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The rig, which is of similar design as Safe Boreas presently in construction at JSPL, will be built to comply with Norwegian regulations.
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The recent move by China to boost fiscal spending, as well as the purchase of bonds and mortgage-backed securities by the European Central Bank (ECB) and US Federal Reserve respectively should provide support for equities in the near term. However, Lorraine Tan, vicepresident of research, Asia, at S& P Capital IQ, cautions that the underlying risks have not changed. She says investors should stay neutral with a defensive stance when it comes to equities.
Image: Tan says stock-picking remains key and investors should pick stocks with industry leading margins and market positions. Credit: Samuel Isaac Chua, The Edge Singapore
She sees the risk of a deeper recession in Europe to be “relatively high at 40%, a US recession at 25% and a hard landing in China at 10%”. The worst-case scenario will most likely stem from the eurozone debt crisis if one of the troubled countries is locked out of the debt market.
However, with the ECB having taken steps to defer this risk, Tan expects the US to grow 2.1% this year, the eurozone to contract 0.6% and China to manage a soft landing at 7.8% to 8% growth. Next year, she expects the US, the eurozone countries and China to grow 1.8%, 0.4% and 8.2% respectively.
“While we think these moves should help restore some confidence for the near term in the financial markets, the uptick to the real economy may take some time to filter through,” says Tan.
ASIA’S EXPORT WOES
Meanwhile, Asian governments are expected to take steps to boost domestic confidence as regional trade data continues to disappoint, says Tan. However, they will be prudent to maintain a targeted policy owing to inflation risks.
“We don’t see the region’s manufacturing activity picking up much in September as companies continue to defer expenditure,” she says, adding
that restocking and pre-Christmas activity are also looking relatively lacklustre.
“As such, we think a sign of improving domestic spending will be a key positive for Asian markets, but do not expect to see this come through until end-October.” In August, manufacturing and external activity in China continued to moderate. Industrial production growth eased to 8.9% y-o-y, the slowest since May 2009, while exports grew just 2.7% y-o-y.
Singapore’s non-oil domestic exports fell 10.6% y-o-y in August, led by a drop in electronics exports. This is a much bigger drop than a Reuters market poll estimate of a 4% decline. Tan attributes this weakness to exports to Europe.
Japan’s data also remained generally lacklustre, although a betterthan- expected 4.6% m-o-m pickup in machinery orders in July helped boost sentiment. This came after 2Q GDP growth was lowered to 0.7%
q-o-q from the preliminary figure of 1.4% q-o-q while the fall in July’s industrial production was revised to 1% y-o-y from 1.2% y-o-y in the preliminary reading. According to Bloomberg consensus, the market is looking at Japan growing 2.5% in 2012, but the recent data has lowered this expectation, says Tan.
STAYING DEFENSIVE
Despite the series of disappointing macro data and earnings results in July and August, selling pressure has been somewhat contained as markets underperformed last year and stayed weak in 2Q, says Tan.
After the latest earnings releases, the regional market has lowered its earnings per share (EPS) growth estimates for this year to 5.1% from 7.5%. However, Tan thinks this has already been reflected in most valuations, although it should be noted that China stocks bore the brunt of the macroeconomic and earnings worries. The Shanghai Composite Index is down 3.2% YTD, losing 8% since end-July, making it the worst performing market in Asia.
In terms of sectors, the key change for S& P over the past month was the lowering of real estate to “market weight” after being “overweight” since end-2011. This move follows the industry’s relative outperformance and S& P Capital IQ’s view that the risk of further policy restrictions would rise with transactions rebounding sharply in Hong Kong.
S& P has also shifted industrials and materials to “underweight” on signs that companies are deferring capital expenditure. “The slower recovery in capacity utilisation likely spells pressure on cash flows for the two sectors and, therefore, added financial risk,” says Tan. However, S& P is “overweight” on the energy, IT and utilities sectors.
“We continue to believe the former two will benefit from a potential pick-up in the economy while the latter is relatively defensive and is seeing stable cash flow, particularly with interest rates declining or staying low,” says Tan. She prefers stocks with industry-leading margins and market positions. “The performance across sectors has not been that uniform, so some have done much better than others and that’s a reflection of how efficient a company is and how effective it is at cost-cutting.”
She likes CapitaLand for its multi- sector property exposure to the residential, commercial and hospitality segments as well as geographical diversification. “This diversification enables the group to weather the volatility of property cycles as well as policy risks, particularly in the residential sector,” she says. CapitaLand also has a growing real-estate fund management business, which has $36.1 billion of assets under management. As at end 2QFY2012, the company’s healthy balance sheet — cash and cash equivalents of $5.07 billion and a net gearing of 0.54 times — will enable it to make opportunistic acquisitions, says Tan.
Meanwhile, DBS Group Holdings’ loan pipeline remains decent. Tan expects the completion of its purchase of Bank Danamon to remove an overhanging uncertainty. With steady earnings delivery, she expects the return- on-equity gap between DBS and its peers to close by 2014, at about 11%. DBS offers dividend yields of 4% to 5%.
Tan’s top pick within the operations and maintenance space is Sembcorp Marine, as she expects the company to be a major beneficiary of a pickup in exploration and production spending, particularly by Petrobas. The group’s technological advantage, execution track record and strong balance sheet with net cash of $1.95 billion as at end-2011 will help it through any short-term soft patch, adds Tan.
While Tan does not have an explicit call on Dyna-Mac Holdings, she believes it bears watching as there may be upside potential to its earnings estimates. She predicts that Dyna-Mac’s aggressive expansion into new yard capacity reflects the healthy tenders currently, which may translate into stronger contract replenishments in 2H2012. She is also positive on its floating production, storage and offloading order flow over the medium term as upstream focus shifts more towards deep water production. (See Charts.)
