With the annual Budget statement by Singapore’s Finance Minister Heng Swee Keat, businesses, individuals, and many stakeholders are eyeing on the merits and potential misfits of many counters listed on the Singapore Stock Exchange. There continues to be winning and laggard stock counters amidst the fear and greed nature of human beings.
This week, I shall be focusing on the Singapore markets given the huge interest among most readers on some of the sectors that might seen as benefiting, and sectors which might face challenges coming from the Budget. Take for example the retail sector where the delay in the Goods and Services Tax (GST) hike from the current 7 per cent to 9 per cent in 2021 might pose difficulties in a difficult retail environment. Also, a look at other industries and how they are coping with the Budget 2018 measures.
Opportunities among property counters
The Finance Minister announced in his Budget 2018 statement in Parliament that the revised Buyer Stamp Duty (BSD) for properties above S$1.0 million will have an additional percentage levy of 1.0 per cent to 4 per cent. Following the announcement, the FTSE ST Real Estate Holding and Development Index fell by close to 1.7 per cent decline.
The index which tracks property developer stocks like CapitaLand, CDL, and UOL, went on a nose dive on February 20 when the new BSD rules kicked in. It was a knee jerk reaction as investors had taken the new BSD rules as another property cooling measure. However, if one were to examine closer on the additional increase of one percent, the impact is merely a S$1,000 increase if one were to take the example of a transacted property price of S$1.1 million.
In fact, after a day of selling, the next day, Wednesday, February 21, the property counters went up by as much as 1% for counters like CapitaLand which rose 1.12 per cent to close Wednesday’s trading session at S$3.60 per share.
Looking at the one-year chart above for CapitaLand, we noted that the stock fell hard to as low as S$3.44 in mid-February before resuming its upward climb. The stock then climbed back up in what is known by market technicians as a technical rebound on hopes that the revised BSD will not create much impacts to the overall property sentiments. Moreover, with the Singapore Dollar strengthening against the major currencies, properties like those located close to the city centre, or the prime districts where expatriates thrive will continue to see buying interest provided that the impacts from the BSD are not significant.
S-Reits prices got lifted as well
In the same Budget 2018 statement, the Finance Minister has outlined the government’s agreement to adopt the tax transparency rules for listed Real Estate Investment Trusts (Reit) ETFs in Singapore. Previously, distributions by S-Reits made through a Reit ETF structure in Singapore were subjected to the prevailing corporate tax rate of 17 per cent. However, with new tax transparency rules scheduled to be implemented sometime in 2H, the tax transparency applied to S-Reits will now apply to S-Reit ETFs. This essentially means that the Reits ETF will no longer be subjected to tax on the specified income that is distributed to the unit holders.
How did the S-Reits perform
Lion-Phillip S-Reit ETF
Take for example, the Lion-Phillip S-Reit ETF which has one hundred percent exposure to the good quality local Reit counters saw a technical rebound on February 19 when the new tax transparency ruling came out, but the rise was short-lived and is last traded at S$1.022 per share, just slightly above its subscription price per share of S$1.00.
At one point, the Lion-Phillip S-Reit ETF went up as high as S$1.085 before it resumes its downtrend on concerns over narrow interest rate spreads, and more hikes in interest rates.
Nikko AM Straits Trading Asia Reit ETF
The Nikko AM Straits Trading Asia Reit ETF traded in Singapore Dollars did manage to buck the continued downward trend and is seen consolidating at around S$1.08 to S$1.09 levels after heading down from its high of S$1.172 per share.
Phillip Asia-Pacific Dividend Reit ETF
The Phillip Asia-Pacific Dividend Reit ETF which was one of the first Reit ETFs to be launched sometime in October 2016 seemed to underperform as it veers towards its lows of close to S$1.27 per share which was hit in July 2017. We think that there could be idiosyncratic risks arising from its sizeable exposure to the Australian Reit market, along with Australia’s withholding tax treatment on distributions.
Although the counter came up nicely at 0.5 cents to close Friday’s trading session at S$1.295, it is still recovering from its major drop with most of the Reit counters facing pressures from an increasing interest rate environment, coupled with the strength of the Australian Dollar.
