Published January 22, 2009

Market faces post-Budget reality check

In store are poor Q4 results, negative macro numbers: Citi

By TANG WEN EN

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THE Singapore market may face a reality check in post-Budget trading, says Citi Investment Research.

Citi, which had recommended investors to sell into strength in the pre-Budget market rally, said that post-Budget, the market will face disappointing fourth-quarter corporate earnings results, more negative macro numbers and gradual realisation of the limitations of government fiscal measures.

Based on Citi's research, the Straits Times Index (STI) historically falls following Budget announcements. In a recession, the fall can be steep. In 1998, the STI fell by 18.3 per cent three months after the Budget announcement. This was after a rally in the one month preceding the Budget. The fall in 2001 was similarly sharp, dropping 17.2 per cent after three months of the Budget.

Investor optimism in what a Budget can do typically results in a pre-Budget rally, but this optimism is generally disappointed by reality. This year, in what Chua Hak Bin, head of Citi's Singapore Investment Research, called 'the worst and deepest recession in Singapore's history', the pre-Budget rally has already experienced a slowdown.

Citi's expectations of earnings results for 4Q08 are pessimistic. Earnings per share (EPS) are expected to fall by 18 per cent in the next 12 months, although past recessions had seen earnings fall by up to 30 per cent.

The market may be disappointed if the Budget measures are not aggressive enough, said Citi. Permanent corporate and personal income tax cuts, for example, may not take place as the government may prefer income tax rebates instead.

Recently revised guidelines allow the government to tap into capital gains on investment returns on fiscal reserves. This might ease the economy as more income is released. However, Citi felt that taking into account recent likely losses by GIC and Temasek on their investments, the amount to draw on might be lower than expected.

Performing the unprecedented action of tapping the national reserves might allow for more aggressive measures and alleviate some of the pain. But by how much? 'This is a thunderstorm,' said Dr Chua, 'not just a rainy day.'