Singapore Downgraded to Underweight by RBS

RBS downgrades Singapore to Underweight from Overweight, saying it sees limited upside for the market. It notes financials account for 44% of Singapore's market cap, and expects this space "to experience substantial headwinds" going forward as "the recent slew of policy tightening measures (in the property space), coupled with new supply and rising unemployment, should trigger a pullback in property stocks, which would be negative for the associated banking sector."

From a valuation standpoint, RBS says Singapore actually looks inexpensive (MSCI Singapore is trading at 12.3X 12-month forward P/E vs its peak at 18.3X in July 2009). However, given the government's stance in capping further property price gains, it believes the domestic property sector is poised to trade lower. "Such policy moves, when coinciding with a weakening economy and further retrenchments on the employment front, should bring about price declines in the physical market as well as the associated equities. In turn, this would be a major drag on loan growth in the banking space."

Year 2012 Holds a Lot of Promise for the Stock Markets

There are only a few more days left before we wave goodbye to a tumultuous year 2011 and cross over to year 2012, with much awaited hope and optimism. Indeed, there is much to hope for in the new year.

If history is anything to gauge from, I believe we are around six months away from a bull market. A typical bear market will last an average of about 9 - 18 months with an average 30% decline from its peak. From the highest point of 3313.61 on 9 Nov 2011 and currently standing at 2674.61 on 27 Dec 2011, we are slightly more than one year into the downtrend though the magnitude is only 19%. We believe the lowest STI can go should be at its support level of 2500 and not any lower. As a rule of thumb, the stock market is always forward-looking and usually move six months ahead of the economy. I firmly believe that those investors who are bold enough to buy into the low now will be rewarded handsomely later.

The rationale for optimism is not something airy-fairy. I believe the stock markets have taken into the worst-case scenario of a Eurozone recession and any bad news will be taken with good stride, notwithstanding a slight chance of another global crisis. Looking at some of the positive slew of data from U.S., I believe the economic superpower is in the course of a nice recovery into year 2012, alongside with China and other emerging countries. A Reuters' polls of economists shows that the U.S. will grow at a pace of 2.2% next year compared with zero growth in the Eurozone.

While China has been adversely affected by the plight of its largest trading partners, the European Union, we believe its huge internal consumption demand will still be the main driver of its GDP growth. I do not foresee any extreme measures undertaken by the Chinese government given the current investment climate and the declining property prices. On the other hand, though the depreciating rupee has caused some chaos this year, it is widely believed that India's central bank will ease their monetary policy to counter the slowdown in GDP growth. Lastly, Japan, another economic superpower, is also tipped to pick up in the fiscal year from April and should narrowly avoid a recession, according to a poll.

Moving forward into 2012, much is abounding in the stock market but it is only the fearless and the wise that will benefit. I wish all my readers a prosperous and blessed year of 'dragon'.

Noble Group Set to Benefit on Merger Talks

Chinese-controlled Yancoal Australia has approached Gloucester Coal to merge their neighbouring coal assets in a deal worth A$2 billion. This represents a hefty 42% premium of its current market capitalisation and will transform them into an A$8 billion coal giant. Both Yancoal and Gloucester have mines and projects in New South Wales and Queensland and we view the merger positively for them to create the scale of economies and synergy.

This is a shrewd move by Yancoal. Besides tapping into the strong demand in Asia, Yancoal is looking to take over Gloucester and use it as a backdoor route for listing in Australia. In this way, they save lot of time and resources and without having to bear the risk of issuing an IPO in this shaky environment.

Gloucester is 64 percent owned by Hong Kong-based Noble Group, which has a track record of buying junior miners, helping to fund projects, and then selling them out. We expect Noble Group, which already attempted to sell its stake in Gloucester to Macarthur Coal last year, to maximise the opportunity this time. Gloucester's shares have tumbled 42 percent this year to the current cap of A$1.4 billion, putting it in the 30 worst performing stocks among Australia's 200 biggest companies.

We believe Noble group can use the cash to acquire other undervalued miners, especially in this bearish environment where opportunities abound. Its Singapore-listed shares jumped 7 percent to S$1.195 on the prospects it would be able to sell its Gloucester stake for a profit before halted for trading. It is set to resume trading tomorrow.

