Published October 9, 2008

Merrill reduces Singapore to underweight

Move follows downgrades in property and banking sectors

By OH BOON PING
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US bank Merrill Lynch has reduced Singapore to underweight following downgrades in the property and banking sectors here.

Building trap: Merrill expects residential prices to fall by 10% this year and 25% in 2009

Based on forecast valuations next year, its favourite stocks are SingTel, Sembcorp Marine and Singapore Petroleum Company.

In a report, the investment house said it has cut the portfolio weighting for Singapore to 4.27 per cent - below the benchmark weighting of 5.14 per cent.

'Although Singapore initially scores well in our model, our Singapore property and banking analysts have downgraded their respective sectors. As these two sectors account for around half of market cap, we are overriding the model to bring Singapore to a heavy underweight.'

For example, its banking analyst Andrew Maule believes a protracted slowdown in the property market will impact profits in 2009.

Specifically, loan growth is expected to slow to mid-single digits from the current 26 per cent year-on-year, while weaker capital markets and reduced appetite for wealth management products will likely hurt market-sensitive revenues.

As for real estate, the research house thinks any chance for a recovery in the second half of this year has disappeared with the deterioration in the economy. For example, it expects residential prices to fall by 10 per cent this year and 25 per cent in 2009.

With demand weak and high inventories, it does not see property stabilising before 2010. Meanwhile, office capital values have peaked due to rising debt cost and lower rentals ahead.

Furthermore, Singapore is exposed to the global slowdown more than other countries, as its exports-to- GDP ratio is the highest in the region, the report adds.

In August, non-oil domestic exports from the city state worsened - sinking 14 per cent from a year ago - the fourth straight monthly drop and the biggest decline since December 2006.

Similarly, factory output shrank 12.2 per cent year-on-year in August on a 35.7 per cent contraction in the pharmaceuticals segment.

The analysts felt that Singapore stocks are not backed by earnings, where 12-month forward earnings from June are up just 4 per cent year-on-year and valuations are not especially cheap either. Least preferred stocks are Singapore Exchange, CapitaLand and Keppel Land.

Elsewhere in the region, Merrill issued mild underweights on India, Taiwan and the Philippines, but has a heavy overweight on China, Hong Kong and Australia.