Deutsche Bank believes the production surge may reflect a build-up of inventories. Indeed, OCBC notes in a recent report that non-oil domestic exports and industrial production from January to February have been relatively tepid. “Moreover, the February-March global leading indicators in the form of the North America semiconductor book-to-bill ratio and Singapore’s manufacturing and electronics Purchasing Managers Indices were also more subdued, reflecting more cautious sentiment on the part of manufacturers,” OCBC says.
Even so, Deutsche Bank believes there could be upside to its already above-consensus 6% GDP growth forecast for the year. Analysts are generally in agreement that this year’s GDP growth will exceed the government’s forecast of 4% to 6%.
Such strong growth raises again the concerns of inflation, and the impact that will have on markets. DBS economist Irvin Seah expects that full-year inflation will probably breach the central bank’s target range of 3% to 4%. “We expect full year inflation to average 4.2%. That is, inflation is still the focus despite the short-term growth concerns,” Seah says. The Monetary Authority of Singapore yesterday announced it would continue to tighten monetary policy in order to curb inflation.
Near-term strength in the Singapore dollar should benefit the transportation sector, says Deutsche Bank in a recent note. The largest cost for transportation companies is often fuel, which is priced in US dollars. Conglomerates, on the other hand, will lose out because a lot of their revenue comes from outside Singapore. However, Deutsche Bank remains positive on conglomerates like Sembcorp Industries and Sembcorp Marine because it believes a surge in order books will more than offset the impact of a stronger SGD.
DMG & Partners Research analyst Leng Seng Choon sees the SGD strength leading to weaker loan growth for the local banks as their overseas assets will be translated to SGD at less favourable rates. “As DBS Group Holdings has a larger percentage share of loans in USD and HKD, its overseas loan growth could be more subdued,” Leng says.
A stronger SGD will also mean a soft Singapore interbank offered rate (Sibor), which Leng says will lend support to the prices of REITs and dividend yield plays. Among DMG’s preferred REIT picks are CDL Hospitality Trusts and Suntec REIT.
Meanwhile, Credit Suisse has conducted an analysis of the impact of higher inflation and cost pressures on the earnings of local companies. “Our analysis has turned up more losers than winners given the general lack of resource names here,” the brokerage says in an April 14 report. Companies with high material or wage costs, low margins and limited pricing power to pass through incremental costs are most impacted.
Big losers include Hong Leong Asia, Amtek Engineering, SATS, Neptune Orient Lines and Wilmar International. Hong Leong Asia’s construction business is expected to be hit by higher material costs and lower margins. The same is likely to be true for Amtek, which manufactures electrical and electronic components and products, Credit Suisse says. Meanwhile, NOL will suffer from rising fuel prices while Wilmar and SATS, which deal in consumer staples, are expected to be sensitive to a rise in soft commodity prices. Selling prices of Wilmar’s cooking oil in China are capped, which means Wilmar will find it difficult to pass on price increases. The consumer product division accounts for 10% of its profits, according to Credit Suisse.
Those most affected by rising wages are SATS, ST Engineering, ComfortDelGro and Raffles Medical, Credit Suisse calculates. Beneficiaries of inflation include Midas, which should be able to pass on higher costs through cost-plus contracts, DBS, Straits Asia Resources, Yongnam and Genting Singapore. Credit Suisse expects interest rates to rise from here, and therefore sees Genting and DBS as possible beneficiaries. “Genting is expected to be in a net cash position for end FY2011. As such, they are a potential beneficiary of higher interest rates,” Credit Suisse says. “Also, as there are only two integrated resorts in Singapore and both are proving highly popular with local and foreign visitors, we believe there is ample room for Genting to pass on any potential wage rate inflation via higher prices.”
