DBS Equity Research: Wired Daily 11 Mar 2016

kiasutrader

Publish date: Fri, 11 Mar 2016, 04:06 PM

Singapore GDP growth forecast lowered from 1.5% to 2.1%

Sell-into strength O&G related stocks, SCI remains only Buy

Asian equities - 1Q low should hold up in 1H16

The ECB cut interest rates further into negative territory and expanded the scope of its bond-buying program. The moves exceeded market expectations and initially spurred demand for risky assets. ECB President Draghi said at a press briefing that risks to the euro-area growth outlook are still to the downside, and the rate of inflation will remain negative before picking up later in the year. Still, he said he doesn't anticipate more rate cuts. The ECB's move failed to impress equity markets as European stocks fell and US stocks ended flat as initial optimism were countered by concerns that the new measures may not be effective.

Our Singapore economist has lowered 2016 GDP growth forecast to 1.5% (previous 2.1%) that implies at least one quarter of GDP contraction This will be even slower than the 2.0% pace posted last year, and it'll be the weakest since the global financial crisis in 2008/09. The manufacturing sector is the main drag but there is risk that services areslowing down as well. The economy could enter a "cold winter" and risk of a technical recession should not be discounted if services tanks and GDP growth will slump.

Our analyst comments that Moody's recent downgrade on ratings of several key drillers could exacerbate their predicament by reducing access to debt capital and pushing some of them into financial distress. This could trigger another wave of rig deferment/cancellations led by a credit crunch.

We trimmed Keppel Corp's FY16-17 PATMI by 1.5-2.8% following Transocean's recent deferred delivery. Transocean's two drillship orders with SMM, could be at stake too. In the event of deferment by another year to 2Q20, SMM's FY17 PATMI could be reduced by 8%. SCI remains the only BUY call among the large-cap offshore plays for its stable but undervalued utilities business. We recommend selling into strength for the O&G-related stocks, as the oil price's bounce could be short-lived without any meaningful change in fundamentals.

Our regional strategist says that while risks still prevail from lower oil price and the FED's move start its rate hike cycle, equity markets may have side-stepped the worst impact in 1Q. Investors should start to realize that global recession is not something to be worried about just yet. Accommodative monetary policies driving interest rates lower should improve the risk appetite for higher-yielding assets.

She is positive on Asia equities in 2Q, in anticipation of oil prices to sustain recent gains that would help ease global growth concerns, and of the US Fed to hold off any further rate hikes till June. She believes that Asia assets should fare well in the yield spectrum and be attractive for investors.

Source: DBS

Keppel Corp (BN4)

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