Eg

CIMB Preferred

INSIGHTS
M A L AY S I A
CIMB Bank Berhad August 2013

MARKET

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CONTENTS
3 Economic Outlook
Despite tail risks and headwinds in some advanced economies and emerging markets, we maintain that the global recovery is on track. .

8 Equities
Despite an ASEAN selldown, investors remain cautious as markets might remain vulnerable to further capital outflows and weaker currencies.

9 Fixed Income
Fitchs negative outlook revision on Malaysia pile selling pressure on Malaysian Government Securities.

EDITORIAL
Effendy Shahul Hamid Head, Group Marketing and Communications CIMB Group

11 Commodities
Underlying fundamentals continue to drive prices, with subdued prices anticipated moving forward.

13 Foreign Exchange
Portfolio outflows were seen across Asia as markets attempted to decipher Bernankes statement on the tapering of QE.

EDITORIAL COMMITTEE
Ken Kamal, Mohd Ikmal bin Mohd Nasir, Nurlia Binti Ismail, Joy Deborah Ling Yea Tze

PUBLISHED BY
Group Marketing and Communications CIMB Investment Bank Berhad (18417-M) Level 6 Menara SBB, 83 Jalan Medan Setia 1, Plaza Damansara, Bukit Damansara, 50490 Kuala Lumpur, Malaysia

CIMB Bank Berhad August 2013

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Economic Outlook
Global overview

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Asian markets are concerned about the size and pace of Chinas slowdown after three decades of overexpansion. China's GDP growth softened to 7.5% y-o-y in 2Q2013 from 7.7% in the first quarter, which was in line with official guidance. The continued sluggishness reinforces the need for policies to stabilise economic growth. We think the authorities may tolerate growth of 7.0-7.5% for 2013-14. The possibility of a hard landing (i.e. GDP growth dips below 6%) is small and can be avoided. Despite tail risks and headwinds in some advanced economies and emerging markets, we maintain that the global recovery is on track. We think the Chinese leadership has a minimum GDP growth target in mind, with an eye on ensuring employment and preserving social stability. Our view has been echoed by Premier Li Keqiang, who says the government sees 7% growth as the bottom line, raising expectations that it may take steps to bolster the economy if needed. On 24 July, Beijing unveiled a mini-stimulus package aimed at stabilising sluggish economic growth. The measures include suspending the VAT and turnover tax for small businesses with monthly sales of less than RMB20,000, starting in August. This move is designed to: boost job creation simplify customs clearance procedures create more funding channels for railway construction. Asia's export growth remains lackluster and continues to hold back the regions economic growth. If not for the buffer from domestic demand (consumption and investment), Asia's GDP growth would have suffered more. A strong and sustained recovery in exports appears to be some way off. Nevertheless, we remain hopeful of a gradual improvement in export demand, based on our assumption of a firmer recovery in the US to help counterbalance slower Chinese demand. Slower growth in China has subdued the export outlook for East Asia as well as South East Asia.

Despite tail risks and headwinds in some advanced economies and emerging markets, we maintain that the global recovery is on track. HSBC's flash manufacturing Purchasing Managers Index (PMI) for July shows divergent growth: PMI for the U.S. and the eurozone rose while PMI for China was down for the fourth consecutive month. Figure 1: Manufacturing PMIs

Source: Bloomberg The U.S. economy continues to display strength, backed by household wealth and a housing recovery as well as still-supportive financial conditions. The month saw a more dovish statement from Ben Bernanke, who continues to emphasise risks to the economy and flexibility in the Fed's response. His dovish tone seems to provide some assurance to the market that bond yields will be allowed to correct gradually higher, although it remains supportive of risk assets. In the coming months, timely increases in the US debt ceiling which is currently at US$16.7trn will be vital to avoid an eleventh-hour budget confrontation that could hurt market and investor sentiment. Ongoing austerity fatigue in the eurozone continues to weigh on economic and industrial activity. Monetary and credit dynamics remain subdued while labour-market conditions are still weak. The Japanese economy may be bouncing back from prolonged deflation as core consumer prices rose 0.4% m-o-m in June, reversing 14 consecutive months of deflation. With the LDP coalitions decisive victory in an upper-house election ending six years of parliamentary deadlock, political stability may just return for the next three years. Political stability is imperative for the passing of legislation, giving PM Abe a mandate to revive the economy through reforms and deregulation. CIMB Bank Berhad August 2013

