January 2, 2009 Friday

Pain will 'ease after 1st quarter'

Analysts predict rally in 'oversold' market as Asia is in strong shape

By Alvin Foo, Markets Correspondent

THE bad news according to stock market experts as they peer into their crystal balls to size up 2009: Singapore will suffer severe economic pain in the first quarter.

The good news, however, is that the pain should start to ease after that.

These experts speak about corporate earnings contractions and further job cuts - both seen as inevitable - but they also refer more optimistically to the recovery that will surely follow.

They say that after the harsh pain of the first quarter, a market rally could kick in as early as the second half of the year.

In fact, one research house is calling the early part of this year the 'darkest hour before dawn'.

The analysts say the local bourse is unlikely to repeat the severe slump seen during the Asian financial crisis 10 years ago, due to stronger corporate and household balance sheets and lower interest rates.

Based on past recessions, stock markets typically bottom out as the economy sees its first sharp economic contraction quarter, which is tipped to hit Singapore in the first quarter.

Says DBS Vickers: 'The market is oversold, and poised for a rebound on cheap valuations.'

UOB Kay Hian notes: 'The market will likely trough in the first quarter of 2009. Thus, sharp market dips during this period would be good opportunities to accumulate stocks.'

Last year, the Straits Times Index closed almost 50per cent down at 1,761.56 points.

Two key events in the coming weeks will be keenly watched for their potential to sow the seeds of recovery - US President-elect Barack Obama's massive stimulus package and Singapore's Budget.

Regionally, the aggressive policy responses from Asian governments are set to spur recovery.

As Macquarie Research notes: 'Interest rates are falling quickly, other monetary instruments are being used, currencies are depreciating, and fiscal policy is out in force.'

Asia is in stronger shape than other parts of the globe as it is not at the epicentre of the crisis.

Mr Jan Lambregts, Rabobank International's head of research for Asia, says: 'The Asian financial sector was never at the forefront of the innovative investment products that have wreaked so much havoc in the US and Eurozone financial sectors since mid-2007, and is therefore in relatively robust shape.'

But the prospect of more job losses here will mean more economic pain is likely before Singapore begins to see light at the end of the recession tunnel.

'The Singapore market could get worse before it gets better as we expect more job cuts in the first quarter of 2009,' says OCBC Investment Research.

And as consumers cut back on spending and businesses find orders slumping, corporate Singapore's bottom lines are bound to be hit.

The general market view is that earnings will shrink by at least 4per cent in the year ahead.

According to UOB Kay Hian, sectors which are forecast to see large earnings per share contractions this year are shipping, plantation, finance, aviation and supply chain.

It notes: 'The shipping, supply chain and plantation sectors will be hurt by lower shipping freight rates and commodity prices, given the collapse of the commodity sector.

'The finance sector's earnings will be lower because of higher provisions, while the aviation sector will be affected by lower yields.'

The broker tips land transport, technology and China plays as sectors which should see earnings growth.

So what should investors do?

OCBC Investment Research says: 'While a full market recovery will take a while, we believe that equities still offer a good long-term bet, especially blue chips.

'We are still advocating a strategy of diversified stock holdings favouring the defensive blue chips in view of current volatile market conditions.'

Analysts predict the STI will see a recovery this year.

UOB Kay Hian says its technical analysis suggests that the STI 'could head towards the 2,100-2,200 level'.

Adds DBS Vickers: 'We expect the STI to trade within a band of 1,250 to 2,100 as it base-builds towards a more convincing recovery in 2010.'

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