Morning Commentary

- STI: +0.79% to 3069.95
- MSCI SE Asia: +0.18% to 842.7
- Hang Seng: +0.49% to 22030.4
- MSCI APxJ: +0.57% to 452.4
- Euro Stoxx 50: -0.25% to 2575.3
- S&P500: +0.02% to 1416.2

MARKET OUTLOOK:

Trading signals for stocks are still generally positive but we’re a little cautious on technical reasons as well as the way fiscal cliff negotiations are going.

Technicals: Although APxJ is trending higher on a rebounding HSI and HSCEI, as evidence of an economic rebound in Asia especially China continues to mount, we note that the S&P500 is at the 50dma and 1417 neckline – a confluence of resistance, while the STI has dojied at the upper downward sloping trendline which has capped a series of lower highs since Oct2010 (please tune in to today’s webinar where we’ll show a chart), again a proven resistance line. At this juncture, the S&P500 we think holds more sway on the STI due to the fiscal cliff.

On fiscal cliff negotiations: currently the President has asked for US$1tr tax increases on the wealthy, plus US$600b more revenues by closing tax loopholes, and a US$50b infrastructure spend, while offering US$400b of entitlement cuts in return. Republicans have balked as the combined US$1.6b over 10yrs proposal which is 33% more than last year’s proposal of US$1.2tr revenues, while the US$400b spending cuts proposal is the same. Recall that Republican’s could not get past this last year (they were willing to give US$800b revenues max) and talks broke down. Thus, the President, leveraging off his election victory which is also widely seen as a decisive repudiation of Republican ideology – is upping the ante by asking for 33% more while giving the same. Uh oh… Positive niceties over, fight begins.

Peering further out into 2013: Assuming we get a deal, we are getting increasingly constructive on the investment climate going into 1H13 - underlying macro conditions see the rate of slowdown in Asia easing and China bottoming. While the US is mixed in our opinion – housing recovery (good), consumption subsidised by savings (mixed), investment sentiment crushed by the fiscal cliff uncertainty (bad) – if a political compromise is reached on the fiscal cliff, a rebound in investment could be catalytic for markets.

SG equity strategist favours Capitaland, SATS and SIAEC.

Macro Data

In US, personal income and spending data remained sluggish in Oct, weighed down by Hurricane Sandy. Specifically, real disposable income declined by 0.1% m-m sa while nominal income as well as disposable income remained unchanged from the earlier month. Real consumption declined by 0.3% m-m sa on account of broad-based weakness in both the goods and services spending. On the inflation front, core PCE price index rose 0.1% m-m sa in Oct, similar to the pace registered in the preceding month.

In the EZ, the anaemic labour market as well as soft inflation underscore the significant headwinds confronting the EZ bloc. Specifically, EZ unemployment rose 0.1%-pt m-m to 11.7% in Oct. CPI decelerated from 2.5% y-y in Sep to 2.2% in Oct - the lowest in two years- owing to lower energy prices as well as weak domestic demand within the bloc.

In Thailand, exports surged 14.4% y-y in Oct (based on BoT data) -reversing from four consecutive months of decline- largely due to a low base effect (from last year’s devastating floods). Domestic demand remained resilient with private consumption and investment registering gains of 0.4% m-m sa and 0.9% m-m sa respectively in Oct. Recall the central bank (BoT) had earlier stood pat in Nov, maintaining the benchmark one-day bond repurchase rate at 2.75% -consistent with our expectations- in view of resilient domestic demand as well as an improving global economy.

In India, GDP grew by 5.3% y-y in 3Q12, slower than the pace of growth (5.5%) registered in the preceding quarter, weighed down by lackluster manufacturing output. We expect the Reserve bank of India (RBI) to continue to stand pat at the next monetary policy review in Dec as price pressures are likely to remain elevated on the back of a hike in the price of subsidized diesel in Sept. However, we opine that if the government succeeds in addressing some of the structural growth constraints and inflationary pressures ease in the coming months, the RBI is likely to review its monetary stance and consider cutting rates (probably in Jan 2013) to stimulate growth.

In China, official manufacturing PMI rose further to 50.6 in Nov, compared to 50.2 in Oct and the market expected 50.8, indicating an expansion in manufacturing business for a second consecutive month. We have said that China’s economy is bottoming out but at the same that we cautioned that the reacceleration would be a mild one as the external environment remains subject to downside pressure from Europe debt crisis.