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Economic Outlook
Malaysia Fitchs Negative Outlook
Fitch Ratings revised its outlook on Malaysi a from stable to negative on 30 July, citing Malaysias public finances as its key rating weakness. It said that the federal governments debt increased to 53.3% of GDP at end -2012 from 51.6% in the previous year, up from 39.8% in 2008. It also highlighted that the governments budget deficit (Fitchs basis) widened to 4.7% of GDP in 2012 from 3.8% a year earlier, adding that expenditure on public wages rose 19% as it was the pre-election year. The negative outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings, most likely by one notch: fiscal slippage relative to the governments targets further erosion of the current account surplus a shock to interest rates or unemployment significantly slower GDP growth This revision is a warning for Malaysia to improve its macroeconomic management; and while we believe there will be a knee-jerk selldown, the average lifespan for a rating outlook is about 18-24 months before a downgrade is enforced, giving Malaysia time to implement the subsidy reduction programme and gradually introduce the goods and service tax (GST) to prevent that. This is a negative development but not unexpected. We believe the authorities will take the warning seriously and move to address any weaknesses. With the political overhang out of the way, what investors will be looking for is the roadmap for fiscal reforms. Much has been said about the need for fiscal reform. The key lies in the strength of the political will to press ahead with the reforms needed to turn around the countrys fiscal and debt positions.

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External trade
Shaky global demand for its electronic and electrical products as well as weak commodity prices pushed Malaysias exports into deeper contraction of 6.9% y -o-y in June from a 5.1% contraction in May, marking their sharpest drop since Feb 2013. The export decline was larger than CIMBs -5.5% estimate but met markets -6.9%. However, Malaysias trade surplus widened to RM4.3bn in June from RM.29bn in May, thanks to a small rise in imports. With low export visibility and softening commodity prices, we cut our 2013 export-growth estimate from a positive growth of 0.7% to a contraction of 3%, the first year of contraction since 2009.

Figure 2: Malaysias trade balance

Sources: DoS, CIMB Research

CIMB Bank Berhad August 2013

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Economic Outlook dgsgsd

Indonesia GDP Growth
GDP growth slowed to 5.8% in 2Q2013 from 6.0% in 1Q2013, missing expectations, by way of lower inventory and investment contribution. Investments remain a primary area of concern against a backdrop of languishing global commodity prices, increased input prices, higher borrowing costs, an uncertain domestic climate as well as slowing receipts of foreign direct investment. Nevertheless, there are reasons to be more upbeat in 2H2013, which include: increased spending during Lebaran a ramp-up in government spending Conceding that risks to the downside have heightened, particularly in the investment space, we cut our growth forecast from 6.1% to 5.9% in 2013 and from 6.2% to 6.0% in 2014. The economys bumpy momentum poses a conundrum for Bank Indonesia (BI), which is simultaneously fire-fighting inflation. The larger-thanexpected inflation print in July argues for a more hawkish intervention, rather than less. We think that due to a combination of stubbornly-high inflation, depleting foreign reserves and the still-volatile capital flows, BI could deliver a 25-50bp hike for both Bank Indonesia Facility Rate (FasBI) and BI policy rates by the end of the year. Figure 3: Indonesias GDP growth
% qoq 6 4 2 4 0 -2 -4 1Q06 1Q07 1Q08 1Q09 % qoq 1Q10 1Q11 % yoy (RHS) 1Q12 1Q13 2 % yoy 8 CIMB forecast 6

Inflation
Headline inflation surged to 8.61% y-o-y in July as the full effects of Junes fuel-price hikes and seasonal price increases kicked in. Food and transport prices rose roughly 15% y-o-y. We revise our inflation forecast for 2013 to 8.2% from 7.8%, to factor in Julys upside surprise. Despite BI signaling a rate pause last month, it could still hike its policy rate by 25-50bp to curb the spillover of fuel inflation into general prices and the accompanying pressure on the rupiah. Figure 4: Indonesias headline and core inflation
% yoy 20 % mom 10 8 15 6 10 4 2
5 0

