Plantations (Neutral)

Inventory declines further in Dec 11

'''' Mom, Palm oil inventory in Dec 11 declined by another 1.5% to 2.04m tonnes, on an 8.2% decline in production that more than offset: (1) A 45.4% increase in imports; (2) A 4.5% decline in exports, and (3) A 22.7% decline in domestic consumption.

'''' Production in Dec 11 declined by 8.2% mom to 1.49m tonnes (Peninsular: -13.1%; East Malaysia: -2.2%), as production cycle (which seasonally weakens from Oct until Jan/Feb) coupled with La Ni''a (that results in higher rainfall) affected harvesting of palm oil. Exports declined by 4.5% to 1.59m tonnes, led by'' most major importing countries (see Figure 3)''

'''' Yoy, palm oil inventory rose by 26.2% to 2.04m tonnes mainly on higher imports and production, coupled with lower domestic consumption that more than offset lower opening stocks and higher exports. ''

'''' Despite our bullish view on the near-term CPO prices (which we believe will likely sustain at above RM3,100/tonne until La Nina subsides), we are keeping our average CPO price assumption of RM3,000/tonne for 2012.

'''' We are keeping our Neutral stance on the sector.

'''' Top picks are Tradewinds Plant (BUY; TP: RM5.04) and TSH Resources (BUY; TP: RM2.13).

''

Performance of IPI (Nov 2011)

'''' IPI grew by 1.8% yoy in Nov (Oct:'' +2.9% yoy), lower than the consensus estimate of a +3.5% expansion. The moderation was due to softening of manufacturing output growth (+4.0% yoy; Oct: +6.3% yoy) which was affected by sustained weak E&E performance and a sudden decline in the output of refined petroleum.

'''' Electricity output expanded at a stronger pace of 2.9% yoy (Oct: +1.9% yoy) while mining output declined at a slower rate of 4.2% yoy (Oct: -5.7% yoy).''

'''' We maintain our full year 2011 GDP estimate at 5.1%, factoring in 4Q estimate of 5.0% (unchanged). We also maintain 2012 GDP growth forecast at 4.5% in 2012 as the bunching of construction projects is expected to cushion the softer manufacturing performance.

'''' We expect BNM to hold the OPR steady at 3.00% until end-2012 given the resilient economic growth with sticky inflation.

''

KLCI: Taking cue from positive Wall St and Europe markets

'' While bigcaps continue to consolidate, second and lower liners continue to hog the limelight following the lifting of trading designation on Harvest and rash of M&A news. Today, KLCI is expected to retest 2011's close of 1530, taking cue from positive Wall St and European markets overnight. Immediate supports are 10-d SMA and 200-d SMA whilst upside targets are the huge gap within 1529-1546 dated 5 Aug 11.

Dow Jones: Uptrend still intact

'' YTD, the Dow jumped 2% and the early "January effect" inspired hopes that U.S. markets were beginning to overcome headline risk from the European debt crisis and moving toward a more independent track.

'' Despite the massive rally since Nov 11, overall market is not excessively overbought as RSI is still hovers below 70. Following the positive ascending triangle breakout, current uptrend remains intact as long as the Dow is able to maintain its posture above 10-d SMA (now at 12339) and uptrend line supports.

'' Immediate resistance targets are upper Bollinger band near 12600 and Jul 11 high of 12753.