Expect a stronger showing in 2Q07. The Ministry of Trade & Industry will be releasing
advance 2Q07 real GDP estimates next week (10 Jul). The estimates are largely
computed from April and May’s data. They serve as an early indication of GDP growth in
the quarter, and are subject to revisions when more comprehensive data are available.
The advance estimates only provide a breakdown of manufacturing, construction and
service activities. The consensus forecast is for real growth of 6.6% yoy, or 7.7% qoq
seasonally-adjusted and annualised (SAAR). These estimates are lower than our forecasts
of 7.3% yoy and 9.9% qoq SAAR (1Q07: +6.1% yoy, +7.6% qoq SAAR).
Manufacturing rebounded on drugs, ships and oil rigs. Despite relatively flat output
from the electronics cluster, the manufacturing sector grew almost 19% yoy in April/May,
thanks to a sharp rebound (+101% yoy) in pharmaceutical products and marine & offshore
engineering output, which shot up 51% yoy on ship and oil-rig deliveries. However, we
expect government statisticians to project manufacturing growth of only 8-9% yoy for
2Q07, vs. 1Q07’s 4.3% yoy, because Jun 07 numbers were likely affected by the base
effect.
Construction to gather steam. On a yoy basis, the construction sector likely expanded
by 12.6% yoy in 2Q07, the fastest yoy pace of growth since 1Q98, when the sector grew
nearly 16% yoy. And with activities and progress payments likely to accelerate in the
coming months when work begins on the two casinos, other residential and commercial
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developments etc., this sector could continue to spring nice surprises.
Services still doing well, thank you! While there has been a moderation in some
service-producing industries (e.g. trade and logistics), other segments such as financial
services (including stockbroking and activities related to the property market) probably did
well enough in 2Q07 to sustain overall growth at 7.2% (1Q07: 7.0% yoy).
Likely to raise our 2007 GDP growth forecast of 6.6%. If the advance 2Q07 estimates
fall in line with or outperform our expectations, we are likely to revise our full-year growth
estimate from the current 6.6% to nearer 7.0%, thanks largely to a combination of firmer
manufacturing and construction growth. The latter is expected to lead GDP growth in the
coming 2-3 years. In light of this, we expect SGX-listed infrastructure and constructionrelated
stocks to react positively to the GDP report. Clear direct winners are likely to be Tat
Hong (S$2.05, Outperform, TAT SP) Yongnam (S$0.51, Outperform, YNH SP) and CSC
(S$0.455, Not Rated, CSC SP) with other beneficiaries being Tiong Woon (S$1.17, Not
Rated, TWC SP) Koh Brothers (S$0.615, Not Rated, KOH SP) BBR (S$0.18, Not Rated,
BBR SP) and Lian Beng (S$0.495, Not Rated, LBG SP).
The week in review:
• It was a relatively quiet week in comparison to the previous few weeks amidst worries
over higher crude oil prices, lingering subprime-mortgage worries in the US as well as
uncertainty ahead of the Federal Reserve meeting. But in the end the Federal
Reserve's Beige Book report told of moderate economic growth and tame inflation,
thereby lifting investors’ confidence. After a wobbly week, the STI ended Friday up
almost 14 pts or 0.4% wow. However, volume traded fell 13% wow to US$1.58bn, the
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lowest in 3 weeks with interest mainly centred on penny stocks. Last week, led by
construction (+7.9% wow) and the hotels & restaurants sectors (+2.4%), all other
sectors rose with the exception of conglos and properties.
• S’pore macro news: After the relatively soft reading in April and May, firming orders
and production led to rebound in June PMI. The consensus forecast is for an overall
reading of 50.7 (CIMB-GK: 51.0). The actual overall PMI & tech PMI readings were
52.3 & 53.1 respectively. The URA released its advance 2Q07 Property Price Index on
Monday. The PPI rose 7.9% qoq in 2Q vs. a 4.8% rise in 1Q07. On a yoy basis, the
PPI rose 20.6% in 2Q vs. 1Q07’s 13.8%.
Things to watch for this week:
• On the S’pore macro news front, there is really only the advance 2Q GDP to watch out
for on Tuesday (10th). We are projecting real growth of 7.3% yoy, or 9.9% qoq
seasonally-adjusted and annualised, on the back of sustained growth in serviceproducing
industries as well as a rebound in manufacturing output. We also expect
construction-sector growth to gather steam, with the fastest pace of growth since
1Q98. If the advance 2Q07 estimates fall in line with or outperform our expectations,
we are likely to revise our full-year GDP growth estimate from 6.6% to nearer 7.0%.
There is also the release of May retail sales (Friday). The spike in mainland Chinese
tourists during China’s Golden Week holiday break probably gave retailers here a
small fillip – just as we saw up in HK. But overall retail sales expected to be flat to
+1% on yoy basis because of lower auto sales (fewer COEs). Excluding car sales,
retail sales probably rose 3-4% yoy (5.1% in Apr07).
• As for S’pore equity outlook for the week, the positive ending to the Dow last Friday
may give Asian investors a bit more confidence this Monday. For the rest of the week,
equities could falter if interest rate jitters and crude oil prices continue to rise - unless
2Q US earnings reports can come to the Dow’s (and S’pore’s!) rescue. A number of
big-name companies in the US are reporting their quarterly results this week, including
the likes of FedEx and Morgan Stanley. On the macro news front, there are a handful
of US data of to watch out for, with perhaps the releases on Friday the key ones to
watch out for. Aside from the May advance retail sales, we have the University of
Michigan’s consumer confidence index out on Friday.
• In Asia, we may see some macro Chinese data for the month of May released towards
the end of the week. Among the first to be released will be May trade and money &
banking aggregates. Another set of strong numbers are again expected and hence we
can expect China’s 2Q07 GDP (likely to be released within the next 2 weeks or so) to
exceed 1Q07’s 11.1%. We are looking at 2Q07 GDP growth of about 12% yoy. If the
2Q07 GDP were to coming in at or above 12%, the risk of Chinese policy planners
tightening monetary policy further will be increased. Elsewhere, the P’pines and South
Korean central banks will be meeting on Thursday to decide on their own monetary
policies. Both central banks are expected to keep their benchmark interest rates
unchanged. And finally there is the question mark over the rising crude oil prices. So it
looks like it could be another testing week for investors.
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