0 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Headline CPI (RHS) Jan 08 Jan 09 Headline CPI Jan 10 Core CPI Jan 11 Jan 12 Jan 13

-2

Sources: BPS, CIMB Research

External Trade
Exports declined 4.5% y-o-y in June, the 15 straight month of contraction, and were below expectations. A one-time surge in mining ore exports failed to push export growth into positive territory as reduced shipments of commodities (rubber and O&G) as well as machinery weighed down the headline number. We cut our 2013 export growth forecast from an expansion of 4.7% to a contraction of 3.8% as we see commodity prices gaining little traction and uncertain growth in external markets, particularly in China. The impact of growth is neutral as we expect a corresponding slowdown in import growth following coordinated measures by the government central bank to tame the current account deficit.
th

Sources: BPS CEIC, CIMB Research

CIMB Bank Berhad August 2013

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Economic Outlook
Thailand GDP Growth
The economic momentum continued to moderate in June as external demand, particularly from China, softened and weighed further on exports, manufacturing production and private investments. Private consumption and tourism were the silver linings in the gloomy picture. However, we expect manufacturing activity to remain lackluster due to the prevailing weakness in key sectors like the food, electronics and refined petroleum segments. Figure 5: Thai consumption activity
Index 89 Index 160 155 84
150

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External Trade
Exports continued to slip 3.5% y-o-y from a 5.1% contraction in May to US$18.8bn, the second month of decline on account of softer global demand for agricultural products, fishery and manufacturing products. This softer demand was most notable in China, whilst supply constraints due to the shrimp disease and the closing of petroleum refineries for maintenance exacerbated the weakness in exports. Imports grew by 0.9% y-o-y to US$18.2bn, reversing the 6.3% contraction in May on the back of the 5.0% y-o-y expansion in consumer goods imports, which was in line with the pick-up in consumption spending. This helped to offset the weakness in imports of raw materials and intermediate goods as well as capital goods. The trade surplus stood at US$0.6bn compared to US$0.5bn in May. Figure 6: Thailands trade balance
% yo y 120 US$ bn 6 5 4 3 2 1 0 -1
-2

79

145 140

74

135 130

69 125 64 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 PCI (RHS) Apr-13 120

100 80 60 40

Consumer confidence

20

Sources: University of Thai Chamber of Commerce, BoT, CIMB Research We are cautious on the impact of the stimulus package announced on the 6 August 2013 to boost domestic demand and exports. The government expects these measures to contribute 1% to 2013 GDP growth but we anticipate a milder impact, given the prolonged slackening of exports and lethargic manufacturing activity. We keep our 2013 GDP growth estimate of 4.5%, with a view of fine-tuning it when the 2Q2013 GDP figures are released this month. Based on the latest data, real GDP growth in 2Q13 may come in at only 1.5-2.5% compared to our initial prediction of 34%.

0 -20
-40

-60 Jan -08 Oct-08 Jul-09 Ap r-10 Jan -11 Oct-11 Jul-12 Ap r-13 Trad e balan ce (RHS) Exp o rts Imp o rts

-3

Sources: BoT, CIMB Research

Inflation
Headline inflation moderated to 2.00% y-o-y in July, the lowest level since Nov 2009, due primarily to lower prices for food, personal and medical care, as well as energy. One of the government measures to control inflation was to agree on 20 July to extend the term of the diesel excise tax reduction for another month, until 31 Aug. Barring any unforeseen circumstances, we expect inflation to remain benign until the year ends. While on the surface this presents the Bank of Thailand (BOT) with greater scope for further rate cuts should the softer economic conditions take a turn for the worse, we believe that rising household debt will serve as a strong countervailing factor in any rate-cut decision. We keep our 2013 interest-rate projection at 2.50%. Page 6

CIMB Bank Berhad August 2013

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Economic Outlook
Singapore

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Inflation
After retreating to a 3-year low of 1.5% y-o-y in April, a recovery in Certificate Of Entitlement (COE) premiums and petrol prices nudged the CPI higher to 1.6% y-o-y in May and further to 1.8% in June. Core inflation similarly rebounded from a 3-year low of 1.4% y-o-y in April to 1.7% in May and June. This was possibly due to costlier food and services. Unless there are dramatic jumps in car costs and core CPI in the coming months, we maintain our 2013 inflation forecast of 2-2.5%. Figure 8: Singapores headline and core inflation
CPI (%YoY)
8 7
6

