Published October 8, 2008

Stocks not expected to bottom out in Q4

Credit Suisse picks defensive stocks like UOB, SIA, SPH, Olam

By CHOW PENN NEE
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HOW low can our stock market go? There is still some way before it reaches the bottom, said a Credit Suisse report. The Singapore market will not bottom out in the fourth quarter of this year, Credit Suisse analysts said. This is because, historically, an economic growth trough follows a Singapore stock market bottom after a period of less than three months.

The report said that looking at the last eight periods in which deceleration in Singapore's economic growth impacted market performance, the market typically bottomed out for no longer than three months before quarterly GDP growth bottomed.

'We currently expect GDP growth for Singapore to bottom in 1Q09. In turn, we take the view that the Singapore market is unlikely to bottom before 2009,' says the report.

Brokerage DMG & Partners, however, believe that the current Singapore slowdown is seen to be less severe than the 1997/98 period. In a report released yesterday, DMG analysts said the market expects a technical recession for Singapore, 'and we believe this is likely to take place'.

But the current Singapore economic slowdown is likely to be less severe than that in the 1997/98 because Singapore interbank rates, which are hovering at 1.8 per cent, have not spiked to levels seen in 1997/98 when it exceeded 12 per cent at one point.

DMG analysts also said that neighbouring countries, which account for 36 per cent of Singapore's visitor arrivals and more than 20 per cent of Singapore's non-oil domestic exports, now have much stronger fundamentals - evident from their current account surpluses (as opposed to deficits in 1996, before the Asian financial crisis); and lower ratio of external debt to GNP.

Credit Suisse's analysts are picking defensive stocks, choosing companies like United Overseas Bank, Singapore Press Holdings, Singapore Airlines, Raffles Education and Olam.

The Credit Suisse report also notes that a slowdown in domestic GDP growth will impact on sectors like real estate, banks and consumer plays. Credit Suisse analysts said they have recently downgraded their earnings forecasts and valuations for these sectors.

With GDP growth expected to slow substantially from 7.7 per cent last year, to 3.9 per cent this year, and 2.8 per cent next year, domestic demand, which has been resilient, is expected to moderate. 'Slower income and job growth, falling asset prices, and flat to negative export growth are likely to weigh on domestic demand, which has been the biggest contributor to GDP,' says the report.

DMG's analysts have recommended investors to 'start nibbling at companies that will outlast the slowdown'. Companies which have strong balance sheet, resilient earnings even in an economic downturn, ability to maintain high yield; and a low beta could give very significant returns for investors within 12 months and beyond, says DMG's report.

DMG analysts have recommended ComfortDelgro, Frasers Centrepoint Trust, SingTel, and SPH. The report added that they will avoid City Developments Ltd, DBS and Singapore Exchange.

According to Credit Suisse analysts, the finance and property sectors saw the most substantial earnings downgrades, especially for financial year 2009. 'Based on consensus estimates, Singapore has seen one of the most significant earnings downgrades across the region,' says the report. Year to date 2009 expected consensus earnings per share for Singapore has now been revised down by 15 per cent, versus Asia ex-Japan's revision of 18 per cent downwards. Regionally, Singapore is third in earnings downgrades after Taiwan and the Philippines.

'Looking ahead, we are now projecting earnings growth of negative 11.1 per cent for FY08 and 3.2 per cent for FY09. Post-revisions, the bulk of the FY08E earnings decline is driven by the finance and property sectors.'

The report added that property sector profits next year would be less than half of 2007's levels, following the sharp fall in 2008.