Stocks Close Up On Europe Debt Sales, China Growth (18Jan)

Stocks close higher after downgrades fail to squelch demand for European debt

- STI: +2.15% to 2815.9

- MSCI Asia-Pac ex-Japan: +2.6%

- Euro Stoxx 50: +1.5%

- S&P500: +0.36% to 1293.7

The Chinese economy is slowing (9.2% full year, 8.9%y-y 4q11, 7 quarters of slowing since 2q10's 12%y-y peak), and will continue to slow till 4q12 as Investment and Exports slowed down further in Dec, quite drastically in case of investment. Given that that is >50% of the economy, poses a significant hard landing risk, yet two things mitigate this (1) rebalancing efforts toward more domestic consumption got a strong boost from income growth which finished the year very well (urban households +14%, rural +18%), which will also provide downside support to housing, and (2) monetary tightening has bottomed out (M2 and New Loan growth both seem to have bottomed out) which in real economy terms means that the investment slowdown will have downside support.

Hard landing risks are still there (not our base case for 2012), but the very thing that worried markets - overtightening leading to such hard landing - has turned the corner, so it may be time to turn cautiously positive on beaten down China exposed stocks on the SGX, ad give them a serious look-in.

The direct significance however to the Singapore economy may be limited, as we have to remember that China is focusing inward as it rebalances its economy, Asia may not get that much of a China boost in the rebalancing act. Singapore's NODX to China actually turned negative y-y. Overall NODX gained 16%m-m and 9%y-y due to Pharmaceuticals, which are volatile, so it remains to be seen if NODX has bottomed. Key electronics NODX worsened -4.6%y-y, reflecting global economic sentiment.

Chances are to the upside over the short term, but we caution traders to watch the downside as: (1) as Greek haircut talks have broken down, (2) US data has been mixed, and (3) the prospect of a China RRR cut will likely still be postponed. On the other hand, market supportive reasons like the rate of mfg contractions in Europe and Asia having eased somewhat, and unlimited liquidity by the ECB resulting in backdoor QE are still there.

Over the larger trend for the STI and S&P500, we are still bearish: (a) we expect US growth to surprise on the downside due to incomes not rising fast enough to offset a fiscally tighter 2012, (b) EZ fiscal and debt-GDP targets will be missed, refinancing will be tough, exacerbated by on-going recession, (c) China will avoid hard landing but its slowdown will be a drag on Asian exports. Positive challenges to our view would be (1) the Eurozone process for fiscal integration actually addresses its suboptimal growth path, and (2) lead econ indicators globally corroborate resilience. We have some improvement in the latter already.

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