GDP Growth
Revised GDP data show the economy growing by 15.5% q-o-q seasonally-adjusted annualised rate (SAAR) in 2Q13, better than consensus and our forecast of 14.2% and 13.7% respectively. Y-o-y, the economy expanded 3.8% compared to consensus and our forecast of 3.4% and 3.5%, respectively. Appearing more confident of Singapores growth prospects, the government has raised its 2013 GDP growth forecast to 2.5-3.5% from 1-3%. While manufacturing and construction growth has been trimmed to 32.1% and 11.2% q-o-q SAAR respectively, service sector growth has been raised to 11.5% q-o-q SAAR or 5.5% y-o-y. Assuming drug manufacturing or transport engineering does not fall over the cliff, we believe manufacturing can expand by about 5% in 2H2013 to support 4% GDP growth in 2H2013 or 3% for the full year. Figure 7: Singapores GDP growth
%-pts contribution to GDP growth (demand-side) 25 20 15 10 5

5 4 3 2 1 0 -1 -2 Jan-08 Jan-09 Jan-10

Headline Inflation

Jan-11
MAS Core

Jan-12

Jan-13

0
-5 -10 -15 -20

Sources: CIMB, CEIC, DoS Singapore

1Q08

1Q09
Net Exports Government

1Q10

1Q11

1Q12
Investment GDP Growth

1Q13

Changes in Inventories Consumption

Sources: DoS Singapore, CIMB

External Trade
The government lowered its trade and non-oil domestic exports (NODX) outlook due to the poor trade performance of the economy in 1H2013. Outlook for total trade and NODX was cut to 2-3% y-o-y respectively, from 3-5% and 2-4% previously. Trade and NODX growth was -5.5% and -8.8% y-o-y in 1H2013 respectively. On a positive note, leading indicators such as PMIs suggest improving global demand in the seasonally busier half of the year. With the help of an undemanding year-ago base, we expect the export drag to reduce in the coming months. CIMB Bank Berhad August 2013

NODX has yet to show signs of rebound though the y-o-y decline in NODX has moderated in the second quarter of 2013. Despite this, Singapores trade and NODX are still expected to pick up modestly in tandem with the projected gradual recovery in global demand.

- International Enterprise (IE) Singapore media release 12 August 2013

Sources: Song Seng Wun Michelle Chia Julia Goh Lee Heng Guie Terence Wong, CFA CIMB Analysts, CIMB Research Team

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Equities dgsgsd
We held off buying into the recent ASEAN sell down on the belief that markets remained vulnerable to further capital outflows and weaker currencies in the transition to higher global rates. Why the increased cautiousness? 1) Relative growth momentum deteriorating. ASEAN had seen stronger GDP trends post 2009 while the rest of the world was struggling. This relative growth momentum has since reversed with mature economies picking up (US 2Q GDP accelerating faster than expected, Japans posting strong recovery and Eurozone emerging from recession) while declining key commodity prices, export fallouts, slowing investment and rising borrowing costs have begun to take a toll on ASEANs economies and financial markets. 2) Cost of capital set to rise further. Forms of monetary tightening are beginning to reverberate across the ASEAN markets. In Indonesia, long bond yields are up to 8% from their recent 5.5% lows in conjunction with policy rate hikes that surprised the market in terms of timing and magnitude. Measures to limit the rising leverage on the consumer sector (especially in property) have also come through in a bid to stem overheating and mitigate financial risks in recent months. Loan growth is expected to moderate further across the region while property tightening and risks of further monetary tightening poses continued upside risks to cost of capital. 3) Capital flight risks not yet over. Asia, in particular emerging ASEAN, shows the largest susceptibility to capital flight given the sharp decline in bond yields over the past three years and the strong rerating/higher foreign holdings. Vulnerability would be even higher for those countries that are commodity producers, run externally-funded current account deficits, and where external account deterioration is exacerbated by falling exports/rising oil price pressures and falling FX reserves. Indonesia remains one of the regions most exposed markets to capital flight pressu res during this period of transition. CIMB Bank Berhad August 2013

