Morning Market Commentary

- STI: -0.95% to 3369.9                                  - SET: -0.64% to 1578.95
- JCI: -1.37% to 4925.5                                   - KLCI: -1.09% to 1694.77
- HSCEI: +0.19% to 10846                             - Hang Seng: +0.10% to 22690
- Nikkei 225: -0.76% to 13694                        - ASX200: +0.96% to 3435.66
- India NIFTY: -0.92% to 5944                       - S&P500: +1.05% to 1614.42
 
MARKET OUTLOOK:
By Ng Weiwen, Macro Analyst
 
The S&P 500 as well as the DJIA heaved a huge sigh of relief, charging to record highs on the back of better-than-expected non-farm payrolls (i.e. NFP) (details under macro data). Looking ahead, the question is whether this NFP-driven rally is sustainable or will it fizzle out?
 
While we are cognisant that the global economy is in a soft patch, we are still OW equities as (i) economic activity has not really fallen over the cliff (ii) tail risks have actually receded and (iii) G4 central banks are undertaking synchronised monetary easing. Thus, equities should still command a decent risk premium over fixed income (specifically Treasuries and investment grade issues).
 
All signs of weakness in the global economy can be surmised by the 0.6pt m-m decline in the J.P. Morgan April global manufacturing PMI to a reading of 50.5. What that means is that global factory output is still expanding, albeit at a slower pace, in part due to weaker new orders and export orders.
 
But don’t fight the central banks.
 
ECB- In addition to reducing main refinancing rate by 25bp (consistent with our expectations, first rate cut since July 2012) and marginal lending rate by 50bps, ECB (or rather Draghi) was willing to do more and even kept an "open mind on negative deposit rates." Deposit rate was  maintained at 0%. Though, we caution that a further rate cut –even if materialise- may not actually boost the real economy especially when banks are still wary of lending to firms (particularly SMEs) based on the recent quarterly ECB bank survey.
 
The key question to ponder is whether will the ECB cut rates again? Reckon the bar remains high. Inflation risks are balanced and ECB is still of the view that recovery will come later this year (even with resilient Germany recently succumbing to weakness!). But if the euro strengthens significantly against the dollar, then all bets are off.
 
Fed - The key takeaway is that the FOMC statement stated that the pace of asset purchases could be -either increased or decreased- depending on macro conditions (i.e. labour market as well as inflation expectations). Odds of an early Fed LSAP withdrawal have reduced on the back of the softer economic and inflationary conditions as well as a still-sluggish labour market.
 
BoJ - No new major policy announcements on  monetary policy meeting (late Apr).  Still intend to double the  monetary base in 2yrs (from �138tn at end-CY12 to �270tn at end-CY14). Have the  BoJ run out of ammunition after its shock and awe campaign earlier in April? More likely keeping its gun powder dry.
 
We are reviewing our rating on Malaysia. BN won a simple majority (consistent with our expectations) but it is not clear whether they had garnered a strong mandate (at the time of this writing). Beware of possible knee-jerk reaction and jitteriness when markets reopen on 6th May as markets digest the implications of the 13th GE results.
 
The STI (one of our Over-weights) has remained resilient and even trudged higher while other markets have pulled back. This has been consistent with our guidance reiterated on this page. Expect some struggle along the 3400 psychological hurdle. If the 3400 level is decisively cleared, STI is on track to challenge the 3485 peak as long as it remains above 3250 key support.
 
