Monday, July 19, 2010

Strong Q2 numbers like water off bourse's back

The benchmark Straits Times Index see-saws amid soft trading volumes

(SINGAPORE) Even as Singapore's strong second- quarter GDP numbers sent economists rushing to raise their forecasts for the full year, the stock market barely stirred.

The real popping of the champagne will probably come only when Q2 corporate earnings show that economic boom has indeed found its way to companies' revenues and bottom lines, which in turn would provide a strong impetus for wage hikes, analysts say.

The benchmark Straits Times Index (STI) has see-sawed amid soft trading volumes, rising by 24.11 points or 0.8 per cent on Wednesday when the Q2 economic data was released, before slipping 9.26 points or 0.3 per cent the following day on fears of a slowing US recovery and a potential slowdown in China. Last Friday, the STI edged up 14.17 points or 0.5 per cent to 2,957.72, closing the week 0.99 per cent higher.

Some analysts note that the revised Q1 growth of 16.9 per cent and the record 19.3 per cent Q2 surge were partly a technical bounce from a low base last year. But the average person has yet to feel the benefits, they added.

'The numbers themselves are not telling the full picture,' said UOB KayHian executive director Chan Tuck Sing. 'I have not seen the economic impact from these numbers filtering through to the man in the street.

'I would be more excited if companies reporting second-quarter earnings show significant improvements in earnings. Then, that's real money flowing through to the companies.'

The Q2 economic numbers have raised hopes of positive surprises in the upcoming earnings reporting season and provided a snapshot of the type of sectors that are likely to have done well.

Mr Chan expects manufacturing and biomedical companies to post sterling Q2 results.

SIAS Research vice-president Roger Tan anticipates rosy report cards from consumer plays - both domestic and export-oriented - particularly those in the consumer discretionary sector.

'Technology companies would continue to show strong numbers either matching or beating analysts' expectations,' he added. 'The banks also look like they could come in with strong numbers.'

If the reporting season yields strong earnings and bullish outlooks from company managements, the STI could breach the 3,000 mark, Mr Tan said. SIAS has an STI target of 3,100-3,200 points by year-end.

Credit Suisse maintains 'market weight' on the Singapore market following the release of the Q2 GDP numbers, which is one level below 'overweight'. It expects wages to start picking up over the next two to three quarters, which would boost demand for consumer-related sectors.

'The key beneficiaries on which we are positive include SPH, SIA, CapitaLand, FCT (Frasers Centrepoint Trust) and Raffles Medical. The robust economic environment also augurs well for the banks,' Credit Suisse said in a report last week.

'Banks' earnings could be boosted by 2 per cent for every 5 per cent incremental loan growth. Asset quality should also benefit,' Credit Suisse analysts said.

On the other hand, they noted that companies that are wage-sensitive and not in a strong position to pass on the incremental costs immediately include Hi-P, ST Engineering, ComfortDelgro, Cosco Corp, SATS, Hong Leong Asia and SMRT.

CIMB head of research Kenneth Ng said he believes the hospitality, airline and Reit sectors will surprise on the upside, while potential disappointments could come from plantation companies.

Calling equities a 'strong buy', Wong Kok Hoi, managing director and chief investment officer of APS Asset Management, noted that equities are currently not expensive relative to other asset classes. In the current low interest rate environment, equities offer attractive yields of about 10 per cent compared with bond yields of about 2 per cent.

Historically, Singapore's GDP and the STI have been strongly correlated. A Barclays Capital research report on Singapore published last year, for instance, showed a graph of the quarter-on-quarter changes in the Singapore GDP and STI since 1997, and the two lines tracked each other well.

But in the near term, market performance continues to hinge on macro issues such as the effects of deleveraging, said Mr Ng. 'Until those issues are resolved, the markets will find it difficult to forge significantly higher.'

Mr Ng is in no hurry to upgrade his market earnings per share (EPS) forecast. In fact, CIMB downgraded its rating on Singapore from 'overweight' to 'neutral' in June as a result of those macro concerns.

Though the World Cup season - blamed for taking some of the steam out of the stock market - has ended, the market still lacks a catalyst right now, said Mr Chan of UOB KayHian.

Should corporate earnings turn out to be mediocre and fail to excite investors, the market would remain in range-bound trading, he added.

Source: Business Times, 19 Jul 2010

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