The U.S. Economy & A Developed Singapore Market
November 3, 2022
The U.S. Economy – Still Too Hot or Starting to Slow?
Despite higher rates, negative survey data, and poor expectations, the U.S. economy continues to plod along just fine. The result is that a key asset allocation decision is emerging for investors: is the economy still hot, requiring further Fed hawkishness, or is winter approaching, allowing the Fed to think about pausing? Recent data on earnings, jobs and inflation paints a picture of success for the Fed and the beginning of a gradual slowdown.
So far, more than 60% of S&P 500 companies have reported earnings, with 72% beating consensus for earnings and 67% for revenue. Energy led the way by a mile, highlighting the problem. Though revenue growth is 10.5%, earnings growth is only 4.7%, and ex-energy earnings are now registering a -3.0% contraction. Higher revenue growth shows continued demand, but companies are reaching the limits of their pricing power. Earnings overall are holding up better than expected, but now clearly signaling a slowdown.
On the jobs front, August’s 8% month-on-month drop in job openings was followed by a 4% gain in September, surprising expectations of another decline. This seems to suggest continued labor market strength, but the Atlanta Fed Wage Growth Tracker (leads job openings by nine months) and the Employment Cost Index have both rolled over. The labor market is holding up well, but companies are starting to hold the line on wages. This forces employees to either dip into savings or to start watching their spending, implying slower consumption ahead.
What about news on the broader inflation front? Most recent readings have matched expectations, which is actually good news. Upward surprises have evaporated, which means markets are closer to accurate pricing of inflation. The core PCE data deflator came in as expected and regional Fed and NFIB surveys confirm an inflation slowdown. A few readings even came in below expectations. The ISM Manufacturing Prices Paid subindex contracted sharply to 46.6 from 51.7 in October and the University of Michigan 1-year ahead inflation expectations ticked down from preliminary estimates. All these measures point to moderation and early signs of outright slowdown in inflation.
The all-too-important housing market is clearly correcting – pending home sales are down 30% year-on-year. The Fed will no doubt wait for more hard data like this to guide its policy before slowing down, rather than relying on surveys and forecasts. What is clear, however, is that the transition from too hot to slowdown has begun.
Singapore, a Leading Developed Market
Global stock markets have been facing decelerating economic growth and downside risks. The Singapore stock market in comparison is holding up steadily. The Straits Times Index (STI), which tracks performance of top 30 companies listed on SGX, is only down 4% so far this year, while the MSCI World Index is down more than 20%.
Singapore’s performance contrasts with the U.S. and Europe, where equity markets are facing challenges from worrisome inflation, energy shortages and geopolitical tensions from disrupted supply chains. Singapore’s limited tech exposure and overall outperformance of value overgrowth have helped the stock market. Until the Fed slows down, Developed Markets will hardly be able to catch up.
The key attraction of Singapore is leading representations from a group of stable companies with long business records and well-established business models, such as the largest Singapore bank DBS Group (up 5%), Conglomerate Jardine C & C (up 48%) and Energy & Urban Development pioneer Sembcorp Industries (up 48%). Importantly, firm policy support benefits its business-friendly environment. No capital gains tax and continuous fund grants to financial technology and innovation are set to encourage entrepreneur and business expansion.
Within the Singapore market, we continue to favor the banking sector which benefits from the growth of family offices, defensive sectors (such as telecommunication) which can achieve a win-win situation from e-commerce integration across ASEAN region and the well-rated property sector which trades at a discount. We have increased our Singapore investment exposure in our Asian Leaders portfolio to enhance quality growth and in our Global REITs to capture stable income stream.
Source: Bloomberg as of 1 Nov 2022.
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Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value-weighted index with each stock’s weight in the index proportionate to its market value.
The employment cost index (ECI) is a quarterly economic series detailing the changes in the costs of labor for businesses in the United States economy. The ECI is prepared by the Bureau of Labor Statistics (BLS), in the U.S. Department of Labor.
The Institute for Supply Management (ISM) Manufacturing Index shows business conditions in the US manufacturing sector, taking into account expectations for future production, new orders, inventories, employment and deliveries. It is a significant indicator of the overall economic condition in US. The ISM Prices Paid represents business sentiment regarding future inflation. A high reading is seen as positive for the USD, while a low reading is seen as negative.
The Straits Times Index (STI) is a capitalisation-weighted measurement stock market index that is regarded as the benchmark index for the stock market in Singapore. It tracks the performance of the top 30 companies that are listed on the Singapore Exchange (SGX).
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.