IQ Weekly Takeaways for 28 June 2020


1) US Fed announces US Banks’ Stress Test Results, places restrictions on dividend payouts

The InvestQuest’s View: In last week’s IQ Takeaways, we had suggested to avoid US banking stocks till the stress test results were published, as any news of dividend suspensions or forced capital raising would likely shake investor confidence. Since then, the major US Banks (Citigroup, JPM, Goldman, Wells Fargo, Bank of America) have pulled back in the 5%-8% range. The price trend still looks pretty bearish to me, so I would suggest waiting till at least the end of the week to reassess any purchase decisions on the US banks.

2) Major brands boycott Facebook ads in #StopHateforProfit campaign

The InvestQuest’s View: Much of the boycott is focused on Facebook and to smaller extents, Twitter and potentially Google. An extended advertisement boycott on Facebook could favour market share gains by other online competitors such as Amazon, Snapchat and Pinterest.

3) IMF Slashes Global GDP Forecasts, Warning Of An Economic Crisis ‘Like No Other’

The InvestQuest’s View: Year-to-date returns for risk assets are hardly reflecting the pessimistic economic projections. I would err on the side of caution, should a V-shaped economic recovery not materialize. Reducing leverage, stock and high-yield bond exposure in favour of investment-grade bonds and having some portfolio hedges would be appropriate now in my view.

4) Hyflux attracts a new suitor, as Utico’s offer deadline approaches

The InvestQuest’s View: The appearance of a new suitor doesn’t change the narrative much, as the equity injection mentioned is quite similar to what Utico had planned for earlier. Perpetual bond holders are still likely to see recovery values of 10% or less.

5) US restricts visas for Chinese officials over Hong Kong freedoms

The InvestQuest’s View: As this move is largely symbolic, we hope that the retaliatory response from China is measured. The big risk is if this situation escalates and creates uncertainty around the US-China trade deal. Any news of tariff hikes at this time will be disastrous.


1) US Fed announces US Banks’ Stress Test Results, places restrictions on dividend payouts

The Federal Reserve put new restrictions on the U.S. banking industry Thursday after its annual stress test found that several banks could get uncomfortably close to minimum capital levels in scenarios tied to the coronavirus pandemic.

The Fed said in a release that big banks will be required to suspend share buybacks and cap dividend payments at their current level for the third quarter of this year. The regulator also said that it would only allow dividends to be paid based on a formula tied to a bank’s recent earnings.

US banks are expected to disclose their capital plans, and whether they actually maintain their current dividend payouts, on Monday, June 29.

https://www.cnbc.com/2020/06/25/fed-puts-restrictions-on-bank-dividends-after-test-finds-some-banks-could-be-stressed-in-pandemic.html

The InvestQuest’s View: In last week’s IQ Takeaways, we had suggested to avoid US banking stocks till the stress test results were published, as any news of dividend suspensions or forced capital raising would likely shake investor confidence. Since then, the major US Banks (Citigroup, JPM, Goldman, Wells Fargo, Bank of America) have pulled back in the 5%-8% range. The price trend still looks pretty bearish to me, so I would suggest waiting till at least the end of the week to reassess any purchase decisions.


2) Major brands boycott Facebook ads in #StopHateforProfit campaign

The organisers of the #StopHateforProfit campaign accuse Facebook of not doing enough to stop hate speech and disinformation and have called for a boycott of Facebook advertisements. Brands that have joined the boycott include but are not limited to Unilever, Coca-Cola, Verizon, Levi’s, iHerb, Honda, Viber and Ben & Jerry’s.

Facebook shares fell 8.3% on Friday as a result of the news.

https://www.theverge.com/2020/6/26/21305065/coca-cola-pause-ads-facebook-social-platforms-july-boycott

https://www.cnbc.com/2020/06/27/the-facebook-ad-boycotts-have-entered-the-big-leagues-now-what.html

The InvestQuest’s View: Much of the boycott is focused on Facebook and to smaller extents, Twitter and potentially Google. An extended boycott could favour advertisement market share gains by other online competitors such as Amazon, Snapchat and Pinterest.


3) IMF Slashes Global GDP Forecasts, Warning Of An Economic Crisis ‘Like No Other’

The IMF forecasts that global GDP will contract by 4.9% this year, a noticeable downgrade from its previous estimate in April when it projected GDP to shrink by 3%.

That said, the IMF’s economic predictions aren’t quite as gloomy as those recently provided by the World Bank and Organization for Economic Cooperation and Development, which forecast global GDP to contract by 5.2% and 6%, respectively.

https://www.forbes.com/sites/sergeiklebnikov/2020/06/24/imf-slashes-global-gdp-forecasts-warning-of-an-economic-crisis-like-no-other/#5c86032e2a72

The InvestQuest’s View: Year-to-date returns for global stocks are hardly reflecting the pessimistic economic projections. I would err on the side of caution, should a V-shaped economic recovery not materialize. Reducing leverage, rotating stock and High Yield bond exposure in favour of Investment Grade bonds would be appropriate now in my view.


4) Hyflux attracts a new suitor, as Utico’s offer deadline approaches

Hyflux announced in a regulatory filing on Friday that it has received a letter from Johnny Widjaja, who expressed interest in investing up to S$300 million in the group. According to the filing, the letter stated that once Mr Widjaja becomes the substantial shareholder of the company or the owner of the said debt, he is prepared to provide S$100 million of working capital to the group. 

This news comes two weeks after Utico (a Middle Eastern utility company) extended its deadline on a revised offer — paying all Hyflux investors in stock now instead of cash — to June 30 from the initial June 4 deadline.

https://www.businesstimes.com.sg/companies-markets/hyflux-receives-letter-from-potential-investor

https://www.channelnewsasia.com/news/business/utico-extends-deadline-hyflux-restructuring-deal-to-jun-30-12829600

The InvestQuest’s View: The appearance of a new suitor doesn’t change the narrative much, as the equity injection mentioned is quite similar to what Utico had planned for earlier. Perpetual bond holders are still likely to see recovery values of 10% or less.


5) US restricts visas for Chinese officials over Hong Kong freedoms

The US secretary of state Mike Pompeo has said Washington will impose visa restrictions on Chinese officials responsible for restricting freedoms in Hong Kong, but he did not name any of those targeted.

The move on Friday comes ahead of a three-day meeting of China’s parliament from Sunday, which is expected to enact new national security legislation for Hong Kong that has alarmed foreign governments and democracy activists.

https://www.theguardian.com/world/2020/jun/27/us-restricts-visas-for-chinese-officials-over-hong-kong-freedoms

The InvestQuest’s View: As this move is largely symbolic, we hope that the retaliatory response from China is measured. The big risk is if this situation escalates and creates uncertainty around the US-China trade deal. Any news of tariff hikes at this time will be disastrous.

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