- As reiterated in last night’s FOMC statement, the third round of quantitative easing (QE3) is expected to end next month. QE3 was announced back in September 2012.
- During the QE3 period, the STI generated a total return of 15.3% which annualised over the near two year period comes to 7.4%. The 30 constituent stocks generated an average total return of 16.2% and a median of 13.9% over the period.
- The five best performers among the STI constituents during the period were Thai Beverage, ComfortDelGro Corporation, Olam International, DBS Group Holdings and Jardine Matheson Holdings.
Bonds and equities are different asset classes that used together can introduce a broad level of diversification to a portfolio. On 13 September 2012, the US Federal Reserve announced a third round of Quantitative Easing (QE3). This was an unconventional policy measure that met market expectations for providing purchasing support for long term bonds in the United States, which could keep downward pressure on yields.
However, over the period, prices of US ten-year treasury notes decreased and yields rose. US ten-year treasury notes are currently trading at implied yields of 2.61%. This compared to implied yields of 1.76% when QE3 was announced. While the yield has increased, it is important to note that expectations for QE3 had driven yields to 1.76% in the first place. Hence the market effect of QE3 had a degree of the buy the rumor, sell the fact adage.
Six months before QE3 was announced, these implied yields were as high as 2.39%. Moreover, QE3 has now been in a tapering stage for about nine months, hence expectations have moved and yields are higher than they were when the program began. More details on the mechanics of QE3 are provided at the end section of the Update below.
Meanwhile, since the QE3 announcement two years ago, the Singapore Fixed Income Index (SFI) has declined 4.4% in price with yields providing a 1.2% total return for the Index. Over the same period of time the Straits Times Index (STI) has generated a total return of 15.3% which annualised over the near two year period comes to 7.4%. The FTSE ST Mid Cap moved slightly less in price however paid more dividends so that on an annualised basis, its total return was 7.3%.
STI performance during QE3
Looking at the performance of the 30 constituent stocks of the STI during the period from 13 September 2012 to 17 September 2014, they generated an average total return of 16.2% and a median total return of 13.9%. The five best performers over the period were Thai Beverage, ComfortDelGro Corporation, Olam International, DBS Group Holdings and Jardine Matheson Holdings. The five least-performing stocks were Golden Agri-Resources, SembCorp Marine, Genting Singapore PLC, City Developments and Jardine Cycle & Carriage.
Historical beta is a volatility measure of the percentage price change of a stock given one percent change in the representative market index. This beta value, in this case, is determined by comparing the price movements of the stock and the STI during the stated period. During this period from 13 September 2012 to 17 September 2014, these 30 stocks maintained an average and median beta at the same value of 0.97. The three stocks with the highest beta were Jardine Cycle & Carriage (1.44), Noble Group (1.31) and CapitaLand (1.22). The three stocks with the lowest beta were SIA Engineering (0.53), Singapore Press Holdings (0.63) and Hutchison Port Holdings Trust (0.77).
The table below details the performances of the 30 constituent stocks of STI since QE3 was announced on 13 September 2012.
