Top Story : Shifting Trends – Six months on, focus is back on risk

Market Update

- We are nearly six months into 2010, and the focus is clearly back on risk. We believe investors’ confidence especially for exporters has been shaken by economic concerns in Europe and China, while incidents such as BP’s deepwater drilling accident in the Gulf of Mexico and Australia’s proposed resources tax will not help the outlook for resources sectors.

- On a sectoral basis, we note that the timber sector has been one of the hardest hit in the 2Q10 so far. Building materials, oil & gas stocks and glove manufacturers generally also posted double-digit declines for the 2Q. We note that these sectors are heavily driven by external factors.

- Among the companies under our coverage, we note that Sino Hua An, ILB, Parkson, Unisem and MPI have the highest earnings exposure to China, while YTL Power, KNM and MPI have the highest earnings exposure to Europe. For now, we do not anticipate any significant downgrades to our earnings forecasts for these companies.

- We reiterate our view that domestic plays with little or no exposure to overseas markets are likely to be more resilient in the current market environment. In our view, these stocks include Maxis, TNB, PLUS, Allianz, AEON, KFC, KPJ and B-Toto.

- In the absence of major catalysts, risk premiums will likely continue to drift in the near term. We downgraded our sector call on oil & gas today, and the plantation stocks are also under review. With shortened investment horizons, and expected volatile markets over the next 3-4 months, the key would be to re-balance portfolios during market pullbacks. We have highlighted the more risky sectors where we see potential earnings disappointment, and we continue to advocate a bottom-up investment strategy in the near term.