After days of aggressive selling, the US Federal Reserve, in an unusual move, cut its benchmark fed funds rate by 0.75% to 3.5% in an effort to fend off a recession. This is its first emergency reduction since 2001 and the biggest single cut since 1990 as global equities plummeted over the past few days. The policy makers will be meeting again next week.
With the deterioration in global markets, this has recently raised more questions of defaults and tighter credit. In the US, retail sales fell last month and unemployment rose in the midst of the US housing slump, and there are increasing worries of a slowdown in consumer demand.
While US stocks managed to par losses from intra-day lows in overnight trading, key indices still closed lower despite the interest rate cut. The Dow Jones Industrial Average gyrated widely intra-day, swinging from -7 points to -465 points before closing down 128 points to 11971.19.
The Singapore market fell in line with the region, down for a massive 12 sessions in the past 15 sessions since the start of the year. According to some reports, the selling pressure of the past few days since the start of 2008 has wiped off close to US$1 trillion from global markets.
With concern over a US recession mounting, the cautious undertone is likely to remain for a while more and this will translate into volatility in the market. In the Fed statement, it mentioned that "appreciable downside risks to growth remain'' and that it will continue to assess the situation and "will act in a timely manner as needed to address those risks.''
With the rate cut, there could be some bargain hunting this morning, but we expect the tone to remain cautious after the past few days of selling and with margin calls, this has taken a toll on retail as well as institutional investors. Corporate earnings will remain in focus, especially with market watchers looking to US MNCs for direction. On this front, analysts are expecting 4Q earnings for the S&P 500 companies to drop an average 17%, dragged down by the financial institutions according to a Bloomberg survey.
But is it time to bottom fish? As volatility remains in the market, there could be more downside as investors stay away from the market. However, for the bargain hunters, we advocate sticking with the blue chips, which are better cushioned to ride out any medium term uncertainty. The 30-stock STI index is down 17.3% for the year (faring better than most of the sub-indices). For the individual stocks within the STI, the decline ranged from -6.4% (for SPH) to -39.5% (for Yangzijiang), with StarHub being the only STI stock that is still up for the year. Banking stocks have taken a big hit from their 52-week highs and look attractive on price weaknesses. We continue to favour the oil & gas stocks (KepCorp, Ezra, etc) and the defensive companies (SPH, ST Engineering, StarHub, MobileOne). (Carmen Lee)
Karin Technology: Expansion of ASEAN footprint
Summary: Karin Technology officially opened its 70%-owned subsidiary, IMI Kabel Pte Limited (IMI Kabel) in Singapore on Monday, which marks yet another milestone for the group, as Karin intends to use it as a launch pad to venture into Singapore and other ASEAN markets. We understand that IMI Kabel has plans to set up sales offices in Malaysia, Indonesia, Korea and Japan this year, where it will not only market control cables but also complementary electronic components from Karin. And as these cable products typically command better gross margins (>20%) versus its present 9.7% gross margin, we expect further sales expansion to give Karin's meaningful bottom line boost. Nevertheless, we have already factored in IMI Kabel's contribution in our forecasts, hence we retain our S$0.44 fair value (based on an undemanding 8x FY08F PER), which still offers >100% upside from here. We also maintain our BUY call. (Carey Wong)
For more information on the above, visit www.ocbcresearch.com for detailed report.
NEWS HEADLINES
- CapitaMall Trust registered a 24.7% YoY gain in FY07 distributable income to S$211.19m, on the back of a full-year's contribution from its 40% stake in Raffles City and contributions from the three malls in the CapitaRetail Singapore portfolio.
- CapitaLand plans to create a REIT or a listed vehicle holding Indian malls for retail projects that it will develop jointly with two separate Indian partners - Prestige Group and Advance India Projects Ltd. The separate JVs will develop/invest in and manage an initial portfolio of 15 retail or predominantly retail projects worth over S$2.12b.
- First REIT posted a distributable income of S$4.8m and DPU of S$0.0176 for 4Q07, which exceed its forecasts by 9.1% and 9.3% respectively.
- Pacific Shipping Trust will be distributing 1.1 US cents per unit for 4Q07, which is 6% YoY higher. The rise in DPU came on the back of higher income distribution for 4Q07.
- Singapore Press Holdings, which has a mandate to buy back up to 158.46m of its own shares, purchased 1m shares yesterday at an average price of S$4.1942 each.
- Anwell Technologies will install its first Blu-ray Disc (BD) replication system for its California-based customer - CD Video, in 1Q08. Also, the Chinese government had awarded it an additional RMB3m in funding for R&D in BD technology.
- Sarin Technologies is paying US$3.4m to acquire a 23% stake in IDEX Online SA, which operates a business-to-business polished diamond traders' network.
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