5 Trends That Could Impact Your Portfolio in 2020 - The Smart ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
5 Trends That Could
Impact Your Portfolio in
2020
Welcome to a special report by
2019 has seen its share of challenging events.
As we begin a new decade, many investors are all but ready to embrace the new year.
There has been no shortage of big events in 2019.
The US-China trade wars, which started in mid-2018, escalated in 2019. Amid slowing
global growth, there were notable bright sparks in Singapore such as the listing of
LendLease Global Commercial REIT (SGX: JYEU), three REIT mergers, and the partial
takeover of Keppel Corporation Limited (SGX: BN4) by Temasek Holdings.
And that's not the end of it.
As we turn the corner and enter 2020, there are five key themes that we think will
matter for Singaporean investors.
Some are carried forward from prior years, while others could be at the cusp of
becoming major, powerful trends. Either way, we think that investors should take note.
In that context, here are the investment trends that could impact your portfolio for
2020 and beyond.
Page 1
1. Digital Bank Licenses
Earlier this year, the Monetary Authority of Singapore (MAS) announced that it would
allow digital banks to operate in Singapore in 2021 by offering five digital-banking
licenses.
Two of these will be full licenses, with the other three being restricted licenses.
The maiden license offer has led to a scramble among financial and payment players
in Singapore to be part of the pioneer batch of digital banks.
Companies that have indicated their interest to apply for a license include iFast
Corporation Limited (SGX: AIY), Singapore Telecommunications (SGX: Z74), Grab,
Oversea-China Banking Corporation Limited (SGX: O39), FOMO Pay and Alibaba
Group's (NYSE: BABA) Ant Financial.
As we look through the list of digital-bank candidates, it is likely that a non-traditional
bank will win a license.
Notably, Hong Kong has issued eight virtual bank licenses to a mix of tech
companies, traditional banks, and private equity firms such as Ant SME [1](under Ant
Financial), Livi VB (a joint venture between JD Digits, BOC and Jardines), and
Infinium (a joint venture between Tencent, ICBC and Hillhouse Capital). The first
batch was awarded in March 2019 and will have to complete a year of operation
before the second wave is awarded.
Page 2
The role of a digital bank
A key requirement is that the new digital banks will need to tackle segments that
are currently under-served while providing a road map towards profitability in the
medium-term.
There are three main functions of a digital bank - spend, send, and lend.
"Spend" enables customers to purchase financial products in order to grow their
wealth. "Send" allows customers to send money to other parties (i.e. funds transfer),
and "lend" represents a key function of a traditional bank - lending out money to
individuals and businesses.
The benefits of a digital bank are numerous. Firstly, it allows the customer to bank
anytime and anywhere in the world, providing 24/7 access to a full range of banking
services as long as there is an internet connection.
Secondly, customers are likely to enjoy lower fees as digital banks have lower
expenses compared to traditional banks as they do not operate physical branches.
As such, these cost savings can be passed on to their customers.
Entering the digital banking arena
Singapore is moving towards a future where banking is pervasive, seamless and
virtual.
With a smartphone penetration rate of 80%, one of the highest in the world [2]
according to Media One, the city state is particularly well-suited for digital banking
adoption.
In other words, the prize is significant.
Not every applicant will qualify for the coveted license, though. Applicants will have
until end-2019 to submit a formal application.
The award of the licenses will be announced by mid-2020, and the digital banks are
expected to begin operations by mid-2021.
Page 3
Source: MAS website
The assessment criteria are stringent: digital full banks need a minimum paid-up
capital of S$15 million and within three to five years, need to increase this to a
minimum of S$1.5 billion. [3]
One of the parties in the applicant group will need to have a track record of three or
more years operating a business in the technology or e-commerce field.
The applicant needs to deliver a suitable value proposition to justify its digital-
banking business model, and demonstrate its ability to manage a business by
charting a path toward profitability.
Page 4
The impact of digital banking
So, the question here is whether digital banks may be a threat to the incumbents
DBS Bank (SGX: D05) and United Overseas Bank (SGX: U11)?
There are two opposing camps, each offering differing views on whether they think
digital banks are an imminent threat to the incumbent banks.
Our view is that the banking industry is indeed facing its first potential disruption in
a very long time. This move, though, is long overdue as the world is evolving and
changing rapidly with the advent of technology and connectivity. Traditional banks
need to evolve and adapt to changing circumstances in order to remain relevant.
To their credit, we think that the three incumbents have done an admirable job.
Digital banks may steal some market share away when they go live, but we believe
the ecosystem is large enough for all players to co-exist and grow in tandem with
one another.
Though Singapore already has a heavily banked population, digital banks are
expected to target unserved or under-served segments and "fill the gaps".
Hence, we believe digital banks will thrive over time, and will not affect the market
share of the incumbents immediately.
