The focus has shifted from inflationary worries to fears of asset deflation, as the process of deleveraging unwinds in the face of tightening liquidity. While we do not discount a rebound in the STI as markets have been oversold, the road ahead is bumpy as investors grapple with the knock-on effects of the global financial crisis filtering into Singapore’s small and open economy.Cheap valuation but risks have risen.
The STI has fallen to a five year low, trading at P/E of 12.5x (08F) and 11x (09F). In the event of a positive outcome from the U.S. Congress approving the US$700bn rescue package in the US, this should restore some stability to the US financial institutions. However, we are not at the end of GDP or earnings downgrade cycle yet. The risk of Singapore going into technical recession in 3Q08 is rising, given weak NODX figures.
Our base case STI target is now 2960, translating into PE of 13x on 2009 earnings. We have attempted to stress-test the STI to determine trough valuations. Based on our bear case scenario, our bottom-up target for STI is 2162 assuming Singapore’s GDP growth slows to 3% next year, property prices fall by 40% from its peak and oil price collapses to US$60/bbl. Our strategy is to pick stocks backed by cash and high yield with minimal downside risks to earnings, namely SPH and A REIT. We have highlighted STX and Keppel Corp as Fully Valued. We expect STX’s share price to fall in anticipation of an oversupply situation in dry bulkers come 2010, while Keppel Corp’s performance is dragged down by Keppel Land (oversupply in office space), refining margins peaking at SPC and slower order flows at offshore and marine.
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