Morning Market Commentary

- STI: +0.56% to 3147.1                    - SET: -0.88% to 1430.9
- JCI: +0.10% to 4581.9                     - KLCI: +0.12% to 1771.3
- HSCEI: +1.39% to 9024.0               - Hang Seng: +1.60% to 20468.7
- Nikkei 225: -0.26% to 14018.9        - ASX200: +2.96% to 3399.6
- India NIFTY: +1.14% to 5836.95     - S&P500: +0.08% to 1615.4


MARKET OUTLOOK:

By Ng Weiwen, Macro Analyst
 
“As long as the music is playing, you've got to get up and dance.” That was the infamous quote by ex-Citigroup CEO Charles Prince. We know what happened when the music ended.
 
There are some parallels with what we are observing today where the extensive search for yield has led investors to take on more risk than they are able to – at their own peril. Subsequently, the Fed’s hints of tapering have resulted in risk re-repricing in  markets, hence the recent volatility in equities and fixed income- which has stabilised somewhat.
 
Now the dust has settled, markets are likely have to navigate and adjust to the new  norm characterised by (i) rise in US Treasury yields (i.e. bear steepening) , (ii) stronger USD, weaker JPY, (iii) slowdown in China amid deleveraging (without a policy cushion).
 
Looking ahead, Japan is likely to join US as the clear outperformers (on the back of pick up in business capex investment particularly in US and Japan), driving the global upswing in 2H13, with China languishing behind in stark contrast (What a twist of fortunes!).
 
Sit tight! Key risk event today: When will Bernanke remove the punch bowl? Ahead of today’s release of non-farm payrolls (which influence the Fed’s tapering decision), Wed’s data provide some clues. ADP and employment component of ISM manufacturing and non-manufacturing indices suggest that unemployment will likely inch down lower from 7.6% in May to 7.5% in June.
 
Recall the Fed has attempted to manage market’s expectations of the tapering by indicating the scaling back of QE asset purchases is hinged on the macro outlook, rather than a calendar date. So fade the odds of an abrupt rate hike. Though Sept seems increasingly likely for tapering to begin, as alluded by Fed's Stein.
 
Consistent with our base case, the ECB stood pat (esp with the pace of contraction in EZ economic activity easing), maintaining the main refinancing rate at 0.5% and deposit facility rate at 0% (rather than negative as it is not warranted at this juncture).
 
But both the ECB and BoE provided forward guidance that the bias is to ease, especially if the economy deteriorates further or volatility in bond markets persist. That essentially crushed the EURUSD and GBPUSD; near-term weakness to persist for both currency pairs!
 
Looking ahead, reckon that the ECB is likely to ensure policy expectations are well-anchored and emphasise that the OMT facility is available to prevent yields from spiralling to unsustainable levels –which we caught sight of with a surge in 10yr Portugal sovereign yields by around 139bps to 8.11% (an 8-mth high), a reminder that EZ is still essentially in a fragile equilibrium.


(Please see our Global Macro Asset Strategy reports for our Asset Allocation strategy and for ETF and CFD instruments to trade the macro outlook. PhillipUT Wrap Account offers tactical asset allocation of unit trusts without front loading sales charge.)

Regional Market Focus

Singapore

• The benchmark STI closed higher at 3,147.12 (+0.56%). The 1.5bn shares traded were worth S$0.8bn in value.
• The STI opened higher, possibly due to spillover effects from the rally in European stocks as the ECB stood pat on key rates.
• We expect support from the 3,000 level, while downward bias may persist should the STI not clear above the 3,230 resistance level.
• 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.

Thailand

• Thai stocks yesterday plummeted, underperforming regional markets, on concern that the Bt2trn borrowing bill will violate the constitutional law. The SET index end the session down 12.69 points at 1,430.88 points on Thu.
• The SET index is likely to move upward to trade above 1440 after the ECB and Bank of England announced to leave their very low rate on hold. Regional markets appear to be on cheerful mode, tracking the strength in European markets, rising more than 3% yesterday. The US will release an employment data overnight.
• Thailand politics became uneventful whilst awaiting next month’s house session and the legitimacy of the Bt2trl borrowing bill remains in the process. Eye should be on the movement of the anti-government party.
• Foreign investors yesterday sold equities a mere of Bt9mn. Meanwhile, the weakening baht appears to dissipate the buying forces. Portfolio rebalancing is expected to continue for a while.
• Strong earnings stocks and dividend play are in focus with up to 50% of portfolio. 