Page 5
2. New Leverage Limits for REITS
In a move that may have significant implications for Singapore's REITs, MAS
published a consultation paper in July proposing amendments to REIT leverage
limits.
While the current gearing limit is set at 45%, REITs typically keep their leverage below
40% so that they are better able to respond to adverse market conditions such as
declining property prices.
The chart below summarises the latest gearing levels for Singapore’s REITs and
trusts.
Source: Presentation Slides for each REIT (latest quarter)
Page 6
Among the proposals is the possibility for REITs to lever up to 50% if they can meet
minimum interest coverage requirements (ICR).
In addition, REITs might even be allowed to increase their gearing up to 55% if they
have demonstrated good financial discipline.
Setting the right limits
The ICR represents the REIT's debt-servicing capability.
To illustrate, MAS will set a baseline requirement for ICR to be at least 2.5 times, for
example, if a REIT wants to maintain a gearing level between 45% and 50%.
Within the region, the change proposed is not outside the norm.
As a comparison, Hong Kong also has a gearing limit of 45%, while Malaysia's limit is
50%. Thailand allows gearing to hit 60% if the REIT has an investment-grade credit
limit.
However, developed countries such as the US, Canada, Australia, France, and Japan
do not impose leverage limits for REITs.
The impact of new leverage limits
This news, if confirmed, should be a strong positive for existing and future REIT
aspirants. With the ability to gear up more, REITs will be able to undertake more
accretive acquisitions to boost their distribution per unit (DPU).
The move could also lower the cost of capital for REITs, resulting in more room for
the REIT’s portfolio growth. DPU could also increase further as debt-funded
acquisitions are likely to be accretive since rental yields should exceed the current
low cost of borrowing.
The Singapore stock market has become a successful hub for REITs, therefore the
decision could turn out to be a favourable boost to the industry.
Page 7
3. Recovery in the oil and gas
sector
It has been over five years since oil prices crashed from a high of over US$120 per
barrel to a low of around US$30 per barrel.
Currently, oil prices are hovering between US$60 and US$65 per barrel, but with no
sign that prices will head back to the previous highs.
Source: MTQ Corporation Limited Annual Report 2019
Signs of a turnaround
That said, Temasek's partial takeover of Keppel Corporation (SGX: BN4) could signal
that there are brighter days ahead for the industry.
In Keppel's 2019 third-quarter earnings, its Offshore & Marine (O&M) division booked
a healthy revenue of S$1.44 billion for the first nine months of 2019 , up 6% year-on-
year from S$1.35 billion.
Critically, the division booked a small profit of around S$18 million for this period
compared to a loss of S$38 million in the first nine months of 2018.
Page 8
To that end, companies such as Boustead Singapore Limited (SGX: F9D) has seen its
oil division turn profitable, with profit before tax for the first half of fiscal 2020 at S$1.8
million (after stripping out currency gains). For context, a year ago, the loss before
tax for this division stood at S$0.9 million for the same period.
CEO of Boustead Singapore FF Wong also had positive words to add, saying that the
division has "benefitted from the better business outlook for the downstream oil and
gas industries".
His observation suggests that a slow but sustainable recovery could be on the cards.
The impact of oil prices
The most meaningful chart comes from MTQ Corporation Limited (SGX: M05), a
firm specialising in the maintenance and repair of blowout preventers for oil rig.
The company shared this graphic in its 2019 Annual Report
The graph above shows that utilisation for contracted oil rigs has been rising steadily
since its lowest point in the first half of 2017.
If the trend continues, the recovery in demand should benefit all upstream and
downstream players within the oil and gas industry.
Page 94. Electronics and Artificial
Intelligence (AI)
Tariffs from the US-China trade war had raised costs for multiple industries.
However, industries such as electronics continue to do well, driven by strong demand
for electronics and components for research into AI and the Internet of Things (IoT).
The graph below, shared by Micro-Mechanics Holdings (SGX: 5DD) during its AGM in
October this year, suggests that the decline in demand for semiconductor chips
could be bottoming out.
Though global chip sales declined by 14.6% during the first eight months of this year,
companies such as UMS Holdings (SGX: 558), Valuetronics (SGX: BN2), AEM Holdings
(SGX: AWX) and Venture Corporation Limited (SGX: V03) have all performed well this
year.
The average year-to-date return for these four stocks (up till 18 December 2019) was
a whopping 62.3%, against the index's more pedestrian 9% return.
The bullishness could be due to the forecast for better semiconductor sales in 2020
as trade tensions could ease..
Page 10The impact of electronics and AI
With the wind at their backs, demand for electronics should continue to persist in
2020 and beyond as AI and IoT (Internet of Things) continue to be important, long-
term developments for the future.
