Singapore Market Focus - Strike One And Out
- US missile attack on Syria a profit-taking excuse for recent ‘risk-on’ rally
- Base case – knee-jerk reaction won’t last as the attack is a one-off response
- What if Syria situation deteriorates – consumer staples, S-REITs, ST Engineering and CNMC Goldmine to outperform. Banks UOB, OCBC to underperform.
Geopolitical risks take centre stage as US responds to Syria with missile attack
- Geopolitical risks took centre stage last Friday after the US launched a cruise missile attack against Syria two days after Bashar al-Assad’s regime used poison gas to kill scores of civilians, which drew international condemnation. According to Bloomberg citing US officials, the limited strike that occurred early Friday morning in Syria took aim at hangars, planes and fuel tanks at the Shayrat Airfield. The US struck the airfield with about 60 Raytheon Co. Tomahawk cruise missiles fired from two Navy destroyers in the Mediterranean Sea.
- The decision to strike in Syria marked a stark reversal for Trump, who during his presidential campaign faulted past US leaders for getting embroiled in conflicts in the Middle East. But he said this week that deaths of children among the more than 70 killed in the April 4 attack, images of which were broadcast worldwide, crossed “beyond red lines” and changed his thinking.
- Investors are concerned that the situation could escalate.
- Russia has military forces in Syria to support Assad’s regime in its battle against rebel groups that include the Islamic State and al-Qaeda fighters. Vladimir Safronkov, Russia’s deputy UN ambassador said, before the strikes were made public, that any US military action would have "negative consequences."
Financial markets react
- Risky assets had rallied in recent months on optimism of improving global economic conditions led by the US. But the "Trump trade" is looking increasingly overcrowded and wavered in recent weeks as investors grew doubtful of his ability to push through his tax reforms and infrastructure spending plans through congress.
- The latest spike in geopolitical uncertain gave investors a "good excuse" to go ‘risk-off’ while safe haven assets rebounded.
- Equities reacted down, and oil price rose on this latest Middle East development, while gold and bonds rebounded from the flight to safety.
Keeping our fingers crossed that the situation will not escalate
- History shows that financial markets' reactions to geopolitical events such as wars or military conflicts do not last. The negative reaction ends once investors see developments pointing to an end to the uncertainty. In this case, investors will eye the responses from Russia and Middle East countries. Fortunately, initial reactions from countries do not suggest an escalation of uncertainty.
- In the first official statement from Russia about the air strikes, the head of the upper house of parliament defense committee said that the strikes could undermine efforts to fight against terrorism in Syria, state media in Moscow reported. Iran condemns the attack while Saudi Arabia said it "fully supports" the strikes, saying it was a "courageous decision" by Donald Trump in response to the use of chemical weapons against civilians.
What you should do if the situation in Syria escalates
- Our base-case assumption is that today's US missile attack on Syria is a one-off response to Assad's use of chemical weapons on civilians. We keep our fingers crossed that investors can put aside the US missile strike ‘soon enough’ and focus on the other key events happening the rest of the month:
- MAS policy meeting on 13 April,
- French presidential elections on 23 April, and
- 1Q17 results season.
- In the more unlikely event that the geopolitical uncertainties in the Middle East escalate, the "risk-off" trade will continue. In this case, stocks/sectors that may outperform are:
- Retailer Sheng Siong as well as Thai Beverage that are seen as defensive
- The defence division of ST Engineering may benefit from more contract wins
- Gold mining-related stock CNMC Goldmine from higher gold price
- S-REITs from slower US rate hike expectations (our picks are Ascendas REIT, Mapletree Commercial Trust, Keppel DC REIT, Frasers Logistics & Industrials Trust and Croesus REIT)