GLP Strikes Again to Venture into Asset Management

Global Logistic Properties (GLP), an unit of the GIC Singapore, has formed a 50:50 JV with China Investment Corp to acquire a US$1.6bn logistics portfolio from LaSalle Investment Management, seeing strong demand for modern storage after the March earthquake. This is at an 8% discount to the portfolio’s latest appraised value.

GLP manages about $11.7 billion of facilities in Japan and China for customers including Amazon.com Inc. and Deutsche Post AG’s DHL International GmbH. The acquisition not only consolidates its market leadership in Japan but also provides a beachhead for the creation of an asset-management platform. GLP will become the asset manager of the portfolio with a new fee income stream by 3Q12. This transaction will boost the company’s revenue from fees generated from asset and property management.

We believe that the acquisition is a steal, given the cheap valuation in the Japanese property market and the recovering demand. The portfolio is 3% under-rented and hence presenting an avenue for organic growth. GLP’s balance sheet remains healthy with an estimated net gearing of a mere 0.4x. GLP is given a target price of $2.27 by one of the brokerage houses and is currently up 1.83% at $1.670.

Values Are Beginning to Show in the Chinese Market Too..

China's equities have hit their lowest level in nearly 33 months with gold and property companies leading the decline. This reflects both global and domestic concerns. At the global level, sentiment has been undermined by the escalating sovereign debt crisis in the Eurozone. In China, fears about inflation, rising interest rates, an overblown property market and non-performing loans in the banking sector have hit confidence.

The benchmark Shanghai Composite Index, which tracks both A and B shares touches 2206.52 briefly, its lowest level since it closed at 2223.73 on March 18, 2009, before trading at 2223.13 now. Most analysts expect the stock market to keep falling in the short term and to end this year near 2200.

We see that consumption growth is still the main driver in China with higher wages leading to more spending power. Consumer demand will become an increasingly important factor in the Chinese economy as the country moves away from a growth model based on exports. On a technical perspective, the index is poised for a rebound if it can close above 2200 level. Investors who want exposure to China can either buy H-shares, ETFs or unit trusts.

A Tale of Two Markets - Stock and Property

We believe that the introduction of the Additional Buyers' Stamp Duty (ABSD) had exacerbated the decline of the private property market in Singapore. Under this rule, foreigners are required to pay an additional 10 percent stamp duty when acquiring residential property. PRs who purchase second and subsequent homes and Singaporeans who buy third and subsequent homes have to pay an extra three percent stamp duty.

Though some investors thought that money could still be made in properties even with the slowing down of the global stock market, we believe otherwise. It is observed that the fate of these two markets is intertwined and it is just a matter of time before the property market will follow suit the stock market. We estimate that the property market might decline as early as first quarter next year, with a time lag of six months in between each other. This is due to the dissipating 'wealth effect', possible credit crunch and the uncertainty of the economy ahead. Moreover, as an open economy, Singapore is susceptible to the outflow of capital which is always in search of higher yield. We estimate that the property market will only recover at least six months to one year after the stock market has rebounded from its low.

We also believe that the ROEs of the property developers will be adversely affected and continue to underweight property sector, particularly City Development and Ho Bee with its concentrated portfolio. It is not advisable to bottom-fish now unless investors are prepared to wait.

Valuations Are Beginning to Look Attractive for Japanese Equities

TOPIX bounced back sharply after falling to a post-Lehman failure low of 701 on March 12, 2009 and rising two months later to 885 and three months later to 951. On November 24, 2011, TOPIX had fallen to 706, approaching its post-Lehman failure low and closed at 716 today. According to Citi’s Japanese Equity Strategist, Kenji Abe, valuations and corporate profits are looking attractive now and 2012 could well see another spectacular rebound for the Japanese market.  

Though he suggested that the rebound is likely to hinge on the ability of the euro zone nations to formulate an adequate response to the current crisis, we think there is some quick money to be made over these few months. Investors who wish to position themselves for the rebound in general can look at Schroder International Selection Fund Japanese Equity Alpha USD (http://www.fundsupermart.com/main/admin/buy/factsheet/factsheetSDIJEA.pdf). It has an alpha return of 9% over three years and invests primarily in undervalued equity (P/E of 12.2 versus 14.4 of benchmark). We believe investors will be handsomely rewarded if they can catch the bull at the right time.

Disclaimer: This is not an investment advice or recommendation. Investors should seek the advice of their financial adviser first before making any investments.