Monday, January 31, 2011

DBSV: Maintain STI near-term view despite uncertainties

The STI rebounded to test the 3230 level last week, the resistance level that we said was crucial to overcome before confidence returns.

This resistance level remains stubborn in the near-term. Expect investors to shy off stocks this week on news of the worsening unrest in Egypt over the weekend, equity markets’ negative reaction to that unrest and this being a holiday-shortened week. The price of oil has rebounded to USD90.87pbl from USD85.6pbl as traders play the possibility of supply constraint given Egypt’s proximity to the Suez Canal. Despite near-term uncertainties, we maintain our view that the current market consolidation should end at 3165, worst case at 3090. Equities remain one of the more attractive investment asset classes compared to the rest (e.g. bonds, currencies, physical properties, even commodities - refer to the next section). In addition, the STI is not that far away from levels seen as attractive and where firm support lies: -0.5SD FY11F is at 3000 and the 200-day EMA for the STI is currently @ 3055.

Equities still the preferred investment choice despite inflation
Singapore’s December CPI hit a 2-year high of 4.6% driven by higher food, fuel and COE prices. Our economist expects the inflation to stay above 4% in the next few months (may even touch 5%) due to rising food and oil prices as well as demand pressure from India and China, especially during the current Lunar New Year period. Going forward, oil prices and wage inflation will start to feature more prominently in the CPI index. Our forecast for full year inflation remains at 3.2% (higher than the official forecast range of 2-3%) with room for upside adjustment. The latest December CPI figure has fanned expectations of further monetary tightening ahead by the MAS. The USD weakened to as low as $1.2787 against the SGD last week on speculation that MAS will let the SGD appreciate further to curb inflation. We foresee the SGD to strengthen further to 1.22 against the USD by 4Q11. The presence of inflation and growth (DBS Research: Singapore 2011 GDP growth forecast 7% y-o-y) supports our view that the economy is currently in an inflationary boom phase.

In India, Reserve Bank of India (RBI) lifted the WPI inflation forecast for Mar 2011 sharply from 5.5% to 7%, which is higher than DBS forecast for inflation of 6.5% (YoY). The RBI noted several upside risks to inflation with rising demand side pressures. RBI also expressed serious concerns about risks to stability ahead if commodity prices continue to rise fast. As a result, the RBI raised the overnight repo and reverse repo rates by 25bps each to 6.50% and 5.50% respectively, in line with our economist’s expectations.

Meanwhile, our HK/China economist believes that the days of 2% inflation in China is likely gone for good even if headline inflation subsequently starts to ease in 2H11. This in turn calls for higher interest rates and a stronger exchange rate ahead. We expect the Chinese central bank to hike the 1-year deposit and lending rates by 100bps by end 2011.

So much focus on inflation lately but the question we ask is – What is the impact on equities? We see more inflows into equities as a result.

Picture the person who has money sitting in the bank. The real interest rate is negative and becomes more so going forward due to inflation. He/she needs to do something about it. There are various asset classes to consider investing in – Bonds, stocks, currencies, commodities and physical properties. Bonds do not fare well in a rising interest rate environment. Traditionally, physical properties are a good avenue but the investment environment is unfriendly for residential properties this time round - the latest government tough measures on residential properties are expected to snuff out speculative activities and if these are still ineffective, more measures are expected. For currencies, MAS is expected to let the SGD strengthen further this year to combat inflation. Thus, the investor would be ‘doing the right thing’ by simply holding SGD currency or in the case of investors in Singapore, by ‘doing nothing’.

This leaves the remaining 2 asset classes – commodities or equities.

The rise in the CRB Index in recent months is substantial – about 27% higher since 2H10 driven by food prices and gold. The Rogers Agriculture Index has surged some 64% from 2H10. The price of gold continues to trade near multi-decade high at USD1312 an ounce, which is some 14% higher compared to July last year and 56% higher compared to the previous bull markets peak in 1980. Can high get higher or do heights make you dizzy?