 (All equity indices mentioned in this note are tradeable with Phillip CFDs or ETFs)

Macro Data:

In the US, the labour market is healing (albeit slowly). Non-farm payrolls registered a better-than-expected increase of 165k in April, following a revised 138k in the preceding month. Consequently, unemployment rate inched down from 7.6% in March to 7.5% in Apr. Though S&P 500 as well as the DJIA responded emphatically to the jobs data, we reckon that the labour market is still sluggish and will not warrant the Fed to change (increase/decrease) its pace of LSAPs anytime soon. A still-sluggish labour market is uninspiring for consumer and business expenditure in 2q13.  (by Ng Weiwen)

In Euro Zone, PPI fell by 0.2% m-m in Apr, reversing the 0.2% m-m gain in Mar. Over the year, PPI rose by 0.7% y-y, compared to the 1.3% y-y gain in Mar. The PPI reading reflects weak manufacturing business in the region.(by Roy Chen)
In China, official non-manufacturing PMI reported 54.5 in Apr, a drop of prior 55.6 reading in Mar, indicating a slower expansion in the nation's service sector. This, together with the previously reported lower manufacturing PMI, points to a weaker than expected economic recovery. PBoC' would tilt toward relative loose and we expect more measures by authority to bolster growth.  (by Roy Chen)

Regional Market Focus

Singapore

• The benchmark STI closed down to 3,369.90 (-0.95%). The 1.9bn shares traded were worth S$1.6bn in value.
• Genting Singapore (-7.8%) was the worst performing counter on the STI due to a poor set of results that disappointed market expectations.
• Top picks for the year are Pan United (Buy, TP: S$1.21), SIAEC (Buy, TP: S$6.10) & Boustead Singapore (Buy, TP: S$1.80). Pan United is a dominant supplier to the construction industry in Singapore and we expect the company to perform well given the strong pipeline of infrastructure work over the next few years. SIAEC is a key beneficiary of the aviation growth story in the region and offers excellent dividend yields. There are hidden gems within Boustead Singapore and we believe that the stock would continue to re-rate as the market appreciates the economic moat in its businesses.

• The Thai stock market is closed for a public holiday.

• The Jakarta Composite Index (JCI) plunged on Friday (03/05), after S&P cut Indonesia’s credit outlook to “stable”, on concerns about stalling fiscal reforms. The JCI lost 83.138 points, or 1.66%, to close at 4,910.908. For the week, the benchmark for Indonesian stocks shed 1.36%. Miscellaneous Industry sector led declines that included all major industry groups on Friday, followed by Basic Industry sector and Construction, Property and Real Estate sector. The LQ45 index trimmed 17.074 points or 2.02%, at 830.219, with only 9 of the 45 blue-chip components ended in green. Standard & Poor's Ratings Services on Thursday (03/05) downgraded Indonesia’s sovereign credit rating outlook to “stable” from “positive”, citing concerns over stalling reforms related to the government’s reluctance to deal with fuel subsidy problem. For every stock advancing, more than 2 declined Friday on the Indonesia Stock Exchange, where 4.22 billion shares worth IDR 5.7 trillion changed hands on the regular market. Foreign investors posted net sale of IDR 821.34 billion.
• The Jakarta Composite Index (JCI) will likely trade higher today, after record high closes on US markets on Friday that may provide positive leads to stock markets in Asia today. We expect the JCI to trade higher, with support and resistance at 4,848 and 5,045 respectively.

