Here's how the potential US$200b trade war tariffs put heat on Singapore's banks

Bank stocks could weigh the STI down and rein in business loans.

September and October are crucial months for business as the enactment pace of the proposed 25% tariffs on US$200b China imports and China’s retaliatory move will be closely watched within this period.

In a research note, DBS Equity Research said that if the proposed 25% tariffs on US$200b China imports are fully enforced within the next one to two months and USD/RMB rises beyond 6.94 that weighs down on Asian currencies, the possibility of the Straits Times Index (STI) falling below 3180 to c.3050 that coincides with 11.24x (-1.5SD) 12-month forward PE cannot be overlooked.

Bank stocks will be the main culprits dragging down the benchmark STI should the US rapidly enforce the 25% tariffs on US$200b China imports within the next one to two months, according to DBS Equity Research analyst Kee Yan Yeo.

“Under this backdrop, business sentiment will be negatively affected and the pace of business loans may slow down. The FED could also moderate the pace of interest rate hikes going forward,” he said.

Bank stocks will be vulnerable to profit-taking should macro uncertainties worsen, the analyst added. This is amidst a five-year average P/BV valuation and the expectation that sector earnings growth is set to moderate significantly from a strong 32% this year to 6.4% next year.

Previously, Singapore’s big three banks highlighted the downside risk posed by the uncertain external environment during their respective results announcements in early August, despite posting relatively good results.

They noted that the Singapore economy remains heavily reliant on global trade, and therefore, rising protectionism will not bode well for real GDP growth over the coming quarters.

Singapore’s rigbuilders could also have an interesting remainder of the year as the Brent crude continues to edge up to test or exceed the US$80pbl level. “Singapore rigbuilders have largely ignored the current oil price recovery as the latest Q2 results season disappointed,” Yeo said.

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DBS Equity Research’s O&G analyst thinks the price could rise above US$80pbl in the near term on the back of supply-side constraints. “We think the market may not have fully factored in the impact of the US sanctions on Iran as the rest of the OPEC cartel may not have enough spare capacity to ramp up sufficiently to fully offset the 2.5mmbbls export losses from Iran, as Venezuelan production continues to fall and unplanned outages could be expected from the likes of Libya, Nigeria, and Angola,” Yeo explained.

Sembcorp Marine is the most sensitive to changes in oil prices as it has the highest revenue exposure to the O&G segment, followed by Sembcorp Industries and Keppel Corp. “Sembcorp Marine's strong order pipeline could translate into $3b or more in new orders this year from the current $730m,” the analyst added.

“With the US-China trade tariffs threatening to take a turn for the worse over the next one to two months, we believe that stocks that are currently trading near ‘bombed-out’ valuations should outperform as value investors look for bargain-hunt opportunities,” Yeo concluded.