Published May 28, 2009

Analysts preach caution despite rising share prices

Fundamentals still show weakness, says head of OCBC investment research

By TEH SHI NING

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RISING share prices, fuelled by talk of 'green shoots' in the economy, could be running ahead of fundamentals, say OCBC analysts.

Ms Carmen Lee (above) expects the second quarter's earnings to still be in decline, though she thinks a slight pick-up might come in Q3 and Q4 of this year.

Head of investment research Carmen Lee observed that the equity market has turned in a 'credible performance' with the Straits Times Index (STI) now 54 per cent up from this year's lowest point, and average daily trading volumes now a four-fold increase from February's levels.

Ms Lee said that stocks rallied on better than expected first quarter earnings, as well as positive manufacturing data and improved confidence indices, but cautioned that Q1 earnings were still in decline, even if that fall has slowed.

She expects Q2 earnings to continue to drop, though a slight pick-up might come in the Q3 and Q4 of this year.

One concern is the risk of corporate defaults, Ms Lee said.

'So far it seems to have been confined to S-chip stocks, but I think if this turns out to be a protracted recession then some of the other small and medium-sized entities in Singapore will also be affected.'

Also, much of the recent buying has been done by funds and institutional investors, rather than retail investors. So, another concern, Ms Lee said, is whether they might exit the market now to take a profit.

Because of the current mismatch between recovery in equities and recovery in actual earnings, Ms Lee said: 'Full market recovery will take a while, as fundamentals are still showing weakness, though the pace of deterioration has moderated.'

Telecoms is the only sector on which the team maintains an overweight call, and their list of stock picks has shrunk considerably, in line with their current 'fairly defensive' stance on equities.

Stocks rated 'buy' by the OCBC team include the three telcos, SingTel, StarHub and M1, CapitaCommercial Trust, Ezra Holdings, Olam International, Hyflux, Raffles Education, SingPost and SMRT. Of the three local banking stocks, DBS is the team's preferred with a 'hold' rating.