Business

Geopolitical risk weighs on markets

When two or more major powers get confrontational, the repercussions can impact bourses globally

Geopolitical risk has rarely featured as a significant factor in daily stock market trading over the past few years.

Other than Greece's financial problems and the occasional temporary wobble brought on by the Brexit vote, North Korean missile tests and the Trump US presidential win, markets have been more concerned with earnings, interest rates and the economy than any potentially destabilising geopolitical developments.

Whether or not the present situation will prove any different will become obvious only in the days ahead, but for now, Middle East tensions are said to be unnerving markets following last Friday's US strike on Syria and news that the US has now deployed an aircraft carrier to Korean waters.

As a result, the Hang Seng Index opened weaker and although it managed an afternoon rebound, it still ended 0.7 per cent weaker.

Similarly, the Dow futures first lost 50 points but at 5pm had regained about 30 of those points.

In the US options market, the VIX Index, which measures expectations of future volatility, jumped to its highest in about four months on Monday.

The Straits Times Index (STI) tracked these movements, dropping to an intraday low of 3,164 before finishing at 3,174.75 for a net loss of 6.7 points.

Turnover amounted to 2.3 billion units worth $1.1 billion, low by 2017 standards and excluding warrants, there were 197 rises versus 272 falls.

In the Reit sector, SPH Reit ended $0.02 higher at $0.995 on volume of 1.74 million. The trust on Monday reported a 5.2 per cent increase in second quarter net property income to $42.7 million and a distribution per unit of $0.014.

In response, OCBC Investment Research reiterated its "buy", revising its fair value estimate to $1.08 from $1.04 because of a lower discount rate of 6.7 per cent in its dividend discount model, given the Reit's "resilient portfolio, robust operational metrics and solid leasing management capabilities".

DBS chief investment officer Lim Say Boon in his April 10 Investment Insights - When Geopolitics Matter, said that although markets have tended to view political upheaval relatively dispassionately, geopolitics do matter where conflicts involve two or more major powers, with the ability to escalate to a point where they impact economies significantly.

"And Russia is still a major power, even if its economy may be puny relative to its military. But there's the rub - it has an oversized military," said Mr Lim.

"So the markets' muted initial response may not be the final word on the US missile attack on Syria last Friday. In addition, the latest geopolitical tensions come at a time when risk asset markets are already on pause - seeking new drivers".

Among the other items of interest was a report from the Singapore Exchange's (SGX) investor education portal My Gateway that the most recent 10 companies to list on the second board Catalist have averaged 56.2 per cent returns compared with their offer prices.

"There has been a degree of consistency in these returns with nine gainers and one decliner, and the median return of the 10 stocks at 43.6 per cent," reported My Gateway.

"Returns have ranged from Acromec's 137.3 per cent return to AGV Group's 22.7 per cent decline. Four of the 10 stocks have paid dividends since their distributions and these average returns were as of the market close on April 10."

The 10 are UnUsUal, Kimly, Samurai 2k Aerosol, HC Surgical, AGV, Wong Fong, Katrina, Advancer Global, United Global and Acromec.

This article appears in The Business Times today. For full listings of SGX prices, go to btd.sg/BTmkts

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