Published April 2, 2009

Volatile but familiar start to Q2

STI tracked the Hang Seng Index before falling victim to expectations of an impending fall on Wall Street

By R SIVANITHY
SENIOR CORRESPONDENT

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AS far as the Straits Times Index was concerned, the second quarter kicked off on a volatile though familiar note yesterday when it tracked Hong Kong's Hang Seng Index on a second-by-second basis, before falling victim to expectations of an impending fall on Wall Street and probable 'window-undressing' after Tuesday's 27-point end-of-quarter window-dressing push.

The outcome was an early spike up of about 20 points for the STI, a drop into negative territory at lunchtime, a bounce up and finally a slide which resulted in a net gain of just 2.27 points at 1,702.26 at the close.

The Hang Seng's negative close, Europe's soft opening - the average loss at 5pm was around 1.5 per cent for all markets - and a 90-point drop in the June futures contract on the Dow Jones Industrial Average suggested a weak Wednesday for the US market.

Citi Investment Research said in its March 31, 2009 report on Singapore banks that although loans fell for the fifth month, there are tentative signs of the economy bottoming - non-oil domestic exports fell at a slower pace in February and Citi's 3-6 month leading indicators are showing signs of stabilising in January-February. 'Q1 2009 may prove to be the quarter of maximum GDP contraction in this recession, a critical marker of the end of past STI bear markets. Our Singapore economist predicts Q1 2009 GDP of -10 per cent year-on-year and expects GDP contraction for a further two quarters, turning positive in Q4 2009,' said Citi.

However, it said that it is negative on the banks given its bearish take on the economy and its in-house view that the STI could head to 1,500.

It therefore called a 'sell' on all three banks, with target prices for DBS, OCBC and UOB of $7.50, $4.25 and $9.80 respectively, using dividend discount models and various EPS estimates. Citi said that while DBS is the most leveraged play on an economic recovery, it also has the highest operating risk to a deteriorating macroeconomic outlook.

'DBS is trading at bear-trough cycle consensus PE levels, but consensus estimates may have downside risk if the downturn deepens' said Citi.

DBS, OCBC and UOB ended at $8.45, $4.80 and $9.80 respectively yesterday.

In its April 1, 2009 Singapore Market Strategy, Credit Suisse (CS) maintained an 'underweight' on the local market after its 12th Asian Investment Conference (AIC) in Hong Kong at which 18 listed companies were present.

'With more companies focusing on volume over pricing, overall margins are likely to contract further in 2009. This is notwithstanding lower operating costs . . . we are projecting EBIT (earnings before interest and taxes) margins for Singapore Inc (based on CS coverage) to decline from 12.7 to 10.8 per cent in 2009 . . . while we are expecting Singapore Inc's dividends to decline by 4 per cent to $11.4 billion in 2009, the risk remains on the downside,' said CS.

Turnover, excluding foreign currency issues, amounted to a low 822 million units worth $755 million yesterday, down sharply from the $1.24 billion done on Tuesday.

Citi called a 'sell' on the Singapore Exchange with a $4.70 target price, on the grounds that history suggests the counter could slide further until the bear market reaches its trough. 'Profit expectations are still largely dependent on volatile securities market turnover, which we view will continue to wane until the bear market comes to an end,' said Citi.

SGX shares rose four cents to $5.14.