• The Jakarta Composite Index (JCI) retained modest gain on Thursday (04/07), after rising almost 1% at mid session, as sentiments improved on hopes that US employment situation would show better picture. But gains in Indonesia stock market on Thursday were capped by weak consumer confidence data for June, and concerns about the possibility of Bank Indonesia rising its benchmark rate at the meeting slated for July 11th. The JCI eked out 4.78 points, or 0.10%-gain, to end at 4,581.933. Five of the 9 major sectors finished in green on Thursday, led by infrastructure sector with 1.00%-advance, followed by finance sector and mining sector with 0.72% and 0.55%-gain. The LQ45 index added 3.02 points, or 0.40%, to 758.330, with 15 of its 45 blue-chip constituents closed in positive territory. In economic news, Indonesia's consumer confidence index, a measure of consumers’ inclination to buy durable goods, declined by 1 point in June to 90.4. Readings below 100 means consumers are generally pessimistic about the economy. The weakening of consumers’ confidence was mostly attributed to increasing anxiety over price pressures. 122 shares advanced, and 126 shares declined Thursday on the Indonesia Stock Exchange. Volume on the regular board totaled at 2.57 billion shares which added up to IDR 3.24 trillion. Foreign investors posted net sale of IDR 199.19 billion.
• With Asia markets rising on cues from Europe, the Jakarta Composite Index (JCI) looked set for a gain today. Signals from European central banks of the intentions to maintain accommodative policy bolstered sentiments in Asia and Europe. US markets were closed for Independence Day. On the downside, worries that Bank Indonesia may need to raise its benchmark rate in July meeting may cap gains in Indonesia stock market today. We expect the JCI to climb, with support and resistance at 4,539 and 4,666, respectively.

• The Colombo bourse dropped for the 02nd consecutive trading day, triggering the indices to drown further and to fall below the 6,100 level for a third time within the past two weeks; this was mainly resulted by the slothful participation of the investors and heavy selling pressure noticed during the day, adding more to the negative trend seen during the previous trading day as well. The ASPI drained further to conclude the day at 6,073.17 shedding 44.80 points (-0.73%). The S&P SL20 (3,399.46) too dived-in further to the red terrain losing nearly 1% to settle 0.54 points below the 3,400 mark. As at the daily closure, the total market capitalization decreased to LKR 2.33Tn while reducing the year to date gain to 7.60%. During the day 07 negotiated deals totaling up to LKR 362.84Mn were noted; this accounted to nearly half of the daily aggregated turnover of LKR 738.09Mn. Bank Finance & Insurance (BFI) sector to dominate the list having made a sectorial turnover contribution of 545.79Mn (73.95%). Additionally BFI sector managed to capture the highest investor interest during the day noting 1,354 trades resulted in a volume of 10.33Mn shares being traded. During the day, a total of 25.10Mn shares changed hands, indicating a drop of 34.23% against the previous trading day. Foreign participants were bullish during the day for the 02nd consecutive trading day where foreign buying of LKR 269.65Mn overtook foreign selling which amounted to LKR 227.93Mn; this added LKR 41.72Mn to the year to date net foreign inflow of LKR 15.39Bn.With regard to the local FOREX, the USD closed at LKR 132.17/- selling and LKR 128.99/- buying.

• The Australian share market on Thursday closed one per cent higher as the military overthrow of Egyptian president Mohamed Morsi boosted the price of crude oil and shares in energy companies. The strong gains marked another day of market volatility, with shares shifting between big losses and big gains each day this week. The benchmark S&P/ASX200 index on Thursday was up 50.6 points, or 1.07 per cent to 4,794.7 points.
• Today (05/07/2013), the Australian market looks set to open higher following gains on most European markets  after the eurozone and British central banks signalled that stimulus measures would continue for some time and ahead of official US employment figures for June. 
• In economic news on Friday, the Australian Industry Group/Housing Industry Association performance of construction index (PCI) for month just ended is due out.
• No major equities news is expected.

• HSI climbed 321 points or 1.6% to 20,468. CEI gained 124 points or 1.39% to close at 9,024. But volume dropped to HKD48 billion, the lowest from 27 May, 2013.
• China coal sector rebounded yesterday after Barclays gave “overweight” rating to China Shenhua (1088.HK). China Coal (1898.HK), Yanzhou Coal (1171.HK) and China Shenhua gained 5.4%, 4.8% and 5.5% respectively. We think it was technical rebound only due to oversold.
• Leading by stronger oil price, Petrochina (857.HK), CNOOC (883.HK) and Sinopec Corp (386.HK) all increased by nearly 2%.
• Technically, HSI returned to 10-MA of 20,317, we expect a further rebound and the next resistance will be at 20-MA of 20,846.

