North Korea's nuclear test spells trouble for stocks in September

With the Kim Jong Un regime escalating tensions with the United States, nervous investors are apt to sell risky investments and seek safe havens in US Treasuries or the Japanese yen.
With the Kim Jong Un regime escalating tensions with the United States, nervous investors are apt to sell risky investments and seek safe havens in US Treasuries or the Japanese yen. PHOTO: AFP

SINGAPORE - September is a much dreaded month or much maligned, depending on what you believe, for investing in the stock market.

Those who indulge in crystal ball gazing based on historical data will point out that this month is the only one out of the 12 in a year in which the Dow Jones Industrial Average has been lower on average over the past 20, 50, and 100 years.

September has produced an average loss of 1.1 per cent since the Dow was created in the late 1890s.

In contrast, the 11 other months of the calendar have produced an average gain of 0.8 per cent.

Others, however, reject this correlation as whimsical.

Closer to home, there hasn't been much, if any, study done to see if there is a similar correlation in the monthly performance of the Straits Times Index.

What is clear though is that this September has got off to a wobbly start, thanks to the bellicose of North Korea. The country conducted today a sixth nuclear test that generated tremors five to six times as powerful as its previous nuclear test. This came just hours after Pyongyang claimed it had developed a hydrogen bomb that could be loaded into a long-range missile.

With the Kim Jong Un regime escalating tensions with the United States, nervous investors are apt to sell risky investments and seek safe havens in US Treasuries or the Japanese yen.

This is likely to trigger a global selloff in equities and bonds when market resumes tomorrow.

The extent of the selling will depend on how US President Donald Trump reacts.

Last week, US equity markets rebounded fairly quickly after Mr Trump did not pronounce any radical action against North Korea following its launch of a missile that flew over Japan beyond saying that "all options are on the table".

This helped to calm markets, said CMC Markets Singapore analyst Margaret Yang. It remains to be seen if he will react with similar equanimity to the latest provocation from North Korea.

On the economic front, the investment temperature is rather more benign, judging by last Friday's labour and manufacturing data in the US. While US non-farm payrolls have come in well below expectations - with 156,000 jobs added last in August after two straight months of strong gains - the pace of the increase is enough to prod the Federal Reserves to start trimming its bloated balance sheet.

Moreover, the key US manufacturing sector accelerated in August at its fastest pace in six years, driven by gains in output and employment. A rollback of the Fed balance sheet will drain the financial system of excessive liquidity that has kept interest rates artificially low since the 2008 global financial crisis.Higher interest rates are thought to be good for banks.

Although rates have not risen significantly in Singapore, the prospect of improved net interest margin has given a fillip to bank stocks.

While the Straits Times Index has generated a 13.2 per cent price gain so far this year, the four financial stocks on the index have chalked up an average gain of 15 per cent, of which the best performer is OCBC Bank with a gain of 25.2 per cent.

Although rising rate usually spells bad news for property investment as it raises the cost of borrowing, it isn't the case for the Singapore property play. The return of buyer's sentiment for residential properties has more than offset the fear of higher interest rate, particularly as home loan rates remain subdued. The recent spate of collective sales will also give developers a boost as the sellers will need to look for a new home.

"Every household displaced from the enbloc market would be on the lookout for a new property, which effectively front-loads demand and pushes out supply," said Maybank Kim Eng.