Bounce or Bottom?

THE STRAITS TIMES Index ended the week 1.2% higher, its second consecutive week of gains. But, volumes are still thin as the debate heats up on whether this is the long-awaited bottom.

Supporting the uptrend has been a rally in banks, particularly in the US. But, Goldman Sachs is doubtful of the recovery as fundamental data on consumer credit is not improving. The brokerage believes recent bank profitability has been driven partly by oneoff factors such as mortgage origination fees. Meanwhile, results of the stress tests on US banks may be released next month. Banks that fail could be forced to raise capital, while those that pass may issue equity to repay the government. Either way, significant equity issuance is expected.

Tham Mun Hon, an analyst at Daiwa, is advising clients against increasing equity exposure ahead of firmer signs of stabilisation. “Equities may be oversold from a technical perspective, but we believe that the fundamentals still do not justify a sustained rally. In fact, the latter have deteriorated further, prompting us to expect a retest of the October 2008 lows, and a probable break below,” he says. Tham recommends investors stick to defensive sectors such as infrastructure, telecoms and utilities.

But, HSBC strategist Garry Evans points to evidence from the biggest banking crises in the past, which show that as soon as the last troubled bank is rescued and monetary policy is eased aggressively, the stock market recovers strongly. “Even if this turns out to be only a bear market rally, it could go on for a while,” he says. “There is probably no point in being excessively bearish just now.”

Meanwhile, Credit Suisse notes that US mortgage applications have risen 131% from the lows in October. The bank says that of the nine global leading indicators it watches, six seem to be bottoming: US mortgages, China’s purchasing managers’ index (PMI), US Institute for Supply Management, German IFO business expectations, Chicago’s PMI and the Baltic Dry Index. It suggests investors play the theme of a bottoming in indicators via cyclicals such as Taiwan Semiconductor Manufacturing Co, BHP Billiton, China Shenhua Energy Co and Posco.

WHAT TO LOOK OUT FOR?
Expect the fever of rights anxiety to continue a little longer. The latest victim was Sembcorp Industries, which had to issue a statement clarifying that the shareholder approval it is seeking for a share issue mandate is mere routine. A recent note by Kim Eng, however, does not rule out the possibility of a cash call in the near future as the company could need money to fund a water-and-power project in Oman. The company reportedly had trouble securing financing for the project. Kim Eng also cites concern over low margins as sources suggest Sembcorp dropped its tariff pricing to clinch the deal.

DMG & Partners Securities says United Overseas Bank, Suntec REIT and Swiber Holdings are also possible candidates for rights issues.


VOLUME MOVERS
By Angeline Cheong

China Fishery (58 cents) was heavily traded last week. The fi shmeal processor said it would not proceed with a fi nal dividend of 6.03 cents a share through the issue of new shares. Instead, the company has proposed a one-for-10 bonus issue. China Fishery announced a 13% increase in revenue to US$459 million ($694 million) and a 6.5% rise in earnings to US$94.3 million in FY2008. As at Dec 31, cash balances stood at US$7.7 million versus borrowings of US$317 million.

Sembcorp Industries ($2.15) rebounded last Friday after clarifying that its request for shareholders’ approval for a share issue at its annual general meeting was to allow the company to raise funds should the need arise and that it did not plan to embark on a rights issue now. DBS Group Research, which has a “hold” on the stock, notes that the company’s need for an immediate cash call is low.

Cosco Corp (74 cents) trended lower on concerns of more contract cancellations. Kim Eng has downgraded the stock to a “sell” from a “hold” in view of faster-than-expected deterioration in fundamentals. The brokerage raised concerns that Norwegian’s Sevan Marine may be facing funding issues and this may affect its ability to pay Cosco for a drilling unit worth US$202 million ($306 million) — only 65% has been paid as at December. “Management will also need time to get its house in order, having expanded too quickly and with insufficient risk controls,” says Kim Eng.

Singapore Airlines ($9.71) shares traded on high volume last week. With passenger carriage down 17% in February, the company was quoted by Bloomberg as saying it does not rule out postponing the delivery of Airbus A380 aircraft. Earlier, SIA announced an 11% reduction in capacity from April 2009 to March 2010. This will involve suspensions of flights and use of smaller aircraft. In 3Q2009, SIA reported a 43% fall in earnings to $337 million, and a 2.6% dip in revenue to $4.2 billion.

Source :

The Edge Singapore