Big market moves have always attracted headlines and investor attention. Despite the broader and significant challenges of 2020, most of us have either seen, noticed or heard about this year’s moves of the stock market.
The big swings in March, early June and early this month have tended to garner the most interest. As with past years, it could be the stakes, the quantum of risks or the lure of potential return. Perhaps it is more to do with an underlying appetite for knowledge or understanding, even more so than risk.
There is no argument that big market moves are attention-getting, and hence tend to be found in multiple forums including risk disclosures, a sensitivity analysis or stress test, educational resources and a Sunday Invest column.
This year, the big market moves have revealed the standout stock market drivers for 2020.
RISE OF THE COVID-19 CASES
The biggest moves were in mid-March, with the key driver a surge in demand for the global reserve currency of the US dollar amid the uncertain economic outlook as Covid-19 took hold of the world.
The surge in demand for the greenback sent the volatility of the trade-weighted US dollar index flying to levels it has reached only a handful of times since 1983. The US Federal Reserve appeared to have resolved the immediate liquidity strain by March 23, with global central banks also moving comparatively quickly to initiate supportive monetary policy measures.
Coupled with global fiscal stimulus, estimates of the global fiscal response tally are 15 per cent of world GDP in the year thus far.
Nevertheless, the Ides of March showed that the adverse social and economic impact of Covid-19 is the biggest market driver of 2020 and as the Federal Reserve chair noted in prime-time TV to US households in May, the biggest market risk for the remainder of 2020 is resurgent waves of Covid-19.
RISE OF THE TECH AND HEALTHCARE STOCKS
The big market moves since March have been sector-driven, in particular technology and healthcare.
These two sectors have been the strongest across the world all because the biggest market driver of 2020 is the social and economic impact of Covid-19.
Technology stocks that are related to digital or Internet businesses have fared comparatively well, as have stocks in healthcare companies that produce and distribute medical supplies, devices and equipment.
This does not mean all technology and healthcare stocks have generated gains. Branding, market share and balance sheets have remained important factors.
Case in point is the approximate 50 per cent gains so far this year for both the iEdge-Factset Global Internet Index, and the iEdge US Technology Enterprises Index, with the latter comprising the top five largest companies in technology-related industries listed and domiciled in the United States.
The strength of the technology and healthcare sectors and their impact on the global benchmarks have led many to question if global stocks in 2020 are detached from the hard economic realities that we currently face.
Technology, healthcare and Internet-orientated consumer stocks make up half the index weightage of the S&P 500, with the same three categories making up more than a third of the index weight of the FTSE All World Index.
The median total return of the top quartile of global technology stocks by market value was 18 per cent from January till Sept 4, and 21 per cent for the top quartile of global healthcare stocks by market value.
Hence, benchmark returns have been sector-driven, with the Covid-19 operating environments driving the sectors.
While technology and healthcare stocks have driven the benchmarks, the other sectors with the tougher operating environments were in no way forgotten.
We have seen instances of rotation into the latter, in addition to comparatively more defensive returns, while the technology and healthcare sectors have retraced gains. For instance, up till Sept 4, the top quartile of global banks generated a median decline of 20 per cent, with the same measure for global energy stocks, seeing a decline of 15 per cent.
However, prior to the resurgence of Covid-19 in Texas, there was a week and a half, in early June, with a promising outlook that the United States had overcome the worst of the pandemic.
Those seven sessions alone saw the S&P 500’s banks rebound 18 per cent, its energy stocks rebound 17 per cent, while its technology stocks rose just 3 per cent and healthcare stocks fell 1 per cent.
More recently, on the night of Sept 3, when technology stocks declined 5 per cent, financial stocks saw only one-third of those falls.
MOVES IN THE SINGAPORE STOCK MARKET
Most of these big moves have extended to the Singapore stock market with similar sector-by-sector performances.
The biggest Straits Times Index (STI) sector is banks, and there are just two technology plays – Venture Corporation and Mapletree Industrial Trust.
With the big market moves since March being sector-driven, investors have had to look beyond the STI benchmark. Indeed they have looked. Aside from Venture Corporation and Mapletree Industrial Trust, Singapore’s top 60 stocks by turnover this year included AEM Holdings, Keppel DC Reit, NetLink NBN Trust, UMS Holdings and Hi-P International.
Similarly, while the STI is not home to any healthcare stocks, Singapore’s top 60 stocks by turnover this year have included Medtecs International Corp, Riverstone Holdings, UG Healthcare, Top Glove Corporation Berhad and Biolidics.
Traders, with much more appetite for risk than investors, typically look for big moving markets. Hence, with a number of healthcare stocks seeing exponential moves this year, increased short-term trading activity and more liquidity in the broader market have sustained their turnover rankings and propensity to swing.
During the recent earnings season, common Covid-19 sub-themes in the corporate outlooks included intentions to keep building resilience by containing costs, lifting productivity and, where possible, pursuing operational excellence.
Vigilance was a word used many times and mostly applied in the context of matching balance sheets with opportunities to enhance value. As uncertain as the outlook for 2021 is, sector-leader Keppel Corporation said it would continue to work as a group to deliver value to its stakeholders, with a bold long-term vision, which transcends the impact of the current crisis.
For the rest of 2020, the bank, real estate and industrial sectors will be large determinants of the STI’s performance.
The mega sectors, built on traditional strengths, will take their cues from the state of the economy, as they have throughout the year.
Accommodative monetary policy and economic lockdowns have meant that global banks have had to contend with a sudden reduction in interest rate margins and overall demand for financing, while needing to boost loan provisions.
At the same time, real estate developers, operators and managers had to grapple with exogenous declines in property sales and leases.
At the end of 2019, transportation-linked industries made up one quarter of the combined market value of the combined industrial sectors of Asia-Pacific.
These three mega-sectors are very connected to current economic realities. At the same time, the STI will continue to evolve, with the next-in-line stock to join the STI, Keppel DC Reit, with Internet Enterprises making up close to 50 per cent of its rental income.
• Geoff Howie is market strategist at Singapore Exchange.
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