STI could possibly slide to 2080 level over the next 2-3 months? The STI has surged 58% from the early Mar 09 low point. Economic indicators, though off the worst, have not taken off in similar fashion. We believe the current market has priced in a sharp economic recovery, and the risk of being disappointed is high. Hence, we believe there could be downside pressure on STI in the short term. We believe the STI could correct to 2080, or 1.3x P/B, which is one standard deviation below the 12-year mean of 1.6x P/B.
But upside to 2750 likely over the next 12-months. The STI P/B peak in 2000 coincided with the peak of M3 to GDP ratio. This occurred after the 1997/1998 Asian Financial Crisis. The liquidity generated led to the strength in the STI then. The M3 to GDP ratio has risen sharply over the past 2 years, and we expect the ratio to rise further with M3 rising faster than GDP. We see this contributing to further upside on the STI over the 12-month time horizon. Our target of 2750 is based on 1.6x P/B, the mean over the past 12 years.
To ride on the short-term weakness, we recommend selling SIA, SGX and Parkway.
SIA (SELL\S$12.34\Target: S$8.80) suffered weak May 09 operating statistics, and we expect H1N1 concerns to lead to further softness in passenger load.
SGX's (SELL\S$7.17\Target: S$6.20) Jun 09 average daily turnover is down~20% from the May 09 peak of S$2.27b. Chinese companies can now also list on alternative exchanges such as Bursa Malaysia, and this could lower SGX long term growth.
Parkway (SELL\S$1.63\Target: S$0.92) is dependent on foreign patients and this segment has been adversely affected by the fall in foreign visitors to Singapore due to the H1N1 concerns.
Certain stocks will outperform despite the likely STI short-term softness.
City Development (BUY\S$8.80\Target: S$12.00) will benefit from the recent strength in new property units sold. We forecast 10,000 residential units to be sold in Singapore in 2009, versus 4,300 for 2008.
ComfortDelgro (BUY\S$1.28\Target: S$1.78) should register resilient bus and rail ridership numbers despite the recession. Softer diesel and electricity prices will keep expenses low.
Keppel Corp (BUY\S$6.75\Target: S$8.60) will see strong demand from its customers as the breakeven cost of drilling a deepwater well is now US$60/bbl, versus US$75/bbl two years ago.
StarHub (BUY\S$2.06\Target: S$2.39) should see resilience given its strong yields of over 8%, the highest in the industry.
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