Published October 23, 2008

Don't make us say it again in three months' time

By R SIVANITHY
Email this article
Print article
Feedback

WE hate to say 'we told you so', but we told you so. Back at the start of the second-quarter reporting season, this column pointed out that because this crisis is without any real historical precedent, using past valuation parameters in determining 'valuation support' levels may be inappropriate (BT, Hock Lock Siew, July 10, 'Q2 reporting season will test Singapore's defensive reputation').

Will the Q3 reporting season see analysts make more accurate (that is less optimistic or more realistic) forecasts? Let's hope so ...

We also said that local analysts, like their US counterparts, had very probably understated risk and overstated earnings (a diplomatic way of saying that despite all that had transpired, everyone was still too complacent about the state of the world and how it affected the markets).

The conclusion reached back then was that because Wall Street had not corrected anywhere as much as the rest of the world, the United States would surely suffer from earnings shocks, and if the same were to occur here, it would severely test the local market's 'safe haven' reputation.

Fourteen weeks later, those predictions and fears have come to pass - in the US and Europe, any euphoria associated with the massive bailouts undertaken by the US Treasury, Federal Reserve, UK and European governments and central banks around the world have been quickly replaced by a sudden realisation that with a crunching, debilitating recession ahead, earnings are going to take a walloping.

Here, the Straits Times Index's plunges over the past two days have been driven mainly by selling of the banks - which in turn stems from analysts rushing out sector downgrades ahead of the banks' Q3 reports. But a glance at the massive selldown already suffered by property stocks, conglomerates and government-linked companies suggests the realisation of poorer forward earnings isn't confined to just the banks but everyone else as well.

Better late than never? Perhaps. The problem is that even with the plunges of the past month, there are indications that overly optimistic earnings might still be a problem.

For example, Citi Investment Research confessed in an Oct 6 report on Wall Street that although its own 2008 earnings estimates have been too aggressive, they were still 'far more conservative than consensus forecasts . . . the current US$77 EPS (earnings per share) estimate for 2008 looks perilous'.

It added that sometime next year, it might be possible to hope that the more traditional valuation methodologies could work because at the moment, given record-high volatility, huge earnings uncertainty and even the risk of insolvencies, these tools are probably not useful at all.

As for the three local banks, Morgan Stanley and Kim Eng Research this week wrote that these stocks are overvalued relative to their earnings, which not surprisingly has helped trigger the rout in the sector since Monday.

Meanwhile for the property market, DBS-Vickers on Oct 20 spoke of developers running into a 'triple whammy'.

'In a slowing property market, the revenue stream slows as a result of declining sales, as the developers' construction progress ends up returning a lower cash flow. There could then be downward pricing pressure on the developer so as to move sales. But when this coincides with a scenario of tightening credit, then developers find themselves in a triple-whammy situation - slowing sales, increasing difficulty in obtaining credit or rolling over debt from their lenders, and increased cost and revenue uncertainty given that construction companies and property purchasers alike will be impacted by the rising cost and potentially decreasing availability of credit'.

The oil and gas sector, in the meantime, has been pounded by collapsing oil prices, and as for China stocks, the less said the better, especially after Ferrochina's bombshell that it is unable to service some of its loans.

Will the Q3 reporting season see analysts make more accurate (that is less optimistic or more realistic) forecasts? Let's hope so - we'd hate to have to say in three months' time that we told you so.