Wealth Management Monthly Synopsis – August 2019
In a reshuffle of Cabinet appointments, Hon. Ian Ling-Stuckey was made the Minister for Treasury this month. Hon. Sam Basil, the former Treasurer, was given the National Planning & Monitoring portfolio previously held by Hon. Richard Maru. Mr Ling-Stuckey was a vocal member of the opposition and an outspoken critic of the fiscal practices of Government before his appointment. The new Treasurer announced that his most immediate priority is putting together a Supplementary Budget in light of the widening gap between spending overruns and decreased government revenue.
Prime Minister Marape’s reshuffling of his cabinet appears to have signalled a major reorganisation of the legislature with political parties shifting between the two sides of the house. There may yet be further changes as the Prime Minister seeks to consolidate his position amidst an increasingly volatile political environment. PNG has enjoyed a relatively stable domestic environment for a while until the change of Government in May which signalled a shift in some of those policies, particularly in the resources sector. This has resulted in uncertainty in the market, however these uncertainties are gradually being put to rest as new announcements being made by government regarding contested development projects.
August was another strong month for the Kina Securities Home Index (KSHi) with steady gains leading to 11.6% year-to-date (YTD) growth. Bank South Pacific Limited (BSP), Credit Corporation Limited (CCP), CPL Group, and Kina Asset Management Limited (KAM) are all on 52-week high prices. Of those mentioned, only BSP has had trades in August which saw some share price growth. Demand for BSP shares were driven by the PGK0.38/share interim dividend announcement this month, as well as a reported PGK434.9 million half-year profit. This had led to a 1.4% increase month-to-date (MTD), with shares at PGK11.43/share to close the month.
Dual listed stocks on the PNG Stock Exchange (PNGX) had mixed performances over the month of August. Kina Securities Limited (KSL) continues its strong performance with YTD movements of 26.8% and 43.7% on PNGX and ASX respectively. KSL’s Net Profit After Tax (NPAT) increased by PGK23.6 million—a 14% increase from the previous corresponding period. KSL announced an interim dividend of AU$0.04/PGK0.10 with shares currently trading at PGK3.36/share on PNGX and AU$1.37/share on ASX. Oil Search Limited (OSH) reached a 52-week low in the last week of August that saw the share price drop 8.9%. YTD price movement for OSH shares was -15.1% trading at PGK15.50/share on PNGX and AU$6.64/share on the ASX. After the August reporting period, following the announcement by government for Papua LNG to continue “full steam ahead”, OSH share rebounded and gained rapidly in the early days of September.
Leading market indicators for PNG stocks have performed well over the year, and the trend continued through August. The KSHi (for PNGX-only listed shares) gained 1.3% MTD, backed by strong performances in the financial sector. The KSi improved due to strong performances in KSL and Newcrest Mining Limited’s shares. Supported by consistent domestic share prices, the KSi has increased by 27.7% MTD, and 26.2% YTD.
PNG Cash & Fixed Income
The Government, through the Central Bank, conducted its planned PGK110 million auction for Government inscribed stock (GIS) this past month. The August GIS auction was the second of three auctions announced by the Department of Treasury in June. The overall auctions were oversubscribed by PGK75 million with total successful bids of K137 million, well above the volume auctioned. Bidding trends appear to indicate a significant demand for long-term Government bonds with term-to-maturity above five years. The series with maturities of two-years and three-years were under-subscribed by PGK9 million. This is in stark contrast to series with term-to-maturities of six and nine years, which were over-subscribed by PGK84 million. There is a GIS auction planned for September for the amount of PGK70 million where we expect to see a similar skew in bidding trends.
Weekly auctions for Treasury Bills (T-Bills) were met with lethargic demand in August where all five auctions during the month were under-subscribed. A total of PGK482.37 million in T-Bills was auctioned this past month, with only PGK371.48 million in bids received. The cumulative under-subscription in T-Bill auctions of PGK110.89 million in August supports the view that investors prefer longer-term Government bonds.