Although the industry is notoriously cyclical, we believe the renewed demand has
both lengthened and smoothed out the cycle, making it much less volatile as
compared to previous cycles.
One risk that we are flagging out, though, is how the trade wars may throw a
spanner in the growth plans these companies.
As more tariffs are introduced by the trade row between the US and China, it could
add on an additional layer of costs into the supply chain.
Page 115. Singapore's Residential
Property Market
In July 2018, the Singapore Government clamped down on the residential property
[4]
sector by implementing a set of cooling measures to moderate price increases.
The additional buyer's stamp duty (ABSD) will be raised by 5 percentage points for
citizens and PRs buying second and subsequent homes, while loan-to-value (LTV)
limits will be tightened by 5 percentage points.
The lowering of the LTV limit is likely to have a greater impact as investors can now
only borrow up to 75% of the property's value, down from 80% previously.
The change will require the borrower to come out with more cash, adding a higher
hurdle to a property purchase.
Raining on the parade
17 months on, and the impact of these measures have been felt at property
developers such as City Developments Limited (SGX: C09) and Chip Eng Seng (SGX:
C29).
The graph below shows sales volumes declining sharply from 10,566 units in 2017 to
7,469 units for the first nine months of 2019. At the same time, price increases have
also moderated from 7.9% in 2018 to just 2.1% this year thus far.
Source: City Development Limited 3Q 2019 Presentation Slides
Page 12As it stands, there is now an over-supply of private residential units.
This situation had led to lower transaction volumes, which in turn has hurt property
brokerages such as PropNex (SGX: OYY) and APAC Realty (SGX: CLN).
There are few signs that these measures will be lifted anytime soon. In MAS' recent
financial stability review [5], it declared that property prices are now "closer to
fundamentals", with just a 2.1% year-on-year increase in the third quarter of 2019
compared to the 9.1% year-on-year increase in second quarter of 2018 (note: the
measures kicked in during the third quarter of 2018).
The impact of lower residential housing sales
The industry could receive some help in the form of lower interest rates and easing
in the over-supply as it slowly gets digested over time.
The developments may lead to a more benign environment for property developers
and brokerages next year, though full recovery may still be some years away.
Another mitigating factor is that Singaporeans tend to view real estate as a tangible
asset and could continue to favour property over equities.
Eventually, the oversupply situation will ease. Prices should then resume their
upward climb, though this may be moderated by the new rules which appear here
to stay for the long-term.
Page 13Get Smart: To 2020 and Beyond
Big events can occur in any single year.
Some will be expected. Some will surprise us. A few of these trends could turn out to
be short-lived while other events may gradually build-up and morph into multi-year
trends.
As Smart Investors, we need to have a long enough time frame to appreciate the full
trend playing out.
After all, some of the best returns, in our book, lie with the long-term returns from
companies that take advantage of long-term trends.
We hope that you've enjoyed this free report from The Smart Investor.
We wish you a profitable and successful investing journey in 2020 and beyond.
End
Sources
[1] https://fintechnews.hk/8951/virtual-banking/hkma-virtual-bank-license-sc-digital-livi-zhongan-za/
[2] https://mediaonemarketing.com.sg/digital-marketing-statistics-singapore-2019/
[3]https://www.mas.gov.sg/-/media/Digital-Bank-Licence/Eligibility-Criteria-and-Requirements-for-Digital-Banks.pdf?
en&hash=57410B76A3359791816B0A0BD592DF8EF2D37B33
[4] https://www.channelnewsasia.com/news/singapore/singapore-property-cooling-measures-higher-absd-rates-loan-limit-10502710
[5] 20191129 - Business Times Article - Post-cooling measures, property prices 'closer to fundamentals'
Disclosure: The Smart Investor does not own any of the stocks mentioned in this report. Royston Yang owns shares in Boustead Singapore, iFAST Corporation, Keppel DC
REIT, Suntec REIT, and Frasers Logistics Trust.
The Smart Investor is not licensed or otherwise regulated by the Monetary Authority of Singapore, and in particular is not licensed or regulated to carry on business in
providing any financial advisory service. Accordingly, any information provided in this report is meant purely for informational and investor educational purposes and
should not be relied upon as financial advice. No information is presented with the intention to induce any reader to buy, sell, or hold a particular investment product or
class of investment products. Rather the information is presented for the purpose and intentions of educating readers on matters relating to financial literacy and investor
education. Accordingly, any statement of opinion on this site is wholly generic and not tailored to take into account the personal needs and unique circumstances of any
reader. The Smart Investor does not recommend any particular course of action in relation to any investment product or class of investment products. Readers are
encouraged to exercise their own judgment and have regard to their own personal needs and circumstances before making any investment decision, and not rely on any
statement of opinion that may be found in this report.
Page 14You can also read