An illustration of the tax treatment for S-Reits
Retailers could stand to lose when GST comes around in 2021
Retailer stocks like Courts Asia, Sheng Siong, Jardine Cycle & Carriage, Jumbo, FJ Benjamin, Metro, and to some extent retail counters with significant real estate exposures like Metro and Wing Tai. There are other consumer-oriented stocks which could be somewhat disproportionally impacted by the impending hike in the GST rates. Although the implementation is in 2021, we think that retailers will be starting to take a hard look at their marketing strategies.
Consumer Services less hard hit
With the implementation of the upcoming e-commerce tax on services, also known as the ‘Netflix Tax’, it appeared that many consumers are unfazed about the impacts on their daily living which could be due in part that services like broadband, cable are essential. We do not think that the ‘Netflix Tax’ will cause one to cut the wire cord overnight.
There are also healthcare services which are already heavily subsidised by the government, but are essential to many. Such services are not likely to be dropped or given up overnight. The poor, elderly or low-income earners do depend heavily on the availability of these basic services, and the government is offsetting some of the costs through subsidies, and GST vouchers to tide over the cost impacts.
We think the consumer services industry are close to becoming somewhat resilient to increases in costs, provided the magnitude of the increase is insignificant. An increase of 2 percentage points in the GST rate from seven percent to nine percent is relatively comfortable when there are offsets like subsidies from the government.
Consumer goods industry impacted mostly by the discretionary-type products
We noted the underperformance shown in the index during the last few weeks which we attribute to probably the greater impacts felt by listed retailers that focus on the consumer discretionary sector, and the current rising interest rate environm. The consumer discretionary sector is broken down to listed firms that deal with luxury goods like The Hour Glass, FJ Benjamin, and restaurant counters like Jumbo Restaurants Group Limited and Tung Lok Group Limited where one does not frequent to such dining outlets regularly, except for special occasions like giving someone a treat, or organise a celebration with family members, and associates.
The index comprise of equity counters like Food Empire Holding Limited, Olam International, Wilmar International, ThaiBev, among others listed in both the SGX. Although some of the counters belong the resilient, and seek exposure to commodities in general, listed firms also face challenges like rising raw materials, volatile spot and futures prices, among others.
Construction sector is set to rise in 2018
In a January 04, 2018 CIMB Securities Research report on the construction sector, the analysts cited an estimate of S$9 billion per annum of civil engineering contracts could be awarded in Singapore during the period 2018 to 2021. The report also cited drivers include the effect from en bloc deals which totalled about S$8 billion so far and this could add about S$1 billion in construction value in 2018.
Moreover, in the Budget 2018 statement, the government has announced increased infrastructure spending to the tune of S$20 billion through providing guarantees for long-term borrowings made by statutory boards and government-owned companies to build critical national infrastructure. Some of the infrastructure spending cited include the construction of Changi Airport Terminal 5, the Tuas Mega Port, the High-Speed Railway linking to Kuala Lumpur, and the Rapid Transit Network linking Johor Bahru, Malaysia. Both are expected to be completed in 2026 and 2022 respectively. Other ongoing infrastructure projects include healthcare facilities, public housing projects, and the public transportation network, among others.
Some of the firms that are likely to see benefits include Lian Beng, Hock Lian Seng, KSH Holdings, Ryobi Kiso, Koh Brothers, and Chip Eng Seng, among others.
Healthcare spending is placed at the forefront of government policies
Budget 2018 has put healthcare spending as one of the critical social spending needs. Finance Minister Heng Swee Keat said on February 19 during the Budget speech that the government will set aside about S$10.2 billion for healthcare expenditure. He said during the speech that within the next five years, Singapore will build more general and community hospitals, four new polyclinics, and more nursing homes and eldercare centres across the island.
He noted that the government is expecting average annual healthcare spending to rise from 2.2 per cent of Gross Domestic Product (GDP) today to 3 per cent of GDP over the next decade. This is an increase of nearly 0.8 percentage point of GDP, or about S$3.6 million in today’s dollars. He also noted that within the next decade, healthcare spending is expected to overtake education spending.
Although the various spending programmes are being announced, there appears to be minimal impacts on the healthcare sector as shown in the FTSE ST Health Care Index.
As shown in the one-year daily chart, we can see that there is some consolidation in the index at around the 1,200 levels with not many major upmoves as expected. We think that the muted impacts could be due to amount of healthcare spending is largely concentrated within the public sector with minimal impacts to the private sector. However, we do not discount the potential spill-over effects of the public healthcare spending to the private sector players like Raffles Medical, Health Management International (HMI), Singapore Press Holdings (SPH) Limited through its Orange Valley Nursing Homes, Singapore O&G, Singapore Medical Group, IHH, and Q&M Dental, among others.