Strategies
Over the medium term, ASEAN fundamentals remain intact. Key structural themes that have driven these markets to outperform in recent years, namely the rising middle income class/growth of the consumer and investment/infrastructure uptrend continue to be backed by infrastructure needs, rising income trends and a comparatively safe level of leverage (especially for the corporates). Indonesia and Thailand remain our top long term country picks. But on a cyclical basis, we think the odds are stacked against huddling in Emerging Markets ASEAN for safety (or growth as North Asia appears to be stabilising). Despite the recent sell-off, a sustained rebound is unlikely; we favour more defensive country and sector selections for the near term. Key structural themes that have driven ASEAN markets to outperform in recent years, continue to be backed by infrastructure needs, rising income trends and a comparatively safe level of leverage

Risk Factors
Risks to growth and earnings have escalated in recent weeks led by falling commodity prices, slowing export growth, rising external account concerns and monetary tightening (Indonesia) into an already deteriorating growth backdrop.

Source: Jason Todd Chang Chiou Yi Regional Strategy CIMB Research Pte Ltd Page 8

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Fixed Income
Malaysian Government Securities (MGS) yields continued to rise as the net selling pressure seen since late May 2013 continued, commensurate with expectations the Federal Reserve will start tapering off its Quantitative Easing (QE) asset purchases program sometime in the coming months. Piling pressure on govvies* was the Fitch Ratings negative rating action on Malaysia. Despite mid-month bargain hunting US Treasuries held losses as uncertainties over the timing of the Feds tapering of asset purchases program continued to pressure sentiment. This was further exacerbated by the rosy non-farm payrolls numbers released in early July. Non-farm payroll data rose 195k in June, beating earlier estimates of 165k. The prior months number was revised upward to 195k from 175k in an earlier estimate. However, unemployment stayed at 7.6%, coming slightly behind estimates of an improvement to 7.5%. To recap, bond markets came under heavy selling pressure since late June, as players pondered the potential scale-back of the US Federal Reserve's QE asset purchases program, which will dampen demand for bonds in the coming 2H2013. After the FOMC meeting on 19 June, the Feds Ben Bernanke pointed that the central bank will scale back its QE this year and ends it completely by mid-2014 if the economy stays on stable course (towards 7.0% unemployment rate from around 7.6% right now). Rupiah Government bonds The government bond market was volatile in July. However, yields ended higher for all tenures. In early month, players anticipated another hike in the Bank Indonesia (BI) rate. Most of economists surveyed by Bloomberg expected that BI rate may be raised by 25bps to 6.25%. However, at the Board of Governor Meeting (RGD) on 11 July, Bank Indonesia unexpectedly hiked the BI rate by 50bps to 6.50%. Meantime, the Bank Indonesia Facility Rate (FasBI) rate was increased from 4.25% to 4.75%. The BI rate decision was taken by BI to restrict the rupiah weakening and amidst the expected higher inflation rate. Thai Baht Government bonds Against the continued yield surge along the US Treasuries market, Thai Baht government bonds showed losses with shorter to longer tenor bond yields rising 10-25bps in the month of July. However, we noted a dip in 20-year yields, down about 20bps. Mild gains were noted along global bond markets midmonth, after a statement from Federal Reserve chief Ben Bernanke that the stimulus program is required until the US economy sees sustainable growth in employment. Further supporting the pickup in bonds during early July was the relatively contained inflation. The CPI rose 2.25% in June 2013 against +2.27% in May and earlier consensus of +2.39%. Along the Corporate Bond side, we also noted net selling action dominating the proceedings. Indicative credit yields as per Thai Bond Market Association (BMA) rose in excess of 10bps during the month, following from the recent surge in government bond yields. Malaysian Government Securities (MGS) yields continued to rise as the net selling pressure seen since late May 2013 continued, commensurate with expectations the Federal Reserve will start tapering off its QE asset purchases program sometime in the coming months. A slower Fed buy up of longer dated US Treasuries signals the start to the end of the period of flush global liquidity. This would lighten market demand for global bonds whilst ensuring a sustained climb in bond yields. Despite a brief lull in July when bond yields held steady, Malaysias 10-year government bonds yields had shot up 72bps in June-July 2013 (along the 10-year MGS) amidst the heightened QE concerns. The rise in MGS yields was particularly notable late in the month of July. On 30 July, Fitch Ratings revised its Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) from Stable to Negative (whilst affirming each at A- and A respectively). According to Fitch, the revision stems from its view of the sovereign governments weakness in public finances had worsened amidst a lack of budgetary reforms and fiscal consolidation. The agency cited the federal governments debt to GDP of 53.3% at end 2012 and its assumption of wider budget deficit to 4.7% of GDP in 2012 from 3.8% in 2011 amidst increased spending. These two indicators (debt levels and budget deficit) are the major keys in our opinion that the government need to improve to avoid further deterioration in Fitchs rating on Malaysia going forward.
*Government bonds

