● Palm oil October futures have risen 10% to RM2,480 in three weeks, as the market is building in some risk premium on La Nina. La Nina enhances rainfall in Indonesia, Malaysia and Australia, but results in drier conditions in the Americas.
● The weather has not been ideal around the world, but it is still too early to tell whether La Nina will have a major impact on crop yields. We will keep an eye on the following: 1) If US Midwest is hot and dry in August, soya yields could be affected adversely. 67% of the soybean crop in the US was rated to be in good to excellent condition, as of 25 July, which is a good start. 2) Overall monsoon deficit in India is 14%. 3) Rainfall in Indonesia and Malaysia has been very heavy and has disrupted harvesting.
● For investors looking for short-term momentum plays, plantation companies with beta above 1 and strong trading volumes are IFAR, GGR, IOI and Wilmar. We have an OUTPERFORM rating on IFAR and Wilmar. However, weather-related rallies could disappear as quickly as they had started, and thus investors need to be very nimble and quick to trade on news flows.
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