Long & Short

Are we at a watershed point? The STI may be poised for a relief rebound this week following yesterday's test of the 2745 mid term support; the same support was tested during the corrective selloff in Jan this year.

The anticipated whipsaw effects following today's development could be a relief rebound above 2800. The VIX indicator has risen to a peak of 31.60. Given its inverse correlation with the STI's trend, any pullback of the VIX will be viewed as positive for the general market.

Notwithstanding, we believe any rebound will be temporary at best as longer term technicals remain bearish. In this issue of Long & Short, we advocate pair trades as a strategy to increase alpha.

Short SGX, long SPH. SGX currently trades at 18.6x FY09E is trading midway of its 5-year historical PE band of 8-28x. Further downside from valuation compression given lower average daily turnover value (ADT). Our regression model of SGX’s share price vs ADT yields a fair value of S$5.80 on an ADT assumption of S$1.8b.
Recommend technical sell on SGX (beta 1.63) and to buy SPH (beta 0.62) to establish a -1 beta portfolio for hedging against market movements. Approach has out performed market since Sept 07.

Short Singapore Airlines, long SIAEC. The aviation cycle may have peaked in 2007. Prospects of a US recession over the next 12 months will have negative ramifications on demand-supply dynamics for the global airline industry. A slower corporate travel market and persistent high oil prices would place downward pressure on margins in 2008.
Slack capacity redeployment by US carriers to Asian routes compound operating risks. Despite SIA’s strong balance sheet, a special dividend payout is not a certainty given the macro backdrop. We prefer a switch into SIAEC as the engine overhaul outsourcing trend remains strong.

Long Sing Land, short SC Global. Singland has significant exposure to the domestic office sector, which is likely to remain resilient given the tight supply outlook over the next 2 years. Even in a downturn scenario, its strong balance sheet should cushion downside better vis-à-vis peers. We are still cautious on SC Global notwithstanding the selloff since 4Q2007. SC Global’s heavy exposure to the luxury end residential segment heightens systemic risks, especially
given the fact that residential markets tend to lag equity markets by an average of 6-9 months.