Singapore Market

This report was compiled by analyst Narjeeb Jarhom for AMFraser Securities.

SINGAPORE MARKET
Market rallies likely to be short-lived in the run-up to the earnings reporting season from month-end till February with STI (3460 at noon today) capped at 3550-3600 and support around 3300-3350.

After seeing unsustainable rallies for most of the 4th quarter, investor psychology is now more acceptable of a downward trending or sideways drifting market in the coming few weeks. Unless of course hedge and sovereign fund managers make a beeline for equities in the next few days to reverse the downbeat sentiments and bring back the bullish spirits.But even then, many investors and traders are likely to capitalise on rallies to trim positions and to cut losses.

Fund managers too are unlikely to go all out to lift the new STI being launched next week to the 3600 resistance area let alone the 3800-3900 peaks of early October anytime soon, certainly not in this quarter where confidence remains shaky amid the unsettling US housing sector and the fast slowing US economy.
With the Singapore economy having slowed down to a 6% annual growth rate in 4q07 year-on-year from 9% in 3q07, corporate earnings growth could have also started to slow last quarter. Chances of a quick pick up in earnings growth this current quarter are not good and this will impact stock prices which will be influenced by institutional perception of earnings potential in 2008.

The 4q and full year 2007 reports may begin to be discounted before they kick in at end-January but the extent of market falls are still hard to quantify depending on liquidity flows in a weak market and Fed’s moves on interest rates at its Jan 29-30 FOMC meeting.Nevertheless, US and local stocks are not expected to plunge to the 25500-27000 support on the Dow Jones and the STI to below the current 3300 support but if they do the Fed may have to be more aggressive in its rate cuts perhaps by 50bp to 3.75%.That possibility hinges on 4q07 US GDP growth especially if it falls below 1%.
A rally may develop ahead of the FOMC meeting in anticipation of a bold Fed funds rate cut in which case we may see the Dow back to its 35000-37000 resistance and the STI to 3550-3600.What happens after the FOMC meeting is more critical to evaluate even at this early stage especially if investors rightly or wrongly perceive that the series of rate cuts has not had much positive impact on US economy and earnings growth.

This could set the stage for a more volatile February and thus investors’ continued cautious approach is called for.We advise cautious buying of blue chips in the leading sectors ie banks, properties, off shore conglomerates and telecoms on rocky market days for traders with a 3-5 weeks’ view and close monitoring of market conditions to see any major shift of investor sentiment for the worse taking place.

Traders should be satisfied with a 5 to 10% trading gains and avoid getting trapped by buying aggressively during rallies as there are still no definitive signs that the closer gaps between correction phases seen in the second half of 2007 are about to end now.We have seen the STI plunging nearly 20% in July-August and again by 15% in November.

After a short 2 week really at end-Nov into early Dec from 3306 to 3622, the index again fell this time by 9% back to 3300 on Dec 18.Although it has recovered to nearly 3500 (3491 on Dec 27 and 3482 on Dec 31) it is only up 16.6% yoy, not a particularly spectacular performance for a year that saw new monthly peaks on the STI for 8 out of 12 months with a 31% year to date gain at the highest point of 3906 on Oct 10 against 2986 at end-2006.The near record trading range of about 1000 points from lows of 2932/2962 in early March and mid-August to 3906 has the unfavourable effect of increasing volatility on the downside.

The worst was in August from the mid-July 3689 high to an intra-day low of 2962 on Aug 17, down 19.7%:Just short of the above 20% mark which conventional wisdom suggests to signal the start of a bear market.Having ended 2007 at 3482, a 20% fall would take the STI to 2787, which is not conceivable at this stage but market players are used to 10-15% corrections and the strategy of buying during sharp downturns is likely to continue this year.A 10% fall to around 3150 is also hard to accept at this stage ahead of the month-end FOMC meeting, the earnings season, Chinese New Year festivities and the mid-February Budget speech where the government is likely to introduce measures to stem the rising cost of living and perhaps other market friendly moves in the unlikely event of a deteriorating external and local corporate environment.

Thus days of market falls in the next few weeks towards 3300-3350 should offer good trading chances barring a sharp Wall Street correction as the market can expect at least a short-lived run-up spanning 2-3 weeks in late January into February.It is still not advisable to chase prices that have run up too fast to the 3600 level.

Traders should wait for the next buying opportunity that should emerge again not long after the Budget speech which notoriously in the past had seen some sharp reversals not long after the statement.Last year about 2 weeks after the Budget, the STI peaked at 3316 on Feb 26 and in a sudden one-week plunge, it landed at 2932 on March 5, down 11.6%. Although it is too early to gauge 2q08 performance, it is quite possible that the STI could reach a major bottom for the year during this periodwhich may well again be below 3000. It may repeat last year’s double bottom behaviour again this year but the timing may differ.

Last year it was at 2932 in March and 2962 in August. If the STI could plunge from nearly 3700 to briefly below 3000, it is best that traders brace themselves for another break of 3000 perhaps as early as late Feb-early March or sometime in second quarter.

The 3650-3700 which houses the then mid-July record high is likely to be a strong resistance, which may not be tested until the second half. But even then only if the US escapes a recession and the Singapore economy does not slow down to the low end of the official 4.5-6.5% growth rate for 2008, which will unfavourably impact earnings growth to single digit range from current forecasts of 12 to 15-16%.On a technical note, the long term STI uptrend is still intact even if it revisits the 3000 psychological level.
The critical support at 2006 high of 2666, which is close to the long-standing 2583 high in 2000 however must not be tested as it could spark a new bear market. The behaviour of the monthly MACD and RSI however are also not that inspiring.Nevertheless, a bear market scenario is unlikely to emerge in next few months but investors should not ignore vital signs of a worsening US economic situation this year as any deep recession there could lead to an easy break of STI 3000 notwithstanding the Asian growth story.

Investors should bear in mind of the still close correlation of the local market to that of Wall Street.
With the STI among the lowest regional indices’ year-on year gainers, up 16% in line with the Dow’s modest 6% gain compared to over 40% for the Hang Seng Index and the 25-35% by other Asian ex-Japan markets, excluding China and India which remain in a class of heir own.
Already we have seen the local economy slowing down sharply in 4q07 in line with the weak US economy.