No doubt the rise in oil price since the 2009 global recovery has been tamer in comparison and some investors may end up buying the ‘black gold’ instrument as a hedge against higher oil price. But this leaves investors who wish to get into commodities with a ‘limited choice’ if they wish to avoid getting into the game at multi-year or worse, multi-decade high levels.

On the other hand, the STI currently trades at slightly below the 10-year average valuation of 14.6x FY11 earnings. Thus, valuation is not stretched and the index remains at some 17% below the 2007’s peak of 3875. There is no ‘policy risk’ for equities. In fact, the implementation of all-day trading from March will enable the Singapore stock exchange to keep pace with competition from other Asian stock exchanges over the increase in trading volumes in the region.

So there you have it – bonds are not in favour, there are policy risks in residential properties, staying with SGD is fine and most commodity prices have already risen, which leaves equities still as an attractive choice for investors given the market’s average valuation and ‘pro-equity investment’ policies.

Our preferred themes are Singapore banks, O&G (yards) and laggards with potential catalysts this year (refer to our previous Weekly Comments and Market Focus reports). Avoid, in general, downstream food suppliers because their profit margins will be vulnerable to rising food prices going forward.

Current correction – What’s resilient, what’s not
STI’s YTD high occurred on January 6 at 3280. The index is lower by 1.8% since. Our thematic picks are doing well amid the current market consolidation with bank stocks and rig builders among the recent outperformers.

The following is observed from Table1 that shows the performance of STI component stocks since that date: 1. Bank stocks UOB and DBS have outperformed while OCBC underperformed. In addition to UOB and DBS being price laggards compared to OCBC, both stocks also have lower P/B compared to the latter. DBS’s P/B is the lowest at 1.32x (source: Bloomberg), UOB at 1.46x while OCBC is the highest at 1.63x. Bank stocks’ recent behaviour supports our view that Singapore banks are worth a look because they are undervalued on a P/B basis compared to ASEAN peers. We forecast earnings growth of 10% in 2011. Upside catalysts could come from positive surprises in loan growth and an earlier than expected uptick in SIBOR.

2. Rig builders Keppel Corp and SembCorp Marine also outperformed. Keppel Corp is the top performing index component stock since January 6. Investors cheered Keppel Corp last week after the company reported better-than-expected FY10 earnings, declared a final DPS of 26cts and proposed a 1-for-10 bonus issue. In addition, Keppel Corp had also secured orders for a pair of newbuild jack-ups worth a total of USD416mil; bringing FY11 YTD order wins to about USD1bil with options for another 9 jack-ups worth USD1.7bil. Equally important, should the Petrobras awards not materialize, downside to FY11/12F is limited to 0-2.5%.

3. 5 of the 8 laggard picks that we highlighted in our latest Singapore market strategy report titled “Tortoises today, hares tomorrow” on 5 January are index component stocks: UOB, SIA, Capitaland, NOL and ComfortDelgro. These 5 stocks put up mixed performances. While UOB and ComfortDegro have outperformed, NOL and Capitaland have underperformed and the performance of SIA is quite similar to the STI.

4. Supply chain managers (SCMs) Olam, Noble Group and Wilmar underperformed and so did CPO stock Golden Agri. A low interest rate environment over the past year has helped SCMs increase their volumes handled through additional working capital as well as securing long-term funding for expansion. However, a rising interest rate
environment going forward is seen to have a negative impact on SCMs intended investments’ viability.

Source/转贴/Extract/: DBS Vickers Research
Publish date:31/01/11

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Warren E. Buffett(沃伦•巴菲特)
Be fearful when others are greedy, and be greedy when others are fearful
别人贪婪时我恐惧, 别人恐惧时我贪婪
投资只需学好两门课: 一,是如何给企业估值,二,是如何看待股市波动
吉姆·罗杰斯(Jim Rogers)

乔治·索罗斯(George Soros)



高估期间, 卖对, 不卖也对, 买是错的。
低估期间, 买对, 不买也是对, 卖是错的。

Tan Teng Boo

There’s no such thing as defensive stocks.Every stock can be defensive depending on what price you pay for it and what value you get,
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