Other foreign players might also look closely at the developments within the local healthcare sector such as OUE Lippo Healthcare Limited, and other players looking to modernise the clinic networks. Even Fullerton Healthcare which is not a foreign player, has plans to go public earlier, may start to relook at relisting again.
How did the Singapore markets fare on a Budget week
The Straits Times Index closed the week’s session on Friday at 3,533.22, up 44.76 points, or 1.28 per cent higher. On a weekly basis, the index is up 2.6 per cent, and on a year-to-date (YTD) basis, the index is up 3.83 per cent. The latest showing came two weeks after a major correction which took the STI returns to become negative for the year. The index is now set to hit the high of 3,611.69 which was the all-time high in late January 2018.
Using the Fibonacci Retracement analysis, the index is now above the 78.6 percentile level at the 3,400 level and is setting its sights to break the 3,600 resistance in the short to intermediate terms. The index is also showing several bouts of higher-highs, and lower-highs which signals bullishness in the world of technical analysis (TA) studies.
The 14-day relative strength index (RSI) is also showing mild bullishness and is now in the middle range at 50.
On Friday, the total trading volume in absolute terms amount to close to 1.89 billion valued at S$1.42 billion, as compared to Thursday’s volume of 1.83 billion worth S$1.73 billion. There were a total of 274 winners against 156 lagging counters.
Top of the volume list during Friday’s session has been Creative Technology Limited. Yes, that is right, the local technology company founded by serial entrepreneur Sim Wong Hoo. The Business Times reported in its front-page news that Sim is expected to launch a gadget that will create “3D” sound on headphones. With this news, Creative’s share price jumped over 130 per cent, adding over S$100 million to the company’s market capitalisation in a single day. The company also received a trading query from the Singapore Exchange (SGX).
A caution to note is the company has been making a series of losses, but has cash balance of of about US$118 million, according to the article published on The Business Times on February 24, 2018.
How did our model investment portfolio perform
Since the inception of the model equity portfolio at the end of November 2016, the latest portfolio return this week has shown a major outperformance of 85.49 per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on December 31, 2017. This compares to the total return of 20.11 per cent for the Straits Times Index (STI) during the same time period.
The top three holdings in total return terms (dividends plus capital gains) include Nordic (up 52.6 per cent since end June 2017); followed by Ascendas Reit (up 10.2 per cent since November 2016), and SATS Ltd (up 8.1 per cent since December 2016).
The model equity portfolio did experience a shortfall coming from Singtel (down 10.6 per cent since December 2016); followed by Straits Trading Company (down 8.2 per cent since end June 2017), and Sheng Siong (6.1 per cent since end June 2017).
For now, we are not planning to make any changes or do any rebalancing for the portfolio. We shall actively monitor the model portfolio till end of March 2018.
Upcoming Earnings News next week
One of the key Straits Times Index (STI) component stocks to look out is UOL Group Lt which is scheduled to report on Tuesday, February 27, and Venture Corporation (not show) which is scheduled to report on Wednesday, February 28.
Economic news coming up next week
Some of the key local economic reports to look out for are industrial production numbers, the PPI, and Manufacturing PMI figures for February 2018. These are some of the core numbers which, if the overall global economy is chugging along, Singapore will continue to enjoy the benefits of growth.
Some of the key economic releases include China’s House Price Index to monitor the state of the real estate market in China which has been seeing slowing sales as a result of the government-wide cooling measures.
Over in the United States, some key economic reports to look out for include the GDP estimates for 4Q, pending home sales in January. We will also be getting an opportunity to listen into newly appointed Federal Reserve chairperson, Jerome Powell who will be testifying to the Congress. Investors will be looking up to him for signs of his thoughts on the overall health of the US economy, including the pace of the interest rate hikes.
There will also be economic data releases relating to personal income, personal spending, and the ISM Manufacturing figures.
In summary, global markets will continue to see more volatility. We are not in a stable, low volatility world after what happened two weeks ago. Inflation has made a comeback, but it is important to know how to manage properly to minimise unexpected shocks to the overall stability of the global financial system.
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