in view of the additional shares issued. I believe that some accredited investors, or even institutional ones who were allocated shares in the recent private placement took the opportunity to take some profits. Some institutions may need to liquidate the additional shares so as not to increase their allocation to the company. As such, i do not think the selling will cross below the $0.983 placement price, as seen in the last few sessions, in which price rebounded off S$0.98 pretty fast.

The company has seen its revenue declining since the onset of the covid crisis. But as I believe that eventually, we will be emerged out from this crisis with the opening up of global travel, this trend should not stay. The decline in revenue was a result of a macro factor (Covid) and not a micro one. The company has always been well managed and prior to covid striking, they were enjoying a profit margin of 51.4% which is commendable in my opinion. Current dividend yield is 3.06% but i think, the DPU should increase once we out of the current covid crisis. It will not happened immediately nor will it happen in the near future with the delta variant raging globally. But for investors with a longer time horizon (more than 2 years), i think this might be a good time to accumulate. Furthermore, investors will be paid while waiting with the current yield of around 3% which is way better than any FD rates in the market today.

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3. Japan

Nikkei 225

Nikkei has displayed strong performance over the last one year. I still remember when a foreign bank called sell on Japanese stocks late in 2019 when the nikkei crossed above 22,000, i was skeptical and started to advise clients to enter the Japanese Market. Why? The last high established in 1997 during the Japan banking crisis was at 22,500. for literally 22 years, Nikkei has been underperforming global markets as it struggles to get back on their feet. The Nikkei hit a high of nearly 40,000 in the year 1989. After Shinzo Abe appointment in December 2013, he tried to revive the japanese economy by engaging monetary policies aggressively, Abenomics has been effective in supporting large firms by boosting equity markets and nurturing the sense of stability that a sharp appreciation of the yen will not happen again. This sharp increase in the yen has created nightmare within the economy as they are heavily dependent on exports. However he was having difficulties bringing inflation after decades of deflation.

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My views:

I believe that Japan has some good companies that are worth a second look. Personally, i do hold positions in Panasonic and Toyota. There has been a growing interest from foreign institutions. Foreigners accounts for two-thirds of stock trading and a change in overseas sentiment could change the dynamic. Japanese equities have lagged developed peers for most of this year. 

A new administration brings the prospects of a spending boost or reforms to vested interests, and foreign investors are back at the table, buying 363.6 billion yen ($3.3 billion) of equities on the Tokyo Stock Exchange’s First Section in the week through Sept. 3.That’s put 2021 on course to be the best year of buying of cash equities by foreign investors since 2013, when foreign interest surged in former Prime Minister Shinzo Abe’s Abenomics program. It would also be the first year of net purchases by foreigners since 2017, data from Japan Exchange Group show.

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In terms of valuation, the Topix trades at 15 times forward earnings, versus the S&P 500’s 22 times. Furthermore, Japan’s economy grew faster than the initially estimated in the April-June quarter. Revised gross domestic product (GDP) data by the Cabinet Office released showed that the economy grew an annualized 1.9% in April-June, beating economists’ median forecast for a 1.6% gain and the initial estimate of a 1.3% expansion.

For those who have no access to Japanese stocks, or do not understand the Japanese market, they may employ unit trust to participate in the Japan story.

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4. Short Coverings in the US

In the last week, we see hedge funds cutting their bearish wagers against the broad market. Their short positions against macro products, such as indexes and exchange-traded funds, last week fell to the lowest level since January, according to data compiled by Goldman’s prime broker. 

My Views:

The fundamentals are still extremely supportive, financial conditions are very easy, We are looking the economy moving into the next phase in the business cycle. We’ve got markets inevitably in transition and this is a time where stock selection matters.

As the market has traditional underperformed in the 3rd quarter, we see that materialising this year as well. With the year end holiday season approaching, I am keeping my fingers crossed, hoping that the covid will not impact the year-end consumer spending much. Historically, the last and first quarters of the year have always seen the stock market appreciating, most probably a result of festive mood among consumers and bonuses paid during that period of time. Again, as the valuation of S&P appears frothy, stock selection is important. Personally, i am bullish on banks, consumer discretionary and travel industry in the US.

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5. Economic Data out of US

  • Producer inflation accelerated in August, as wholesale prices rose record 8.3% from a year ago.
  • Weekly jobless claims post sharp drop to 310,000, another new pandemic low.
  • A sharp rise in wages is contributing to worries over inflation.
  • Businesses are feeling stronger inflation and paying higher wages, Fed’s ‘Beige Book’ says
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My Views:

  • Producer inflation accelerated in August, as wholesale prices rose record 8.3% from a year ago.
  • Strong demand and supply constraints continues to add upward pressure on US producer prices. Supply chain bottlenecks have lasted longer than expected. Labour shortages added its weight to the problem. The coronavirus has disrupted production at factories in Southeast Asia, key raw materials suppliers for manufacturers in the US. Congestion at Chinese ports is also adding to the pressure on U.S. supply chains. One key thing to note is that though PPI is moving higher, PPI for August rose only 0.3%, the smallest gain since November 2020. PPI is showing a slowdown in its acceleration as global supply chain are showing signs of easing.

    This reaffirmed the FED’s stand of inflation been transitory. If inflation eases off in the months to come, it will gives the FED more flexibility in terms of monetary policies. If the growth in the US continues to face headwind from the coronavirus, they may delay tapering of its bond buying program to 2022, which is a positive for the market.

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  • Weekly jobless claims post sharp drop to 310,000, another new pandemic low.
  • Continue signs that labour market is recovering well in the US. But market may take this negatively at this time, as one of the criteria that FED is looking closely to taper off its monetary policies is employment numbers. But one thing positive to take out of this number is we are seeing a continued recovery of the US economy.

  • A sharp rise in wages is contributing to worries over inflation.
  • I believe that the rise in wages was a result of labour shortages as the delta variant has casted fear among some Americans in returning back to work. The lockdowns in the US may have impacted people’s perspective about life and thus, delaying their decision to head back into the workforce. People moving out of cities or to a different regions may have created mismatch in employment,

    But as the US slowly opens up in the future, i do see that trend easing. I see the wage gain most prominent in the hourly rates, implying that this wage gain is a result of paying the part timers, and not the fully employed Americans.

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  • Businesses are feeling stronger inflation and paying higher wages, Fed’s ‘Beige Book’ says
  • As mentioned above, the inflationary pressure was most probably a result of supply chain disruption and the coronavirus crisis. Will these situation lasts? I believe not, as history has shown. But when will situation improves? I do not have a crystal ball to predict that. But one thing that i know, these situation will not last. The root of these problems is the pandemic. Once the pandemic eases off, supply chain disruption will most probably disappear. My ballpark, with the emergence of medical science and vaccination rates globally, most probably we will see global reopening sometime 2023-2024.

    That’s all for this week. Stay safe and happy investing.