Why Singapore's STI Could Fall Another 700 Points

 Remain Sell SGX, target S$4.70: Citi has cut Singapore GDP forecasts, now signaling a mild recession, with possible risk to the downside. History suggests the STI can fall >50% from peak for prolonged downturns. So if the recession deepens, we can make a case for the STI to retrace to 1800 (STI peak was 3830) by mid-2009, which on a bottom-up basis is 1.1x trailing P/B, and suggests that consensus earnings may fall c.30% from peak.

 Why the STI may fall to 1800: This note identifies 7 STI cycles from 1975 to 2003. Four of these bear markets saw recessions, and the STI fell on average 49% (worst fall: 62%) from peak over 84 weeks, giving up 97% of its bull mkt. gains. For the present (8th) STI cycle, the index rose from 1170 (Mar-2003) to a peak of 3830 (Oct-2007). Today's bear market is now 50 weeks old, and at 2477 the STI has fallen 35% from peak. Depending on the depth of a possible recession, we view an STI of 1800 by mid-2009 is no longer unrealistic.

 Singapore — slipping into recession: Citi economist Kit Wei Zheng has cut Singapore GDP forecast to 2.8% for 2008E and 2.5% for 2009E, expecting a technical recession in 3Q08, citing NODX contraction, tighter funding, with potential knock-on effects to Singapore's labor and property markets. He guides that the trough of GDP fall may come in 1Q 2009, but also cautions that the downturn may prove more protracted than currently forecasted.

 Bottom-up view: STI 1800 = 1.1x P/B, c.30% peak earnings fall: Our 12 Sept SGX report documented a bottom-up approach to value the STI trough. The multiples implied by an 1800 target seem realistic if the downturn deepens.