In Japan, CPI fell by 0.4% y-y in Oct, compared to a 0.3% y-y drop in Sept. Core CPI remained unchanged from a year ago, compared to 0.1% y-y drop in Sept. The deflation will keep pressure on Governor Masaaki Shirakawa to add stimulus at next policy meeting. Abe, head of the Liberal Democratic Party that polls suggest will win the election, called for unlimited easing and an inflation target of 2%. A separate report shows that the nation’s industrial output unexpectedly rose by 1.8% m-m in Oct, while the market was predicting a 2% m-m drop, after it fell by 4.1% in Sept. Japan’s economy is at risk of a recession as a contraction in Europe and a diplomatic dispute with China hurt exports and the expiry of car-purchase subsidies weakens consumer demand at home.

In South Korea, industrial production rose by 0.6% m-m in Oct due to demand for cars and components in semiconductor industry, after it advanced 0.7% m-m in July, marking an expansion for a second consecutive month. On y-y basis, industrial production fell by 0.8% y-y, compared to the 0.7% y-y gain in Sept. The earlier two benchmark interest rate cuts to 2.75% has helped stabilize the nation’s economy.

Company Highlights

CSE Global Limited (“CSE”) announced that Tan Mok Koon (“TMK”) and Vivek M Dixit (“Vivek”), have entered into a sale and purchase agreement with Lim Lin, Lim Tai Nam and Ng Cher Kiat to acquire 100% of the total issued share capital of Power Diesel Engineering Pte. Ltd. (“Power Diesel”) for a cash consideration of up to S$9.5million (the “Proposed Acquisition”). CSE, TMK and Vivek will own 66%, 32% and 2% respectively. Upon completion, Power Diesel will be a 66% owned subsidiary of CSE. (S$0.795, unchanged)

Joyas International Holdings Limited issued a profit warning statement in respect of the financial results of the Group for the financial year ending 31 December 2012 (“FY2012”) as based on preliminary financial figures, the Group’s FY2012 results might be adversely affected by weak sales and margins in its principal markets namely US and Europe, possible restructuring costs and provisions due to downsizing of the metal gifts and jewellery business and additional tax assessment on certain of the Group’s subsidiaries (see separate announcement by the Company dated 30 November 2012). (S$0.018, unchanged)

Olam International Limited (“Olam”) announced that it has acquired 100% equity interest in Dehydro Foods Limited, a leading processor of dehydrated onions and herbs in Egypt, for US$30.8 million including an estimated amount of US$3.5 million for net working capital. The consideration was arrived on a negotiated basis taking into the account the historical performance and the prospects of the business. The consideration shall be discharged on a cash basis from internal accruals and shall be paid at completion. (S$1.575, +0.962%)

Saizen Real Estate Investment Trust (“Saizen”) entered into a sale and purchase agreement for the acquisition of Rise Shinoe (“RSO”) from an independent party (the “Seller”) for a cash consideration of JPY 285,000,000 (S$4.2 million1) (the “Purchase Price”). The acquisition was completed on the same day. RSO is located in the Central Ward of Kumamoto City and is within 10-minutes walk from train and bus networks. RSO was built in June 2003 and comprises 34 residential units and 19 car parking lots. Saizen will have full ownership of the entire building block of RSO and full title of the freehold land. (S$0.173, unchanged)

Koon Holdings Limited announced that its wholly owned subsidiary, Koon Construction & Transport Co. Pte. Ltd. (‘KCTC’) has been awarded a project to construct of roads, drains, sewers and vehicular bridge at Ayer Merbau Road further extension phase 1,Jurong Island. The contract is estimated to be S$24.8mn with a stipulated duration of 15 months. With the inclusion of the new contract, Koons outstanding construction order book (excluding the Precast division) stood at approximately - S$165.0 million as at date of announcement. (S$0.190, unchanged)

Yoma Strategic Holdings Ltd. announced the appointments of the following individuals to the management team: (a) Mr. Jeremy Westmore as group general manager; (b) Mr. David Whitting as project director of SPA Project Management Pte Ltd; and (c) Mr. Peter Francis as general manager of Thanlyin Estate Development Ltd. (S$0.660, +1.538%)

Source: PhillipCapital Research - 03 Dec 2012