• The Colombo Bourse crossed the 6,000 mark for the 1st time in 16 months. The Colombo bourse ended the day on an enthusiastic sentiment resulting in both indices closing positive for the second successive trading day. Early hours of trading showed positive movement, however the market further accelerated during mid-day’s trading; where most counters witnessed price appreciations hence resulting in the gainer to loser ratio being a smashing 145:66. Further, the active investor participation and the buying pressure which prevailed assisted both indices to accumulate significant gains and close within the green terrain. Crossing the 6,000 mark for the first time in 16 Months the benchmark ASPI Index closed at 6,013.18 gaining 40.81 points or 0.68%. Moreover, having passed the 3,400 level for the first time, whilst reaching an all-time high the S&P SL20 concluded day’s trading at 3,405 having gained 24.61 points or 0.73%; the index has closed positive for the past 8 trading days accumulating 69.87 points or 2.08%.The daily turnover amounted to record LKR 881.50Mn, a rise of 38.20% in comparison to the previous trading day. Under the sectorial round-up, Diversified Holdings Sector(DIV) accounting for 35.17% of the daily aggregate turnover topping the list providing LKR 310Mn. However investor attractions were vastly on Bank Finance & Insurance (BFI) sector with 2,548 trades out of the total 9,319 trades been noted. BFI provided LKR 273.94Mn to the total turnover. The two sectors DIV & BFI collectively made a 66.25% subscription to the total turnover. During the day, a total of 31.27Mn Shares changed hands resulting in a drop of 29.34% against the prior trading day. Foreign participants appeared to be bullish during the day for the 5th successive trading day resulting in a net foreign inflow of LKR 48.39Mn.
• The Week at a Glance. The market gained positive momentum during the week surpassing the 6,000 points on ASPI; both indices recorded considerably impressive appreciation throughout the shorter first week of May. It was a remarkable week for both indices as price levels of a large number of equities considerably moved higher providing clear capital gains. The ASPI index gained 51.01 points or 0.86% and the S&P SL20 index gained 46.63 points or 1.39%.The turnover for the week was LKR 3.24Bn supported by 10 crossings totaling up to LKR 431.24Mn accounting a 13% contribution to the weekly turnover while recording a 17.17% decrease compared to the previous week’s turnover. 173.1Mn shares changed hands during the week, this was a 44.33% reduction compared to the previous week. Foreign purchases amounting to LKR 709.7Mn outpaced the foreign sales of LKR 361.6Mn during the week, resulting a net foreign inflow of LKR 348.1Mn while extending the year to date net foreign inflow to LKR 8.93Bn. As at the week’s closure, the total market capitalization stood at LKR 2.30Tn, recording a year to date gain of 6.33% and the market PER(X) and PBV(X) stood at 16.25 and 2.22 respectively. In regard to the local FOREX market the USD closed at LKR 127.78/- selling and LKR 124.73/- buying.

• The Australian share market on Friday closed flat as investors reap profits from booming bank stocks and some worries about global growth. The benchmark S&P/ASX200 index was up half a point to 5,129.5 points.
• Today (06/05/13), the Australian market looks set to open higher following strong gains on Wall Street after better-than-expected US jobs figures. The SFE Futures 200 is pointing upwards 6 points or 0.11 per cent to 5,127.
• In economic news on Monday, the Australian Bureau of Statistics releases the retail trade figures for March, while the TD Securities inflation gauge, the Dun and Bradstreet business expectations survey, and the ANZ jobs figures are also due to be released.
• No major equities news is expected.

Morning Note

Company Highlights

Singapore Technologies Engineering Ltd announced that ST Aerospace San Antonio, L.P. has acquired substantially all of the assets of Turbo Mach, LLC, for a purchase consideration of US$250,000 (approximately S$308,500). This purchase, which was signed and completed today, will transfer Turbo Mach’s existing contracts, equipment, inventories, key employees, as well as its trade names ‘Turbo Mach’, ‘Turbo Mach R&D’, ‘Turbo Liner’ and ‘NAAS Composite Technologies’ to STA San Antonio. To be marketed as part of the aerospace sector’s global MRO network, this new division will work closely with ST Aerospace’s MRO network to offer one-stop repair & overhaul services and turnkey cabin retrofit services. (Closing price: S$4.40, 0%)

AusGroup Limited announced that Karara Mining Limited has withheld progress payments amounting in aggregate to approximately AU$21.7 million for structural, mechanical and piping installation works carried out by the Company’s wholly-owned subsidiary, AGC Industries Pty Ltd at Karara Mining Limited’s Karara Iron Ore Project in Western Australia pursuant to a 2012 contract entered into between AGC and Karara Mining Limited. Based on legal advice of AGC’s lawyers, it is AGC’s firm view that the Progress Payments are validly due under the Contract and that Karara Mining Limited has not provided a substantiated basis for refusing payment and its intended call on the Security. (Closing price: S$0.46, -14.0%)

