�� STI - Current rebound can extend to 2825 or even 2860 before the decline to 2540
�� Yield picks - CMT, Cache Log, Mapletree Log, CDL HT, Hutchison Port Trust, SIA Engineering and China Merchant
�� Trading picks to STI 2825 – Keppel Corp, Ezion, ASL Marine, Noble Group
The €100bil Eurozone bailout of Spain’s beleaguered banking sector over the weekend offers short-term respite to the current crisis. STI’s technical rebound that started from 2700 last week has room to extend to 2825 or even 2860 should the upcoming Greece election yields favourable results for the pro-austerity parties.
Beyond this short-term rebound, STI should resume its correction trend. We maintain our view for the index to trend down towards 2540 once the current rebound ends. Only a close above the key resistance level at 2900-2910 invalidates the 2540 view.
Investors who want to ride out the current Eurozone uncertainty and global slowdown should stick to defensive and yield plays. Our yield picks have been CMT, Cache Log, Mapletree Log, CDL HT, Hutchison Port Trust, SIA Engineering and China Merchant. For traders going for the oversold bounce, we prefer stocks with good earnings visibility in the current uncertain environment. These can be found in the O&M sector and our picks are Keppel Corp, Ezion and ASL Marine.
Keppel Corp has secured orders in excess of SGD14bil (including LOI); Ezion has 86% of FY12F and 92% of FY13F earnings backed by secured contracts while ASL Marine has around 90% of FY13F shipbuilding revenue secured by existing orders. Noble Group is another oversold stock to consider, heading towards short-term resistance at $1.22.
Macro uncertainties still weigh on sentiment
One surprise rate cut, speculation of co-ordinated efforts by central bankers, attractive stock market valuation and a technical rebound worth a couple of percentage points later, equity markets remain unable to shake off the shadow of macro uncertainties.
Post sell-down in reaction to the weaker-than-expected US May employment data, the MSCI World Index rebounded as much as 4% last week before ending the week 3% firmer. The short-covering rally was triggered by speculation that global policy makers will act in a concerted effort to revive the slowing economy. ECB President Mario Draghi said officials stand ready to act as the euro region’s growth outlook worsens. There was also the hope that the FED will extend “Operation Twist” and that China may implement stimulus to boost an ailing recovery. Then, came China’s surprise 25bps cut in deposit and lending rates.
Still, with equity indices ending off their intra-week high and stock market activity staying muted, it is clear that the unknown about how the Eurozone crisis will pan out and the danger of a stall in the global economy continue have a stranglehold over investors’ sentiment.
Greece’s June 17 general election will be held within a week. The anti-austerity leftist SYRIZA party is running almost neckand- neck with conservative New Democracy in opinion polls. If no party emerges victorious, another vote may be on the horizon, prolonging the current uncertainty. Even if New Democracy is able to form a government, the party faces a Herculean task ahead.
Over the weekend, Spain became the 4th Eurozone country to seek a bailout after Eurozone finance ministers agreed to lend the country up to €100bil. While a bailout to recapitalize Spanish banks will ease immediate stress, the Eurozone crisis will also be seen as having shifted from affecting just the peripherals to now core Eurozone nations.
The Spanish economy is more than twice the combined size of Greece, Ireland and Portugal.
Credit rating agency Fitch downgraded Spain’s credit rating by 3 notches to BBB last week. Fitch estimated the total fiscal cost to underpin the banks could be as high as €100bil (9% GDP) in a more extreme scenario. Fitch added that Spain’s economy is set to remain in recession through 2013.
The central bankers
Events last week also showed that central bankers are pushing back, shifting the charge of reviving their respective economies to politicians.
ECB President Mario Draghi left the door open to a rate cut and highlighted the limitations of the ECB’s tools in countering the region’s financial turmoil. FED chairman Ben Bernanke also did not hint at further monetary easing but instead urged American politicians to do something about pulling the economy out of its doldrums. He said that while further stimulus by the FED could boost the economy, it is affected by the law of “diminishing returns” because interest rates are already near record lows.
And China’s rate cut
In a signal that Chinese policy makers have become more pro-growth, China surprised with a 25bps cut in deposit & lending rates. However, the rate cut failed to stir excitement.
On the contrary, Asian equity bourses including China and HK markets ended Friday lower.
DBSV Research believes that the unexpected 25bps cut signals that China’s economic slowdown is more severe than expected and reflects policy makers’ concerns about the weakness in loan demand. In addition, so long as there is no plan to launch a big stimulus package, the overall market impact of the latest rate cut is likely to be short-lived. Over the weekend, China’s National Bureau of Statistics reported that May CPI rose 3% y-o-y, lower than consensus expectation for 3.2% increase. At the same time, May industrial output rose 9.6% y-o-y, below the projected 9.8% gain. Meanwhile, May retail sales figure was up 13.8% y-o-y (consensus 14.2%) compared to 14.1% in April.
Current short-term rebound still has legs but eventual downside to 2540 maintained
The hope that central bankers and politicians will once again come to the rescue of the ailing global economy and the banking crisis in Spain triggered an oversold rebound in equity markets last week. For the STI, it started at 2700, some 50pts above where we thought one should begin. Valuation was another reason for the rebound as STI probed the 12.39x FY12F (-1 SD) FY12F earnings at 2706.
While it is possible for the STI to extend last week’s gains towards 2825 (38.2% upward retracement of recent decline) or even 2860 (50% upward retracement of recent decline) if the pro-austerity parties win the upcoming Greece election, we still keep our technical downside objective of 2540. A bailout to recapitalize Spanish banks eases some of the current stress facing the Eurozone but this also signals a dangerous shift from the crisis affecting just the peripherals in the past to now core Eurozone nations.
Then there is also the uncertainty of earnings downgrade going forward. Current earnings forecasts have yet to factor in the decline in manufacturing output numbers across the globe that started from April. This increases the likelihood of earnings forecast downgrades come the 2Q reporting season that starts from a little more than a month’s time.
What is “-1SD” PE level now will no longer be so once earnings get downgraded.
Investors who want to ride out the current Eurozone uncertainty and global slowdown should stick to defensive and yield plays. Our yield picks have been CMT, Cache Log, Mapletree Log, CDL HT, Hutchison Port Trust, SIA Engineering and China Merchant.
For traders going for the oversold bounce, we prefer stocks with good earnings visibility in the current uncertain environment. These can be found in the O&M sector. Our picks are Keppel Corp, Ezion and ASL Marine:
1. Keppel Corp has secured orders worth more than SGD14bil (including LOIs from Petrobras and Floatel) with book to bill ratio of 2.7x.
2. Ezion, which secured an USD86.3mil service rig contact last week, has 86% of FY12F and 92% of FY13F earnings backed by secured contracts. In addition, Ezion has strong FY11-13 earnings CAGR of 53%.
3. ASL Marine enjoys a significantly enhanced order backlog and earnings visibility with around 90% of FY13F shipbuilding revenue secured by existing orders.
Our analyst estimates an earnings rebound of over 40% in FY13 for ASL.
Noble Group is another stock that traders can position for a rebound, highlighted in our Wired Weekly dated 28th May. Fundamentally, our analyst expects better earnings momentum in coming quarters due to a seasonal lift in volumes from soybean and sugar harvests. Fundamentally, we have a $1.40 TP on the stock. Technically, gains should be capped at $1.22 short-term resistance.
Source/Extract/Excerpts/来源/转贴/摘录: DBS Vickers Research
Publish date: 14/06/12