Published October 2, 2008

Don't count on a Santa bailout

Rising risks from US will fan headwinds in stock markets, say analysts

By LYNETTE KHOO

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(SINGAPORE) It looks like Santa Claus may not deliver a stock market rally this Christmas, with investors bracing themselves for lean times in the fourth quarter.

While technical charts suggest oversold positions and that a bottom is near, analysts say the escalation of risks from US and Europe would only fan headwinds in markets.

'I think the effects of the sub-prime crisis that affected Singapore from the fourth quarter last year is now more serious and deep-rooted. This being the case, it will take a longer time to unwind all these that are affecting the equities market,' says Macquarie Securities research head Soong Tuck Yin.

The benchmark Straits Times Index has slumped 31.9 per cent year-to-date. It is now set to end 2008 lower than the 3,465.63 level at end-2007. The MSCI's Asia Pacific Index of regional shares has dropped 32 per cent since the beginning of the year.

DBS Vickers says in a report that although current valuations look cheap compared to the average PE of 15.6 times, and are close to the Sars low of 9.3 times, the derating of the market amid heightened risks presents a potential downside for the STI of a low of 2,100 points.

Many analysts believe there is still hope for the US bailout package but think its resuscitation may not bring an extended rally beyond a brief technical rebound.

'A lot of the developments are still unravelling in the US and Europe right now; the big picture does not look good and I doubt that markets have troughed,' says Kim Eng director of research Ong Seng Yeow.

'In the short term, our technical strategy team believes that the Straits Times Index may be heading toward the support level of 2,307 where a technical rebound or rally may occur,' he adds.

UOB Asset Management senior director Wong Ann Derk notes that the plan to buy troubled assets is helpful in boosting liquidity, buying time for banks to recapitalise and instilling market confidence, but the root of the issue remains, namely the US housing problems, slowing growth and poor consumer confidence.

For Singapore, there are clouds, too. The odds of another quarter-on-quarter decline in GDP in the third quarter has risen after non-oil domestic exports hit the skids in August, sinking 14 per cent from a year ago.

'I think there are ominous signs that the domestic economy is weakening. While our market is somewhat more resilient because of our safe-haven status as an oil refinery hub, don't forget that sentiment is determined by the aggregate money flows of the world economy,' says Mr Ong of Kim Eng. 'Our equity markets are equally at risk if the financial turmoil in US and Europe spills over to Asia.'

Market sentiment over the economy and corporate fundamentals remain weak, analysts say. They note that the fiscal third-quarter results due out in the fourth quarter have already been factored in and focus has shifted to the dismal earnings outlook for fiscal 2009.

DBS Vickers says it expects the cycle of earnings downgrades to continue into 2009, with the biggest risks to earnings coming from the property and banking sectors.

Describing the current market situation as a 'stalemate', OCBC research head Carmen Lee says investors are staying on the sidelines. But for those with a two to three-year horizon, current valuations offer good yields. With no clear bottom in sight, analysts hail cash as king.

But any window- dressing by fund managers at the end of the quarter cannot be ruled out.

To stay invested, analysts recommend defensive stocks that give predictable dividend yields, and companies that are well-capitalised and need little financing.

Mr Soong suggests avoiding companies that are highly leveraged. He is 'overweight' the offshore sector and Reits.

Mr Ong of Kim Eng favours oversold plantation and agricultural stocks, and defensives like SMRT and SPH.

'The value investors will definitely be the first to come back into the market,' Ms Lee of OCBC says. Those hoping for a market recovery would probably go for the blue chips, which are usually the first to rebound, she adds.