CIMB Bank Berhad *Government bonds August 2013

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Fixed Income
Elsewhere, Bank Negara kept the Overnight Policy Rate at 3.00% after the Monetary Policy Committee (MPC) meeting in the first week of July. The language in the accompanying statement appeared similar to the MPC statement back in May 2013. Bank Negara pointed towards the threat of slow global growth, but Malaysias growth remains supported by domestic demand. Meantime, inflation is expected to show modest rise in the second half of the year.

Strategies
We foresee the following drivers for the domestic government bond market: Domestic and external data. Trading trend will be responsive towards incoming data, as they expect central banks to hinge short- to medium-term monetary policy direction towards the same data Slow month for govvies auction. Seeing the market will be taking a week-long break mid-month for the Hari Raya break, there will only be one govvies auction slated for this month, namely the issuance of a new longer dated 20-year Government Investment Issue (GII Aug33). The longest tenor GII is currentl y the 15-year GII (maturing Aug28). For this upcoming tender, we expect an issuance amount of around RM3.0 billion Foreign investors flow will be scrutinized. Bank Negara released the latest numbers for foreign holdings in domestic debt securities just before the end of July. Data showed that foreigners holdings of MGS fell by RM6.63 billion in June 2013, on the heels of the expected QE scale back and drive towards riskier asset classes. Hence, total foreigners' holding of Ringgit government bonds fell to about 30.9% of total outstanding in June from about 32.5% in May 2013. Total foreigners net sell of domestic debt securities including shorter term bills summed to RM11.1 billion during the month. Continued pricing on bonds for impending QE scale back. The end month US economic events were supportive of bond markets. Coming out of the FOMC meeting, policymakers scaled back their assessment of the US economy recovery pace, quoting that growth was only modest and that inflation was not picking up (Fed s targeted inflation is 2%). In addition, there was no clear timeframe given for the QE tapering plans. Meanwhile, the US nonfarm payrolls for July came in below expectations at an increase of 165k against consensus of 195k increase. Source: Nik Ahmad Mukharriz Bin Nik Muhammad Vice President of Fixed Income Research CIMB Investment Bank Bhd

Risk Factors
The longer term economic outlook in the US and globalwise will be on steadier trajectory, and that scale back and halt of the QE remains on the cards in 2H2013-1H2014. Hence, we think bond players will respond as such. We foresee MGS yields to continue to be pressured upwards. In the coming couple of weeks, we expect both Malaysian bonds and US Treasuries to trade on weak footing. We expect 10-year MGS to hover above 4.00% and the 10 Treasury above 2.75%. The weak Ringgit should also sustain above the 3.2000 level The US economy unexpectedly accelerated to 1.7% q-o-q annualised growth in 2Q2013 from a marked-down 1Q2013 growth of 1.1% (1.8% previously), supported by capital investment though there was a cooling in consumer spending. However, the US non-farm payrolls for July came in below expectations at an increase of 165k against consensus of 195k increase. CIMB Economics Research expects the US economy to sustain its expansion, backed by private demand that is underpinned by rising household wealth, housing recovery and still-supportive financial conditions. Our economists maintain their growth estimates of 1.9% for 2013 and 2.53.0% for 2014.

CIMB Bank Berhad August 2013

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Commodities
We anticipate commodity prices will remain subdued in 3Q13, as weak Chinese growth and muted fundamentals continued to weigh on the markets. But clearly, global markets remain fixated on when the Fed will start to ease its bond purchases and the ensuing turn in the global liquidity cycle. For commodities, we expect preciousmetal markets to be more sensitive to the timing and expectations of Fed tapering. Outside of that, underlying fundamentals continue to drive prices.