Morning Note

Company Highlights

Yanlord Land Group Limited announced today that it had sold 94.3% or 336 of the 356 apartment units during the first two days of its inaugural launch of apartment units at Yanlord Yangtze Riverbay Town (Phase 3) in Nanjing on 29th June 2013 (“Launch”). An average selling price (“ASP”) of approximately RMB27,223 per square metre (“sqm”) was achieved for the 44,395 sqm gross floor area (“GFA”) sold. The total contracted pre-sales derived from the Launch for the first two days amounted to approximately RMB1.209 billion. Commenting on the Launch of the apartment units, Yanlord’s Chairman and Chief Executive Officer, Mr. Zhong Sheng Jian, said, “Sustained demand for quality developments by discerning customers continue to drive our sales performance. While market uncertainties arising from the introduction of regulatory policies by the PRC central government have impacted sentiments within the sector, the positive market response during the opening weekend for the Launch stands testament to the strong support and confidence that Nanjing residents place in the Group’s ability to deliver quality developments and further reflects the Group’s brand equity as a leading high-end developer within China. Moving forward, we remain steadfast in our commitment to build internationally recognised developments and will seek to consistently exceed the expectations of our discerning customers.” (Closing price: 1.225, +0.823%)

AusGroup Limited subsidiary AGC Industries Pty Ltd (‘AGC’) a leading Australian based fabrication, construction and integrated services company to the oil and gas and resources sectors, is pleased to announce they have been awarded a three year plus three month extension on their calciner overhaul and maintenance contract with Alcoa of Australia Limited (Alcoa).The estimated value of this extension is AU$36 million over the period. The highly specialised work will be conducted for Alcoa’s Western Australian calciners located at Kwinana, Pinjarra and Wagerup refineries. The initial scope of work covers calciner overhaul maintenance services including refractory, access, and mechanical trade work as well as general calciner repair work. (Closing price: 0.370 +2.778%)

Yangzijiang Shipbuilding announced yesterday that it had secured new shipbuilding contracts for 15 vessels worth a total of US$414 million. As the vessels are scheduled for delivery from 2015 to 2016, they will not have any significant impact on the company's earnings for the financial year ending Dec 31, 2013. "In 1H2013, the group had secured a total of 27 effective shipbuilding contracts with an aggregate value of US$1.01 billion," said Yangzijiang. The company now has a total of 51 options worth US$2.64 billion entered with its respective buyers, of which 22 are for container ships worth US$1.56 billion and 29 for multipurpose bulk carriers worth US$1.08 billion. With the Baltic Dry Index recently achieving a 52-week high of 1,179 points, the company said that it was confident that more options will be exercised in the second half of 2013. Separately, Yangzijiang also announced yesterday that it had acquired the balance of 49 per cent of the equity interest in the capital of Jiangsu Yangzi Changbo Shipbuilding Co (JCSC). Previously, the company was holding 51 per cent of the equity interest in the registered capital of JCSC. With this latest acquisition, JCSC will become a wholly owned subsidiary of the company. (Closing price: 0.825, +2.484%)

FJ Benjamin has inked a franchise agreement to open the first standalone Raoul store in Colombo, Sri Lanka, this December, just two months after it sealed a similar deal in China.The franchisee, White Lotus Fashions, is owned by Sri Lankan entrepreneur Rayynor Silva, the chairman of Asia Broadcasting Corporation, which operates some of the country's radio stations and one television channel. He also has interests in hotels and properties. The agreement is for an initial five years, with an additional three-year renewal option. Douglas Benjamin, the chief operating officer of FJ Benjamin Holdings, said: "This franchise agreement will give Raoul first-mover advantage in a country where the market for luxury fashion is still at a nascent stage, with very few quality brands available for the discerning, fashion-conscious shopper." FJ Benjamin secured a franchise deal - its first major one for Raoul - with Anderson Wang's Budy (Chongqing) Import & Export Trading Co in May. Under this deal, it will open 27 stores across China by 2017, with the first one raising its shutters in Chongqing in mid-September. The deal is for an initial five-year period with an option for renewal. (Closing price: 0.260, -)

United Engineers Ltd has proposed plans to divest its mixed-use development UE BizHub East in Changi Business Park for $518 million. The group's wholly-owned subsidiary United Engineers Developments (UED) has entered into a conditional put and call option agreement with Viva Industrial Trust Management (VITM), in its capacity as the manager of the proposed Viva Industrial Reit (real estate investment trust), for the sale of the property. Talk in the market is that the proposed Viva Industrial Reit is also acquiring Technopark @ Chai Chee from CapitaLand for about $200 million and a property in Tuas from another party. The proposed Reit is said to be backed by Tan Kim Seng, the founder and former chairman of KS Energy. United Engineers, in its announcement yesterday on the proposed divestment of UE BizHub East, said that upon completion of the proposed divestment, UED is expected to realise an estimated net divestment gain of $86.7 million. UED also has the option to subscribe for 5 per cent of the stapled securities of a stapled group comprising the Reit and a business trust proposed to be issued and listed on the exchange. (Closing price: 2.450, +5.150%)

Source: PhillipCapital Research - 5 Jul 2013