| Name | SGX Code | Market Cap S$ B | Total Return from 13 Sep 2012 % | Beta from 13 Sep 2012 | Px Chg Pct from 13 Sep 2012 % | Dividend effect from 13 Sep 2012 % | ICB Subsector Name |
| SINGAPORE TELECOMMUNICATIONS | Z74 | 60.3 | 24.9 | 1.10 | 14.1 | 10.8 | Mobile Telecommunications |
| JARDINE MATHESON HLDGS | J36 | 53.5 | 25.1 | 1.18 | 19.5 | 5.6 | Diversified Industrials |
| JARDINE STRATEGIC HLDGS | J37 | 51.3 | 17.2 | 1.10 | 15.5 | 1.6 | Diversified Industrials |
| DBS GROUP HOLDINGS | D05 | 44.6 | 33.3 | 0.96 | 24.8 | 8.5 | Banks |
| OVERSEA-CHINESE BANKING CORP | O39 | 37.8 | 15.3 | 0.97 | 7.9 | 7.4 | Banks |
| UNITED OVERSEAS BANK | U11 | 36.0 | 24.2 | 1.10 | 16.2 | 8.0 | Banks |
| HONGKONG LAND HOLDINGS | H78 | 20.0 | 24.6 | 0.93 | 18.3 | 6.3 | Real Estate Holding & Development |
| WILMAR INTERNATIONAL | F34 | 20.0 | 9.2 | 0.96 | 5.0 | 4.2 | Food Products |
| KEPPEL CORP | BN4 | 19.0 | 5.2 | 0.83 | -2.1 | 7.3 | Oil Equipment & Services |
| THAI BEVERAGE PCL | Y92 | 18.2 | 125.0 | 1.03 | 111.8 | 13.2 | Brewers |
| JARDINE CYCLE & CARRIAGE | C07 | 15.4 | -2.3 | 1.44 | -8.4 | 6.1 | Specialty Retailers |
| GLOBAL LOGISTIC PROPERTIES | MC0 | 13.6 | 10.1 | 1.05 | 6.8 | 3.3 | Real Estate Holding & Development |
| CAPITALAND | C31 | 13.5 | 6.8 | 1.22 | 2.2 | 4.6 | Real Estate Holding & Development |
| GENTING SINGAPORE PLC | G13 | 13.4 | -17.1 | 1.06 | -18.2 | 1.2 | Recreational Services |
| SINGAPORE AIRLINES | C6L | 11.7 | 2.7 | 0.79 | -4.0 | 6.7 | Airlines |
| SINGAPORE TECH ENGINEERING | S63 | 11.3 | 14.6 | 1.06 | 5.8 | 8.8 | Aerospace |
| SEMBCORP INDUSTRIES | U96 | 9.2 | 2.0 | 0.81 | -4.9 | 6.9 | Oil Equipment & Services |
| NOBLE GROUP | N21 | 9.0 | 9.8 | 1.31 | 6.6 | 3.2 | Diversified Industrials |
| CITY DEVELOPMENTS | C09 | 8.7 | -9.8 | 1.04 | -12.4 | 2.7 | Real Estate Holding & Development |
| SEMBCORP MARINE | S51 | 7.9 | -18.3 | 0.93 | -23.2 | 4.9 | Oil Equipment & Services |
| SINGAPORE EXCHANGE | S68 | 7.6 | 13.3 | 0.87 | 4.9 | 8.3 | Investment Services |
| HUTCHISON PORT HOLDINGS TR-U | NS8U | 7.6 | 17.3 | 0.77 | 0.8 | 16.5 | Transportation Services |
| STARHUB | CC3 | 7.1 | 22.8 | 0.78 | 11.7 | 11.1 | Mobile Telecommunications |
| CAPITAMALL TRUST | C38U | 6.8 | 8.7 | 0.83 | -1.5 | 10.3 | Retail REITs |
| SINGAPORE PRESS HOLDINGS | T39 | 6.6 | 20.6 | 0.63 | 3.5 | 17.1 | Publishing |
| GOLDEN AGRI-RESOURCES | E5H | 6.4 | -21.7 | 0.97 | -24.6 | 3.0 | Farming & Fishing |
| OLAM INTERNATIONAL | O32 | 6.2 | 35.0 | 0.97 | 28.8 | 6.2 | Food Products |
| ASCENDAS REAL ESTATE INV TRT | A17U | 5.5 | 8.0 | 0.95 | -2.6 | 10.6 | Industrial & Office REITs |
| COMFORTDELGRO CORP | C52 | 5.4 | 59.5 | 0.92 | 49.1 | 10.4 | Travel & Tourism |
| SIA ENGINEERING CO | S59 | 5.1 | 20.7 | 0.53 | 9.6 | 11.0 | Transportation Services |
Source: Bloomberg (Data as of 17 September 2014)
Thai Beverage
Thai Beverage has businesses in spirits, beer, non-alcohol beverages and food. The company owns and operates 18 distilleries and three breweries in Thailand. Thai Beverage’s leading products include well-established spirits brands, its Chang Beer, drinking water, tonic soda and ready-to-drink green tea. Thai Beverage has a market capitalisation of S$18.2 billion and generated total return for this period of 125.0%, the highest amongst the 30 constituent stocks of STI. On 14 August 2014, Thai Beverage reported profit for the period of THB5.5 billion for the three-month period ended 30 June 2014, an increase from THB4.9 billion for the previous corresponding period (click here to view). The stock went ex-dividend on 25 August 2014, distributing THB0.15 per share in dividends.
