Strong Market to 2007

Published December 19, 2006

Strong market sentiment seen continuing into 2007 OCBC report also forecasts more M&A deals By OH BOON PING THIS year's strong market momentum should continue into the new year, says OCBC Investment Research, which has also identified such trends as an increase in merger & acquisition (M&A) activities here in 2007. The research house's stock picks for the new year include KS Energy Services, SembCorp Marine, Genting International, Tat Hong and STATS ChipPAC. In a report, OCBC said the Straits Times Index (STI) has seen new highs in 2006, while the local market benefited from the optimism arising from improved macroeconomic factors. Likewise, tenders for the integrated resorts also buoyed interest in property, hotel and construction stocks. The research house expects this optimism to continue into 2007, particularly for oil and resources linked companies, citing factors such as strong orders throughout this year and the sector's strong earnings visibility. 'This will differentiate this sector from the rest of the pack if market situation does take a turn for the worst. Strong share price performances are well backed by strong corporate earnings stream, and we continue to have an overweight on this sector.' Despite the lack of earnings visibility, OCBC is also upbeat on the other sectors thanks to improved macro-economic factors which it says 'should help to ensure continuous profitability, although share price appreciation momentum is likely to taper off after coming from the strong base in 2006'. Some of the investment trends it sees next year include a more active M&A scene and interest in China consumer-linked stocks. Due to strong earnings visibility, a sustained interest in oil-linked companies is also likely, the report adds. On the M&A front, OCBC noted that corporations here have been fairly quiet on the acquisitions scene this year, as most were focused on organic growth. However, this may change next year when these firms merge to fence off competition and retain market share, especially in the face of mega M&A deals overseas. 'If this materialises, it could bring another 'hot' factor into the market.' Already, the brokerage sees several potential areas for M&A activities. These include smaller construction firms coming together to work on projects related to the integrated resorts, as well as smaller pharmaceutical firms forging strategic alliances to ensure growth. 'In the highly fragmented consumer and electronic sectors, mergers are also likely in order to gain more market share. In the Reit market, the lack of acquirable assets will also see some of the bigger Reits taking a serious look at some of the smaller Reits.' OCBC also sees growing interest in laggard stocks, even as buying interest moves from the current big-to-mid cap stocks to mid-to small cap stocks. The report said: 'While the STI appreciated 21 per cent as at end-November 2006, only 42 per cent of the listed stocks have matched the STI's gain of at least 21 per cent. This means that about 58 per cent of listed companies have underperformed the STI.' Similarly, OCBC believes that the next big growth could come from China consumer-linked stocks in areas like food, retail, entertainment and health, and it also sees potential in non-China stocks with China exposure. The report said such non-China stocks are run by management with valued expertise garnered from operations in other established markets in the region, while tapping on the huge growth potential in China. Based on those trends, the brokerage selected a list of stocks that 'offer the right exposure to various aspects of these investment themes'. These include AsiaPharm Group, Biosensors International, Bright World, China Essence, Ezra Holdings and Frasers Centrepoint. The other preferred plays are HTL International, Jurong Technologies, Koda, Pacific Andes Holdings, Pine Agritech.