Published December 15, 2008

Stockmarket analysts look past the pain

Rough ride ahead but bank on bottom-fishing opportunities in 2nd half-year, they say

By LYNETTE KHOO
Email this article
Print article
Feedback

(SINGAPORE) For stockmarket investors gazing into the new year, any decisive rebounds and opportunities for bottom-fishing are likely to come in the second half of the year, analysts say.

For H1, analysts recommend high-yield defensive stocks in the telecoms, land transport and media industries.

Till then, investors will be in for a tough ride marked by more downsides and volatility as corporate earnings and the economy are tested.

'It's a foregone conclusion that the outlook for next year will be worse than this year if you look at all the economic indicators and the related corporate fundamentals that go along with it,' says Kelive director of retail research Ong Seng Yeow.

Last week, Asian stocks got a lift from the largest US infrastructure investment plan since the 1950s unveiled by President-elect Barack Obama, before the failure of the rescue deal for the Big Three carmakers put markets into reverse. The Straits Times Index ended the week at 1,740.34 points, but still only half way from the level it reached for 2007.

Analysts believe there could be a near-term rebound from the typical New Year's effect and the expansionary Budget to be announced in January. But any reprieve will be short-lived as the economy, jobs market and corporate earnings may not recover till 2010.



Markets are still pricing in a re-run of the 1997 Asian financial crisis, or worse, some analysts say. CIMB-GK research head Kenneth Ng expects a bottom of 1,200 points to be reached in the third quarter at best, which is 0.7 times price to book (P/B) - the trough of the Asian financial crisis.

'There is potential for Singapore GDP to be the worst ever. In this climate, I don't think the market will rally convincingly,' Mr Ng says. With recovery in the external economy expected to come in 2010 at the earliest, we are likely to see very weak corporate earnings in the first half of next year, he adds.

Most analysts think that poor fourth-quarter earnings due to be announced early next year will show only the initial recessionary impact and there could be more earnings downgrades.

Corporate margins will be eroded as producers in sectors saddled with overcapacity cut prices to get sales moving, Mr Ng says. He is projecting a 16 per cent slump in earnings per share (EPS) of the STI component companies for 2009 from an estimated 8 per cent decline for 2008, which is one of the more dismal EPS outlook for 2009 among analysts.

Mr Ong of Kelive thinks that with the slowdown in corporate earnings to be reflected in the next six to nine months, the STI could retest the lows of 2008 around the 1,500-point level. 'We are looking at the 1,300 points as a level to enter,' he says.

Most analysts expect a rebound in stocks in the second half of 2009, which could take the benchmark STI higher by end-2009.

CIMB-GK is calling a bottom-up target of 2,040 points while UBS Investment Research pegs its end-2009 STI fair value at 2,100 points. UOB KayHian, which expects the market to trough in the first quarter given its undemanding valuation of 0.99 times P/B, eyes a bottom-up STI target of 2,150 points.

Average equity returns have a good chance of turning positive by end-2009, Mr Ng of CIMB-GK says.

So how should investors position themselves for 2009?

For the first half, analysts recommend high-yield defensive stocks in the telecoms, land transport and media industries. They favour blue chips over small caps, and cash-generating businesses given the tight credit condition.

Mr Ong of Kelive says that index proxies will probably be on investors' radar. He thinks a portion of investors' portfolios should be in defensive stocks 'which are critical in preserving value and collecting some dividends as the market turns south'.

Some analysts have also started looking beyond earnings to consider the balance sheet strength of companies in their search for 'deep-value' stocks.

According to a recent Deutsche Bank report, conglomerates such as Keppel Corp and land transport companies ComfortDelGro and SMRT have low refinancing risk given their net cash position and low gearing.

In a strategy report, Merrill Lynch recommends stocks that will emerge winners in the next cycle. It says that investors with a long-term horizon of over one year should consider stocks such as UOB, City Developments and Sembcorp Marine.

It all boils down to individual corporate fundamentals, says ST Asset Management president and CEO Goh Mui Hong. 'If the company can survive without gearing, I think those would be the companies that will last.'

But she prefers bonds over equities for next year, since bondholders get priority over shareholders in a credit event.

Towards the end of 2009, cyclical stocks such as financials and commodities could be rebound bets, Mr Ng says. Sectors not plagued by overcapacity would recover first, he adds.

For investors with a long-term view, DMG & Partners Securities co-head of research Terence Wong believes that 2009 is still 'a great time to look for stocks that could see their share price multiply in the years to come'.