Global Investment Strategy - The New Perspectives Series – Agriculture – a structural story
Andrew Garthwaite / Research Analyst / 44 20 7883 6477 / andrew.garthwaite@credit-suisse.com
We first highlighted the imbalance in supply and demand for global agricultural products, and specifically the prospect for rising prices, in our report ‘Higher agricultural prices: Opportunities and risks’ (November 2007). Much of what we said in this report is still relevant today and we are keen to revisit what we believe is a structural bull story in the agricultural sector.
While we recognise global demand for agricultural produce will likely suffer a cyclical downturn this year (we expect a contraction of 1–2% in 2009) as both food and biofuel demand falls, we believe the degree of the likely supply-side contraction will outstrip this.
We calculate falling planted acreage, lower fertiliser application and adverse weather conditions may drive a 3–4% fall in crop production over the next 12 months.
We highlight 20 stocks within our global coverage that should ultimately benefit from this ongoing theme: AGCO, BrasilAgro, Bunge, China Yurun, Deere, Dupont, Illovo Sugar, Indofood Agri, Israel Chemicals, Kroger, London Sumatra, Marfrig, Nissin Food Holdings, Perdigao, SLC Agricola, Syngenta, Taiwan Fertilizer, Tesco, Wilmar and Yara International. ( Credit Suisse offers a Delta One basket based around this list.)
Asia Equity Strategy: Consensus EPS – Broad-based upgrades continue in June; China the only exception
Sakthi Siva / Research Analyst / 65 6212 3027 / sakthi.siva@credit-suisse.com
Kin Nang Chik / Research Analyst / 852 2101 7482 / kinnang.chik@credit-suisse.com
The key factor that drove the upgrade of our MXASJ (MSCI Asia ex. Japan) Index target from 370 previously to 425, was our confidence in Asia achieving 25% EPS growth next year (see our 22 May report, Is 25% EPS growth achievable in 2010”). So, we are rather encouraged to see consensus EPS upgrades – and broad-based upgrades – continuing into June.
So far in June, 2009E Asia ex. Japan consensus EPS is +1.5%, and this comes after May’s +3.4%.
Except for China (June so far -0.3%), all countries were associated with upgrades in June. At the sector level, except for telecoms (-0.4%) and industrials (-0.4%), all sectors were associated with upgrades in June.
Countries that have now seen three consecutive months of upgrades to consensus EPS are Taiwan, Korea and Indonesia.
Thailand is seeing upgrades for the first time in June.
Asia Palm Oil Sector – New report: The El Niño "wild card"
Tan Ting Min / Research Analyst / 603 2723 2080 / tingmin.tan@credit-suisse.com
The risk of an El Niño happening is increasing. Further updates on El Niño will be released on 17 June, 3 July and 9 July 2009.
If El Niño develops, one would expect warmer and drier conditions in South East Asia. Although El Niño results in a drop in palm oil production, it is usually more than made up by a significant spike in palm oil prices. Hence, El Niño has historically been a windfall for plantation companies.
After analysing the last four El Niños, we conclude that share prices start to outperform some 16 to 22 weeks before an El Niño, but palm oil prices usually spike up after the El Niño has started. During the last four El Niños, palm oil prices rose between 15% and 125%, depending on the severity.
If El Niño strikes, it could have a major impact on vegetable oil prices as the stock-to-use ratio this season is already at multi-year lows. Unfortunately, it is too early to call an El Niño.
Maintain an UNDERWEIGHT stance on the Malaysian palm oil sector and an OVERWEIGHT stance on the Indonesian players.
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