Year 2020 has been a year of frightful year. Following the fruitful ending for year 2019, most of us were hopeful that the prosperity would follow through into year 2020. Just the opposite. It was nightmarish not long after the Chinese New Year (CNY), which took place in the last week of January 2020. The fear about the uncontrollable spread of the unknown coronavirus was gaining momentum each passing day. The speed of the stock index descent took us quite off-guard. The STI went into a tailspin within one to two weeks after the CNY as the spread of the virus became quite unstoppable. With no idea of how this virus came about, let alone finding a cure and finding ways to contain it, the stock avalanche then became distinctively imminent. Between mid-February to around end-March, it had been unidirectional…. down, down, down. The total descend was 1,000 points on the STI in a month. At the trough of the descend in the last week of March 2020, the STI was down about 30% from the beginning of the year.
Any fund manager or anyone who holds a reasonably significant portfolio of stocks will tell you, this is the most fearful type of scenario. There is no escape route so long as we hold some stocks. Many veteran players’ immediately action was “just sell first and talk about them later”. I bet before we can get back to our senses, we found that the STI was already 30% down. In particular, many investors who have been diligently accumulating stocks over the last few years, suddenly saw their portfolio decimated significantly within a month.
On the whole, the stock market movement had been quite depressing for next 6 months that followed. Corporates started to cut dividends to conserve cash. REITs offered rental rebates to retain tenants. Retail malls became ghost towns. Countries started closing out against foreigners. Airlines and the hospitality counters were hit badly. Oil as well as its related industries tanked as the aviation and travel industries came to a grinding halt. The list went on.
But then again, as stock prices continued to fall in anticipation of dividend cuts and dwindling returns, a lot of them were often quite oversold. Values are starting to present themselves for some stocks by June onward.
- Transport sector
One of the early hits from the Covid-19 pandemic was the transport sector. Any mode of travels from one place to another, be it local or overseas, was affected. In particular, SIA was hit very badly. An extremely huge and urgent cash call was needed. Apart from bank borrowings and bond issuance, a huge amount of $8.8 billion had been raised through rights and mandatory convertible bond (MCB) issue from existing shareholders. This comes with a further option to raise another $6.2 billion MCB bond by the middle of year 2021. Although the share price has since recovered from its low to above $4 now, it is unlikely that existing shareholders have gained from this stock in view that the stock was more than $9 per share at the beginning of the year. I believe many existing shareholders have held SIA shares at the time, are in the red now as they need to fork out a huge amount of funds to subscribe to the rights and MCBs. In all likelihood, it would at least take a few years for existing shareholders to break-even, despite all the hypes about operating the in-cabin restaurants, cargo transports and, more recently, the vaccine transports.
The land transport appeared to be in a better shape. Although the stock prices of Comfort-Delgro (CDG) and SBS Transit are still about 38% and 25% respectively down from that of the beginning of the year, things are looking positive as the economy normalised. Given that the land transport operations are largely local, the government has better control over the normalisation of these operations. Never before did CDG stock price hit below its book value of about $1.38. Those who bought in those prices should have by now richly rewarded by the recent ascent in the stock price. However, going back into $2.30 level for CDG may be quite a distance off as work-from-home (WFH) schemes are still likely to be in place for the next 6 months at least. Nevertheless, I think between $1.80 to $2.00 should be within striking distance if the results for the next one to two quarters are within expectation.
- Oil & gas
This is one of the sectors that was brought down to its knees following the collapse of air travels. There was even a day or so when the oil price was negative. Sembcorp Marine (SCM), whose share has been on a decent in the last few years due to the weakening oil price, tanked further by another 30% after demerging from Sembcorp Industries (SCI). Keppel Corporation, whose share price is quite highly co-related with the crude oil price, has also seen its low. Some eagle-eyed investors may have even spotted that the share price went so low that by sum-of-parts valuation, the share price could have ring-fenced the oil and gas component and this would have been a great opportunity to pick up the stock. When Keppel Corporation’s share price touched $5, it was a good price. When it went below $4.50 per share it was even netter. By the developments in this sector, it is quite rational to infer that some kind of consolidation and merger is imminent between the oil and gas unit Keppel Corporation and SCN. Existing shareholders of SCM who were forced to subscribe to the rights issue following the demerger may have lost money while those who picked up Keppel Corporation shares, at below $5, should have made a tidy sum by now. In any case, given that SCM shares have come down to such a low level, it may just make sense to hold through and watch for developments that may, hopefully, favourable to the SCM shareholders.
- Real Estate Industrial Trusts (REITs)
As a whole, the REITs were in a mixed bag. The hospitality and retail sectors were hit the hardest, while it is less so for the industrial REITs. For office and healthcare space, the number of counters within them are not really sufficient to make conclusive inferences. While most of sectors have already recovered to some extent, there are still uncertainties. Office REITs, may be in the spotlight, as companies release more employees to work from home, thereby reducing the need for office space, in particular, those in the central business district. On the whole, I think the most fearful part for REIT investors is the number of fundraising exercises and cash calls. Whether for the right or wrong reasons, all these activities usually come together, especially in such an environment whereby interest rates are low and, when there is a general need for cash whether for expansion or for rental rebates. In this aspect, investors’ funds get ‘lock-in’, often against their wish. This reason is good enough for me not to hold too many REIT counters. (In fact, I have none at this time after trading off the Keppel REITs for Keppel Corp shares.)
- The banks
While the banks were doing well last year, they could not possibly escape unscathed when the economy was disrupted. The Monetary Authority of Singapore (MAS)’s recommendation for the banks to cut banks’ dividend by 40% certainly pinned down stock price. Like the STI, their stock prices tanked about 30% at the worst point compare against last year’s closing price. Those who were brave enough to buy them as they hit their lows were largely rewarded as their stock prices recovered by early November. I believe most of the investors that held bank stocks and ride through the whole storm did not really lose out.
Interestingly, this sector was not really affected by the Covid-19 pandemic. Some technology stock prices tanked just like the other stocks initially but they were back quite strongly comparatively quickly when other sectors were still down. In fact, they were doing relatively well during the worst stage of the pandemic. Despite its volatility, it has gained about 25% to 30% since the end of 2019. So, I believe those who held and had ride through year 2020 should have made some gains by now.
- Plantation stocks
Except for Wilmar International, most of the stocks in this sector were still deeply under-water. This is partly due to the collapse of the oil price, its close substitute prices and the end-user demand. Wilmar International’s case was a bit different in that their 99.99% china subsidiary, Yihai Kerry Arawana (YKA) is in the midst of IPO. Consequently, the share price of Wilmar has actually advanced by 5.8% from $4.12 to $4.36. For the other three stocks, being, First Resources, Bumitama Agri and Golden Agri, the share prices were down between 30% and 35% compare to their respective closing price on the last trading day of year 2019. But this could all change as the crude oil price is gradually creeping up and increase in end-user demand. An interesting index to watch would be the Crude Palm Oil (CPO) price.
So on the whole, apart for the agricultural & transport sector and, some REITs, most of the stocks have already recovered. So far so good. For me. No SIA, no SCM and no REITs. So, I am not ‘lock-in’ and am free to deploy funds according to my needs. Going into 2021, unless there are unexpected surprises, it looks to me that more stocks should be able to make gains. However, the speed of the upside may be less abrupt compared to what had happened in November. This is my take.
Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.