Gold
We expect the precious metal markets to be more sensitive to the timing of and expectations around the Fed tapering. Outside of that, we see more underlying fundamentals driving prices. At the same time, we see golds recent rise being unsustainable, although vulnerable to some short covering. While gold fell nearly 30% in 1H13, it has risen 10% over the past three weeks as fears of an immediate end to QE3 have subsided. As US growth prospects bring forward the timing of Fed tapering and a stronger USD, gold will likely suffer. However, this may continue to be interspersed with some weak US economic data, which would imply a delay to the tapering and support gold prices. We have maintained our Neutral weighting on gold in the short term due to concerns around an end to monetary easing, a stronger USD and lack of inflationary pressure. One positive is persistently strong physical demand, along with the fact that much of the impact of rising yields and stronger USD appears to have already priced in. We believe the gold price will trade in a tight range of US$1,250-1,300/oz in 2H13.

Overall Energy Neutral

Overweight Brent, WTI

Neutral Gas, uranium Lead, zinc, nickel, Gold, silver

Underweight Thermal coal

Base metals Precious metals

Slightly Overweight Neutral

Copper, Tin

Aluminium

PGM

Sources: CIMB Estimates

Crude Oil
We have been broadly positive on crude oil for a couple of months now, on the back of improving fundamentals. We came out of a perfect storm in the early part of 2Q13, where demand was hurt not only by a weakening macro environment, but also a more sustained maintenance period (on refineries). At the same time, we have seen some good growth in output from not only the US, but also OPEC. There is little doubt that risks to Chinese growth have increased over the past month. The economy continues to weaken and in our view offers little scope for upside surprise in the coming months. However, supply-side issues will remain an important balancing force in this market and, as such, we continue to see the overall market dynamic as conducive to prices moving to the top end of our forecast price range of US$100-120/bbl over 2H13. Geopolitical risks are never far from the surface in the oil market and they have once again raised their head over the past month. This includes issues in Turkey (where an oil pipeline has been repeatedly bombed), Syria and Nigeria.

Base Metals
We have downgraded aluminium to Underweight as we believe it is increasingly likely that inventory previously held off market due to financing deals will start to hit the market. In the case of nickel, we have kept our neutral outlook despite our expectations that the market will remain oversupplied for the immediate future. This is based around the uncertainty surrounding the ban on Indonesian nickel ore exports. We maintain our Overweight short-term recommendation on copper but have shaved our price forecasts over the next couple of years. While the market remains concerned about the sustainability of the current macro recovery in China, we believe supply disruptions and better-than-expected US demand will negate these issues.

Source: Daniel Hynes Head of Commodity Strategy CIMB Securities (Australia) Ltd Page 11

CIMB Bank Berhad August 2013

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Commodities
Crude Palm Oil (CPO)
The average CPO price in Jul 2013 fell 3% m-o-m to RM2,325 per tonne, due to the concerns of seasonally higher palm oil supplies and larger soybean harvests from the US and South America. Furthermore, the competitiveness of soybean oil price has improved against CPO following its recent price decline. In 7M13, the average CPO price was RM2,313 per tonne, or 16% below 7M12s average due to the higher production and stocks at the beginning of 2013. We maintain our view that the CPO price will correct when palm oil stocks increase in the seasonal peak production period that starts in September and higher soybean oil supplies from South America become more widely available on the export market. Malaysias palm oil stocks rose for the first time this year to 1.66m tonnes (higher by 1% mom). However, the stock level remains 16.8% below July 2012s stock level of 2m tonnes. Julys palm oil stock level is 3% above the consensus median forecast of 1.6m tonnes (based on a Reuters poll), mainly due to stronger-than-expected production. However, it is below our projection of 1.7m tonnes as the better-than-expected exports and domestic usage trumped stronger production. We forecast that output will decline 3% m-o-m in Aug 2013 due to the fewer working days as estate workers return home to celebrate the Ramadan festival. Export volumes are expected to be flattish mom as the discount gap between CPO and soybean oil prices has narrowed significantly to US$162 per tonne from US$349 per tonne in Jan 13 due to weaker soybean oil prices, palm oil stocks in China remain high relative to historical stock holdings and the rupee weakness could hurt India's demand for edible oils. But this will be partially offset by the supportive profit margins for biodiesel production, which is positive for demand. We project that palm oil stocks will increase 4% m-o-m to the 1.73m tonnes level by end-August.

