1. Institutional selling of bank stocks started in the week of 10 Feb. It's especially pronounced because of the consistent weekly selling. Institutional selling volume increased 4 times in the week of 9 Mar and the Straits Times Index (STI) constituents dominated the Top 10 list that week.
My hypothesis: Funds expected Singapore banks to have higher non-performing loans from airline and tourism sector because of the flight and tourist restrictions, so the selling started after the announcements on restrictions. Funds received (either start to receive or receive a lot more) withdrawal requests from 9 Mar and started cashing out stocks to meet clients' withdrawal requests.
2. 13 Mar Friday was the day the markets experienced their first -10% drop. I observed that the selling continued everyday, and prices continue to fall for the stocks in the STI. A few Real Estate Investment Trusts (REITs) fell a lot more than others, and these were those with lower volume, poorer asset quality or assets outside of Singapore.
My hypothesis: Singapore funds that copy the STI and Singapore REIT-20 index (S-REIT-20) were in high demand in the past few years, and a lot of money flowed in because of the touted higher returns with lower risk (because they are "blue-chip companies") compared with cash or fixed deposits. As a result, the funds buy these index constituents, driving up their prices (and valuations). As these plans were sold as flexible investment plans where customers can contribute a fixed sum monthly and withdraw/cash out anytime, it is very likely that many customers treated it as a high yield savings account, and decided to withdraw their money at one go when they saw the prices falling. These customers were unlikely to be retail investors who analyse and choose stocks from the stock market. I believe that all the REITs will minimally be sold to their book values. Beyond which, how low prices will go depends on the number of buyers.
3. There is a confluence of factors triggering the sell down. There is the oil price crash that impacts the oil companies, the commodities trading companies and subsequently the bank. There is the restriction on air travel that impacts airlines, cruise lines, airline-supporting industries such as tourism, hotels, airline food and logistics, and subsequently the bank. The banks bear the risks of companies being unable to repay their loans or becoming bankrupt. And there is what I call the index fund unwinding phenomenon because "investors" who supposedly were long-term investors decided that they prefer to hold cash.
My hypothesis: Airlines have been operating with thin margins. Singapore Airlines (SIA) margin is just 4.3% based on their 3rd quarter (ended 31 dec) financial report. Their cash balance will only last them about 2 months, and they will definitely end their year with a loss, although china flights were only grounded from Feb and europe flights in mid mar. Their 9 month profit is ~$500M, but their operating cost per quarter is $4B. Assuming grounded flights don't earn revenue and also don't incur expenses, there are other fixed costs such as non-flight crew staff cost, loan repayments, rental and a bunch of payments which I estimate to be ~$1B/quarter. SIA cannot afford to not collect revenue, and they don't have alternative revenue streams. Their alternate revenue streams are all airline-related and will all be impacted. I will avoid airlines and airline-related stocks until these companies announce their financial reports for the quarter ending on 31 mar.
I will also avoid oil-related companies for the time being because the oil price war is destructive.
I will buy REITs and companies that are not in the STI, if their valuations are attractive.
4. Risks factors. Banks will get hit really bad if they get a triple blow from bankruptcies from oil sector and airline sector and withdrawal of client investments from funds. Wealth management fees have been seeing double digit growths mostly because fees are charged as a percentage of the Assets Under Management (AUM). As the fund values are high, the fees will correspondingly be higher. At this point, I will avoid banks too until there is more certainty that there won't be an oil or airline company going bankrupt.
The phenomenon of investors cashing out should not be overlooked as well because the rate of cashing out in this market correction is a lot a lot a lot faster than previous corrections. At this point, we are only at about -30% from peak, and the cashing out phenomenon started from before -20%. Some reasons I can think of are the investors are not working (retirees who need cash for daily expenses), they have an upcoming condo down payment, they have a margin call on their shares financing account.
I see the need for cash for condo down payment as a risk that should be monitored. There is a huge pipeline of new launch condominiums due for completion in the next few years. These condos have also been sold at higher than market prices. There are a few scenarios that can play out:
- Buyers forfeit 25% of their 5% deposit (which is 1.25% of the purchase price) if they have just exercised the option but haven't completed the sale.
- Buyers want to proceed with the purchase, but they haven't sold their existing HDB flat or condo because the developers gave them more time to sell and will reissue the option at a later date. These buyers will have to sell if they want to avoid paying Additional Buyer Stamp Duty (ABSD) or 12% of purchase price. If they can't pay the ABSD or they can't sell, then they will have to forfeit their 1.25%.
- Buyers will sell their existing HDB flat or condo at lower prices because they are unable to sell at their asking price but they need the money for 20% down payment of the new condo. This can cause resale prices to fall.
- Developers may end up with more unsold units if buyers decided not to complete the sale despite paying the 5% to exercise the option earlier. Developers will have up to 2 years after completion to sell these units or have to pay 25% stamp duty on these unsold units. Developers may end up having to lower their prices.
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