Kina Bank notes that the auction trends for both GIS and T-Bills indicate a tightening of liquidity in certain sections of the financial market as well as investors chasing higher yields. Investors chasing higher yields in the bond market may be due to the drop in alternative investment yields as a result of a weakening domestic market. We also note that the Central Bank has reimposed restrictions on offshore capital payments which may result in a build-up of liquidity and influence bidding trends into September and beyond.
There have been significant investments into construction in Port Moresby over the last 5 year with key large-scale projects such as Hilton Hotel, Ela Matana Apartments, APEC Haus, Nambawan Plaza and Touaguba Hill Paradise Apartments. New developments like Rangeview Heights Limited and Nobel Centre are both currently under construction and are expected to be completed in the medium-term. These investment decisions were based heavily on the estimated shortage of real estate, due in part to expectations brought about from the resources boom in PNG. In addition, increased liquidity, especially from local superannuation funds, freed up capital for real estate development.
Economic conditions and over-supply is currently having a negative impact on the outlook for commercial, residential and industrial developments in Port Moresby. Kina Bank notes that the development market is volatile and it seems likely that the historically high rates of capital appreciation have moderated over the last few years as demand and supply conditions emerge. Kina Bank maintains its view that both the residential and commercial market in Port Moresby will remain under pressure in the medium term due to increasing supply and low economic growth.
In Lae, real estate professionals are looking to capitalise on the high-end retail market for residential property as Wafi-Golpu and Kainantu mine are expected to drive up demand. The predominantly industrial city has seen a recent surge in “white collar” service activity, and the demand for associated real estate, both commercial and residential. The demand for quality industrial and warehousing property is still consistent in the city.
Major Government investments in infrastructure in Mt Hagen have been the catalyst for business development in the provincial capital of the Western Highlands Province. Investments in the upgrading of Kagamuga airport and the new four-lane highway have boosted investor confidence, with many new commercial investments in the city. There is great potential for investment in commercial property, with promising indicators for retail and office spaces. There is also undersupply in high-end residential properties and premium hotels with existing investments reportedly being consistently above 90% occupancy all year round. New property investments like Tininga Hagen Central and the Provincial Government Headquarters are being brought onto the market, however demand is expected to persist in excess over supply as business activity is expected to grow.
The price of coffee continued its descent into the second consecutive month after promising signs of recovery in June. The International Coffee Organization reports that the cumulative surpluses from the last two seasons are negating demand and ensuring price remains under pressure. Coffee prices slipped down to US$92/lb after a movement of -6.4% MTD and -9.8% YTD. Cocoa has shrunk by 8.4% in August closing at a price of US$2,124/mt
Gold and silver continue their rise amid uncertain investment conditions on the global market. Investors have been buying heavily into gold since June during the height of Middle Eastern tensions with Iran, and as the US-China trade war escalates and is prolonged. Demand for silver also increased soon after with prices appreciating 13.4% in August alone for a price movement of 18.8% YTD. At the close of the month, gold was priced at US$1,538.7/oz and silver closed at a 52-week high price of US$18.46/oz.
Energy prices have been hampered all year by falling demand and US-China tensions. The effect of the slow-down on LNG prices in particular has been exasperated by oversupply from cheap shale-produced LNG from the US, and Russia stepping up production to maintain dominance in the European market. The overwhelming downward pressure placed on LNG prices has led to a 48.3% fall this year. At the close of August, the Japan/Korea price marker for LNG was US$4.65/MMBtu. Crude oil has remained relatively steady over the last two months as prices stabilised around the US$60/bbl mark after price falls began in the fourth quarter of 2018. Brent crude was at US$60.76/bbl and light crude at US$56.27/bbl at the end of August.
All major stock market indices were weaker at the end of the month except the Shanghai Composite Index and the CAC 40. The FTSE and the Hang Seng showed the biggest losses over the month with -3.0% and -4.8% MTD, respectively. The major factors of concern for the markets were escalating tensions in the trade war, the increasing likelihood of a no-deal Brexit, and fears of a looming recession.