Source: Ivy Ng Senior Research Analyst CIMB Equities Research CIMB Investment Bank Bhd CIMB Bank Berhad August 2013 Page 12

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Foreign Exchange
USD
Dollar eased in July by 1.9% as markets perceived Bernankes testimony before the Congress in mid July was rather dovish and concluded that the asset purchase program will not be tapered off earlier than expected. Markets have clearly misinterpreted Bernankes statement as the scale back of its existing US$85bn per month bond buying program remains intact with September FOMC meeting will be keenly eyed for any reduction schedule. Therefore, the current weakness in the Dollar offers great opportunity to accumulate on the dips ahead of the Fed meeting.

AUD
AUD was the worst performing currency in July, off by 2.78% on the back of continued weakness in the domestic economy which prompted the RBA to cut its policy rates by 25 bps to 2.50% in its recent MPC meeting. While the central bank has been silent of its future interest rate guidance, the strength of AUD still remains a concern amongst the MPC members. Nevertheless, RBA is likely to take comfort of the Feds intention which is likely to put the AUD further under pressure without the need for any additional rate cuts for the time being.

MYR
MYR was the 2nd worst performing currency for the month as it tumbled 2.46% on the back of portfolio outflows given the Feds intention of scaling back its bond buying program. Also adding pressure to the currency was the revision of rating outlook on Malaysias sovereign rating by the International rating agency, Fitch from stable to negative outlook due to fiscal concerns.

Euro
EUR jumped 1.82% in July, underpinned by market expectation that the Fed would not scale back its bond buying program sooner than expected. Furthermore, better than expected economic data in the region also supported the single currency. However, the near term trajectory for the EUR is still remains on the downside and therefore preference remains to play the currency from the short side with expectation for the currency to decline towards 1.3000 by end of the September 2013.

THB
THB was also not spared from portfolio outflows as the Baht weakened by almost 1% in July. Further weakness is likely to be in store given the large foreign exposure in its domestic bonds as well as the economy which is also pointing towards a slowdown given the recent economic data.

GBP
Cable was relatively unchanged in July as markets were cautious of the BOE forward guidance which is expected to suppress Cable from heading upwards though domestic economic data in the last several months had been strong, indicating underlying improvement. BOE Carney still believes the domestic economy remains weak and has yet to recover from its historical highs and thereby forwards guidance would be necessary in the foreseeable future. We remain bearish on Sterling given the strength of the Dollar in the near term.

IDR
IDR was the worst performing currency in July; off by 3.21% with bias remain on the downside given the broad based Dollar strength and potential portfolio outflows in the near term despite the recent policy hike by BI. Furthermore, twin deficits i.e. trade and current account deficit continue to weigh on the currency. We see the IDR weakening towards 10,400 by end of September 2013.

SGD
SGD plunged 0.6% in July and was not spared from the weakening of rest of the Asian FX units. While 2Q2013 GDP came out better than expected, we do not foresee the currency to benefit significantly as the Feds tightening measures shall weigh on the SGD to a weaker trend in the near term with expectation that the currency would fall towards 1.2800 by end of 3Q2013.

CIMB Bank Berhad August 2013

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Foreign Exchange
Forecast of Major Currencies: Sep-13 EUR JPY GBP AUD NZD CNY SGD MYR IDR THB
1.3000 100.00 1.5000 0.8900 0.7900 6.1700 1.2800 3.2500 10400 31.60

Dec-13
1.2900 101.00 1.4800 0.8800 0.7700 6.2400 1.2900 3.3000 10500 32.00

Mar-14
1.2700 103.00 1.4600 0.8600 0.7600 6.3000 1.3100 3.3300 10600

Jun-14
1.2500 104.00 1.4300 0.8500 0.7500 6.3500 1.3200 3.3500 10700

32.30 33.00 Source: CIMB Treasury Research

Source: Suresh Kumar Ramanathan Head of Interest Rates & Foreign Exchange Strategy CIMB Group Treasury Fixed Income Research Team CIMB Investment Bank Bhd CIMB Bank Berhad August 2013 Page 14

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CIMB Bank Berhad August 2013

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