ComfortDelGro Corporation
ComfortDelGro Corporation is a land transport company with a total fleet size of more than 46,300 buses, taxis and rental vehicles. The company has operations in seven countries: Singapore, China, the United Kingdom, Ireland, Australia, Vietnam and Malaysia. ComfortDelGro Corporation has a market capitalisation of S$5.4 billion and maintained total return for this period of 59.5%. On 13 August 2014, ComfortDelGro Corporation reported net profit of S$75.7 million for the second quarter ended 30 June 2014, an increase from S$68.9 million for the previous second quarter (click here to view). The stock went ex-dividend on 19 August 2014, distributing S$0.0375 per share in dividends.
Olam International
Olam International is an agri-business company, with operations in 65 countries and supplies food and industrial raw materials across 16 platforms to over 13,800 customers worldwide. Such products include cocoa, coffee, cashew, rice and cotton. Olam International has a market capitalisation of S$6.2 billion and its total return for this period stood at 35.0%. On 29 August 2014, Olam International reported sales revenue of S$5.8 billion and profit after taxes and minority interests of S$31.8 million for the fourth quarter ended 30 June 2014 (click here to view). The stock will go ex-dividend on 4 November 2014, distributing S$0.075 per share in dividends.
DBS Group Holdings
DBS Group Holdings is a financial service group, with 250 branches across 17 markets. The group provides services for consumer, small-medium enterprises and corporate banking activities. DBS Group Holdings has a market capitalisation of S$44.6 billion and generated 33.3% in total return during this period. On 1 August 2014, DBS Group Holdings reported net profit of S$2.0 billion for the six months ended 30 June 2014, an increase from S$1.8 billion for the previous corresponding period (click here to view). The stock went ex-dividend on 13 August 2014, distributing S$0.28 per share in dividends.
Jardine Matheson Holdings
Jardine Matheson Holdings operates from Hong Kong and provides management services to companies under Jardine Matheson Groups that include Jardine Motors, Jardine Lloyd Thompson, Hongkong Land, Dairy Farm and Mandarin Oriental. Jardine Matheson Holdings has a market capitalisation of S$53.5 billion and maintained total return of 25.1% over this period. On 1 August 2014, Jardine Matheson Holdings reported profit attributable to shareholders of US$818 million for the six months ended 30 June 2014, an increase from US$784 million for the previous corresponding period (click here to view). The stock went ex-dividend on 20 August 2014, distributing US$0.38 per share in dividends.
Mechanics of QE3
Quantitative Easing programs have provided the unconventional aspect of US monetary policy in recent years, with the already low short-term interest rates the conventional part. As noted above, the third round of quantitative easing (QE3) was announced in September 2012. To help longer-term yields remain accommodative to borrowers, the Federal Reserve announced an open-ended bond purchasing program of agency mortgage-backed securities to the amount US$40 billion per month. In mid-December 2012 this was increased to US$85 billion a month with long term treasury securities also added into the purchasing program.
A year later in mid-December 2013, the Federal Reserve announced tapering of the purchasing program at a rate of $10 billion at each meeting. The tapering of QE3 has continued to date. Last night the Federal Reserve stated if employment and inflation developments meet their expectations it “will end its current program of asset purchases at its next meeting”. Hence the program is effectively near completion and focus remains on the conventional monetary policy tool of short-term interest rates. Economists at United Overseas Bank Group expect the federal funds rate normalisation to take place in the second quarter of 2015 bringing the federal funds target rate to 1.25% by the end of 2015, and to 3.25% by the end of 2016.
While bond prices declined in the United States, the unemployment rate declined from 7.8% to 6.1%. The US Volatility Index (VIX) declined 10.0% and the Dow Jones Industrial Average gained 28.7%. On a valuation basis, the Dow now trades at a price-to-earnings (P/E) multiple of 15.7 and a price-to-book (P/B) multiple of 2.95. In comparison, the STI trades at a less stretched P/E ratio of 13.8 and a P/B ratio of 1.37.
