IN contrast to the previous month, market concerns on contagion from European sovereign debt seem to have tempered, as investors believe the crisis should be largely contained.
In addition to Greece, more countries have also come up with fiscal policies, including the United Kingdom, and this should help them to rein in their debt levels gradually.
However, weaker economic data coming out of not only the United States, but also China, are giving rise to concerns that global economic recovery may be stalled. Nonetheless, at this juncture, although growth outlook is more fragile, most believe the risk of a double dip is low.
Meanwhile, Asian markets received a short boost, when China announced a relaxation of its currency peg, which boosted sentiment, especially in those markets whose currencies are highly correlated to the renminbi, including the ringgit. This move is likely to help underpin continued appreciation of Asian currencies.
Market volatility may persist for the next few months until a clearer picture emerges on the strength of the global economic recovery, and investors are also awaiting the results of the European bank stress tests (to be disclosed on Friday).
By that time, if there are no negative surprises, and investors are more convinced that economic growth has not been derailed, market sentiment could see a significant lift.
Hence, in the short term, we would advocate a trading strategy — take some profits on outperforming stocks, while on market weakness, look for opportunities in banking, utilities and selective resources (commodity) plays, to position for the medium to longer term when growth momentum picks up again.
In terms of asset allocation, we are increasing equity exposure slightly, by increasing exposure in Singapore.
China/Hong Kong (1. Strong domestic demand 2. Strong currency)
China Construction Bank
• Recent 1Q10’s results show rebound in net interest margin (NIM) while asset quality continued to improve.
• Trading at attractive valuations (P/B of 1.9x) and dividend yield of 5%.
China Mobile
• A defensive big-cap for current volatile market conditions.
• Still trading at notable discount to Asian wireless peers (at 12x FY11 PER) while giving good dividends (>3%).
PetroChina
• Trading at undemanding valuation of 10x PER, while there may be further upside from higher crude oil prices or natural gas segment.
Zijin Mining
• Given that gold price is expected to continue its uptrend, Zijin provides strong earnings potential with over 75% of its revenue contribution coming from gold, while it continues to increase its reserves.
Singapore (1. Limited currency risks 2. Some good turnaround stocks)
Hyflux
• Increase in environment spending in this region presents good opportunities to the company.
• Contract flows in Singapore have regained momentum while China order flows may resume soon. Meanwhile, earnings visibility is strong.
SembCorp Marine
• Contract flows have improved, with recent wins of contracts from ConocoPhillips and Petrobras.
• The company has maintained its guidance for FY10 order wins of S$3 billion (RM7 billion) for rigbuilding and conversion.
SIA
• Seeing good turnaround with a reported strong set of March quarter results. Well positioned to benefit from stronger passenger demand (from continued economic recovery) and Singapore’s opening of two integrated resorts.
• Likely to be able to sustain average dividend yield of 10% in next three financial years.
SPH
• Strong advertising revenue growth expected this year, given strong correlation to domestic economic growth (which is estimated to be 13%-15% for 2010).
• Also provides attractive dividend yield of over 6%.
Wilmar
• Provides good exposure to soft commodities (especially China).
• Recent acquisition of Sucrogen (Australia’s largest raw sugar, and second-largest fuel ethanol producer) would boost its earnings growth beyond rice and flour milling.
Suntec REIT
• Its properties are well located and likely to benefit from opening of Marina Bay Sands integrated resort.
• Dividend yield attractive at above 6%.
UOB
• Our top Singapore bank pick as it has higher provision recovery prospects versus peers given its prudent stance earlier, and stronger ROEs.
• Lower credit costs, stronger loans growth and improving margins will drive its strong earnings growth for 2010.
Malaysia (1. Political stability to provide growth impetus 2. Strong fundamental support for currency)
Malayan Banking
• Will benefit from recoveries in domestic and regional economies.
• 3QFY10 results registered strong growth all-round, and is expected to continue in the coming quarter.
• Still trading below long-term price-to-book average.
Axiata
• Strong growth momentum.
• Cost savings from potential infrastructure collaboration with DiGi.
• Formalising dividend policy by 3QFY10.
Maxis
• Resilient earnings from domestic mobile operations.
• Sustainable high dividend yields (>6%) due to strong free cash flow generation and low capex needs.
YTL Power
• High dividend yield of >6%.
• A dark horse to secure the 2,000MW coal-fired plant from Tenaga.
• Expansion opportunities in Bangladesh as well.
SapuraCrest
• Strong order book of RM10 billion following the award of 11 PSC umbrella job by Petronas.
• Deepwater pipelay capability puts it in good position to secure more jobs from expected job flows from new deepwater developments.
Star
• Another good proxy for recovering adex albeit with lower beta.
• Strong net cash position may potentially see capital repayment or higher dividend (currently >5%).
Media Prima
• A good high-beta proxy to ride on rising adex due to economic recovery.
• Stronger ringgit also leads to lower newsprint costs.
• Undemanding valuations at 14X PER as compared to long-term average of 18x.
Axis REIT
• Resilient mix of asset portfolio.
• Proven track record of yield accretive acquisitions.
• Dividend yield of > 8%.
Indonesia (1. Strong domestic demand 2. Political stability)
Indo Tambangraya
• Highest dividend yield at 8% in 2010 and minimal capital expenditure in the next couple of years.
Bumi Resources
• Its present share-price weakness provides an opportunity to enter.
• Post its China Investment Corp (CIC) deal, it has potential to become a bigger and better-diversified mining company.
• With positive outlook on coal prices this year, it is likely to see a re-rating.
Interest rates (Malaysia only)
Review: Bank Negara Malaysia (BNM) hiked OPR by 0.25% to 2.75% in the latest policy meeting. Money market and short-dated yields have eased after the hike. Three-year MGS has eased down 3bps whereas the five and 10 years eased between 10 and 15 bps.
Outlook: Expect the risk-free yield curve to hold steady for the next two quarters on the back of tame inflation numbers. BNM is expected to hold rates till next year as we view BNM has completed its normalisation.
Strategy: Stay long on medium-term dated bonds (between three and 5 years) for yield pick-up as the risk of inflation is subdued. Increase risk tolerance by taking position in the AA and A-plus segment for yield pick-up, and stay in below five-year maturity bucket. This is to take advantage of a possible credit upgrade early next year.
This article appeared in The Edge Financial Daily, July 21, 2010.
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