Intraco Limited intends to make a mandatory conditional cash offer to acquire all the issued ordinary shares of Dynamic Colours Limited, other than the DCL Shares already owned, controlled or agreed to be acquired by Intraco Limited. The Offer, when made, will be on the following basis: For each Offer Share: S$0.185 in cash. Save in relation to the final tax exempt (one-tier) dividend of 1.50 Singapore cents per DCL Share approved by the shareholders of DCL on 23 April 2013, if any dividend, other distribution or return of capital is declared, made or paid on or after the date of this Announcement by DCL, Intraco Limited reserves the right to reduce the Offer Price by the amount of such dividend, distribution or return of capital. (Closing price: S$0.180, 16.9%)

Bharti Airtel, an associate of SingTel, announced that it has entered into a binding agreement with Qatar Foundation Endowment, under which Bharti will issue 199,870,006 of its new shares to QFE representing a shareholding of 5% in the Company, post issuance of the new shares. As per the agreement, QFE will subscribe to 199,870,006 new shares of Bharti at a price of INR 340 per share amounting to a total consideration of USD 1.26 billion. The investment will further strengthen the capital structure and provide further flexibility for the Company to deliver on its growth strategy. (Closing price: S$3.81, -3.1%)

Vard Holdings Limited announced that it has entered into a new contract with Island Offshore for the construction of one advanced offshore support vessel of Rolls-Royce design. The value of the contract amounts to approximately NOK 400 million. Delivery is scheduled from Vard Brevik in Norway in Q3-2014. The hull of the vessel will be delivered from Vard Braila in Romania. (Closing price: S$1.055, -2.3%)

Leader Environmental Technologies Limited issued a profit warning regarding the financial results of the Group for the first quarter ended 31 March 2013. The harsh winter conditions in the Northern part of China prevented them from completing the remaining work-in-progress relating to desulphurization and industrial wastewater contracts. In addition, as part of its credit control and risks management, the Group has been selective and only undertakes those projects which offered better payment terms and/or gross profit margin. These accounted mainly the reasons for the decline in revenue and bottom line. In the light of the above-mentioned reasons, the Group is expected to report a small loss for the first quarter ended 31 March 2013 as compared with the corresponding period in 2012. (Closing price: -, -%)

CEFC International Limited announced that it is expected to record approximately US$370,000.00 net loss for 1Q13. The Board believes that the expected loss was mainly attributable to the seasonal effects of the Lunar New Year holidays resulting in fewer transactions in the first quarter. As announced on 3 May 2013, the Company’s wholly owned subsidiary, Singapore CEFC Petrochemical & Energy Pte Ltd has been awarded an upstream proposal by Mercuria Energy Trading Pte Ltd, pursuant to which Mercuria intends to supply 65,000 MTS to 100,000 MTS of fuel oil to Singapore CEFC Petrochemical at one cargo per month from May 2013 to May 2014, and a downstream proposal by SinoPec Hongkong Fuel Oil Co., Ltd for Singapore CEFC Petrochemical to supply SinoPec with 65,000 MTS to 100,000 MTS of fuel oil each month. With such positive developments and baring any unforeseen events or developments, the Directors are cautiously optimistic that the Group will be profitable for FY2013. (Closing price: S$0.054, -3.6%)

PSL Holdings Limited issued a profit guidance regarding the financial results of the Company and its subsidiaries for the first quarter period ended 31 March 2013. Based on the preliminary financial figures, the Group is expected to report a loss for the 1Q 2013 as the first quarter results of the Group are traditionally weaker and coupled with stiffer competition. (Closing price: S$0.210, 0%)

Food Junction Holdings Limited issued a results warning. The Group is expected to report a loss for the first quarter ending 31 March 2013 as some new restaurants require further fine tuning and marketing initiatives to roll out. (Closing price: S$0.188, -1.1%)

Source: PhillipCapital Research - 6 May 2013