IMF financing plan for Italy

Expect an oversold technical rebound in the first half of this week on the back of a strong start to the US holiday shopping season and a reported IMF financing plan for Italy. Data released yesterday showed US Thanksgiving weekend sales rose to a record USD52.4bil with the average shopper spending almost USD398.6 (+9.3% y-o-y). This is positive news but more likely driven by aggressive promotions during the holiday season by retailers and pent up consumer demand in this period rather than a sustainable upward reversal in consumer sentiment. On the data front, the US November employment figures will be out this Friday and consensus expects an improvement to 120k versus 80k the previous month, so some positive expectation could also build up ahead of the figure, especially during the 1st half of the week.

News of Italian newspaper La Stampa reporting that the IMF s preparing a €600bil loan for Italy in case the country’s debt crisis worsens should also lift sentiment. According to the article, the money would give Italy’s PM 12 to 18 months to implement his reforms without having to refinance the country’s existing debt. Italy could draw on the money if the planned austerity measures fail to stop speculation on Italian debt. The country would pay an interest rate of 4-5% on the loan and the amount could vary from €400-600bil.

We expect the rebound to test the 2700-2720 immediate resistance level while any further gains beyond that should not exceed the 2nd near-term resistance at 2780. Gains during the 1st half of the week could stall by Wednesday or latest Thursday as minor profit taking sets in by then.

Macro economic uncertainties continue to affect sentiment and with the approach of the year-end holiday season, we see a gradual decline in market trading activity over the next 1 month. We keep our view for the STI to trend down towards the October low at 2530. The immediate resistances are at 2700-2720 and 2780. If events in Europe are to make a rapid turn for the worse, we do not rule out the decline to reach 2400 in the weeks/month ahead before much better buying opportunities emerge.

Beyond the temporary rebound this week, we continue to advocate staying with defensive stocks with higher earnings visibility, lower earnings risk and better yields. Our picks are Singapore Telecom, Comfort Delgro, CMT, Global Logistics, SembCorp Industries and UOL. Among the REITs, we prefer Cache Logistics, Frasers Centrepoint Trust, Frasers Commercial Trust, Mapletree Commercial and Mapletree Logistics Trust.

We downgrade Ascott Residence Trust to Hold from Buy with TP lower to $1.13 from $1.34 on potential downside risk in the event of a worsening European crisis because 42% of its assets are in Europe. We see minimal impact to earnings from its sales and purchase agreement to acquire a 60% interest in the 160-unit Citadines Shinjuku Tokyo from Mitsubishi Estate. Instead, we see declining business travel especially in/from Europe likely to limit opportunities to raise rates. However, close to 45% of its earnings are contributed by master leases (to Ascott Limited)/minimum income guarantee structures, which offer downside protection. The stock offers 8.6% yield.