Opportunity to sell
By Kang Wan Chern

Buoyed by the European Central Bank’s unexpected 25 basis point interest rate cut to 1.25% on Nov 3, the Straits Times Index -- led by jumps in Jardine Matheson, Jardine Strategic, Overseas China Bank Corp and DBS Holdings -- opened on a high note on Nov 4, rising 1.9% to 2,863 points from the day before.

The ECB lowered rates partly because “what we’re observing now is slow growth heading toward a mild recession by the end of this year,” President Mario Draghi said during his first press conference in Frankfurt. However, the new president made no mention of plans to rescue the region’s weakest nations and warned that growth forecasts for the Eurozone in 2012 were likely to be cut owing to sluggish demand.

In that light, the current rally in the local bourse could be a precious opportunity to sell and take profit ahead of further volatility. In a Nov 2 note to its investors, Morgan Stanley warns that equities on the MSCI Singapore Index face earnings risks and increasing volatility owing to the city state’s high external capital and trade linkages to the West. The brokerage expects a 10.6% slide in earnings by 2013.

Already, consensus 2012 growth forecasts for the city state has declined from 5.8% to 5.1% during the last three months. Morgan Stanley expects that Singapore should record growth ranging from 1.5%-3.8% for 2012. “We expect Singapore’s GDP CAGR to slow down from 8.7% and 7.2% during 1990-1997 and 2002-07, respectively, to 5.2% during 2011-17. We also expect MSCI Singapore’s earnings growth to slow from 15.9% during 2001-10 to 3.9% during from 2010-13,” it cautioned investors.

The brokerage is urging its clients to sell into the recent bounce, and recommends investors buy “on dips” into other markets, particularly Indonesia, and continue selling Singapore equities in rallies. Since hitting a low of 291 points on Oct 4, the MSCI Singapore has bounced 11.6% but Morgan Stanley believes that the Singapore market will continue to underperform in the months to come, and is recommending a list of local stocks that look ripe for sale.

Among Morgan Stanley’s top sell ideas are the three commodity supply chain managers -- Olam International, Noble Group and Wilmar International -- which it believes are overvalued. Since the companies hit 52-week lows on Oct 4, Noble -- which recently made public its intentions of separately listing its soft commodities arm on the SGX -- has rebounded the most, rising 30% to $1.56 on Nov 4. Meanwhile, Olam and Wilmar have rallied by 17% and 23%, respectively. All three are due to report 3Q2011 results within the next 2 weeks.

It could also be time to sell Keppel Corporation. The rig builder recently announced earnings amounting to $1.25 billion, up 12% yoy, on the back of a 4% yoy rise in revenues to $7.2 billion for the nine months to Sept 30, 2011. It has secured some $8.7 billion worth of new orders to date, although some analysts expect that new orders are beginning to slow as capacity at Keppel’s yards fill up.

Meanwhile, investors should also sell ST Engineering and Genting Singapore PLC, which have rallied recently, but that Morgan Stanley believes to be over-popular despite weaker earnings recently. Also on Morgan Stanley’s sell list are property developers City Developments, UOL Group and Fraser & Neave, palm oil plantation owner Golden Agri-Resources and Jardine Cycle & Carriage.