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Fresh sub-prime concerns in Europe?

Local session turns more sober with ST Index down 41.9 points and a weak broad market

IT’S possible to argue that since the Straits Times Index had rocketed by almost 117 points on Wednesday, it would be reasonable to expect some kind of pullback yesterday. This, indeed, was the case, with the index dropping 41.9 points to 3,552.46.

On the other hand, it must have been troubling on some level to some observers that activity yesterday was very heavily concentrated in penny stocks and warrants, and that the focus as far as blue chips were concerned was narrow – support for the index came almost exclusively from DBS, while the main drag was exerted by SingTel.

For those who subscribe to the first point of view, which is that Tuesday’s 50-basis-point US interest rate cut is sufficient to kickstart the bull market, then yesterday’s dip would best be described as the market ‘taking a breather’.

This is the phrase most commonly used to describe a fall in prices, a seemingly innocuous term but one actually laden with meaning, since it implies that once the breather is over, the upward push will resume.

However, those who were troubled by the lack of breadth, depth and follow-through would undoubtedly have found grounds to fret over the fall, since it came despite a follow-through rise in Hong Kong and Japan.

Instead of the former British colony setting the pace as it traditionally does, the local market most probably drew its inspiration – or lack of it – from a fall in the US futures market and a soft opening for Europe.

One possible reason for Europe’s slip was a plunge in the shares of the UK’s embattled mortgage lender Northern Rock and a warning by Deutsche Bank that its Q3 profit has been adversely affected by the recent market turmoil, both serving as reminders that the US sub-prime crisis may not have fully played out yet.

All told, it was a much more sober session than that which preceded it, resulting in the broad market recording 145 rises versus 341 falls excluding warrants.

Meanwhile, DBS Vickers (DBSV) recommended an ‘overweight’ on the banks, mainly because it expects topline growth to remain robust.

On the ongoing and controversial subject of the local banks’ exposure to US collateralised debt obligations (CDOs), DBSV said that ‘as CDO investments are generally held as available-for-sale and/or held-to-maturity securities, mark-to-market losses would be recorded in reserves rather than the profit-and-loss account unless it is deemed permanently impaired’.

‘Nevertheless, the upcoming release of Q3 results will clearly reveal how banks treat their respective CDO investments, and we believe this would ultimately seal back investor confidence over time.’

Morgan Stanley, on the other hand, reminded investors that good times don’t last forever.

‘Singapore banks have enjoyed very low loan loss charges for the last four years. Current earnings and ratings don’t capture underlying risk tendency in our view,’ said Morgan Stanley. It called an ‘underweight’ on OCBC and an ‘equal weight’ on DBS and UOB.

In a preview of its upcoming global investment strategy to be released today, BCA Research said it recommends staying positive on equities since policy reflation will lift prices. In addition, BCA recommends overweighting emerging markets, raising the weighting of US stocks to ‘neutral’, and that investors stick to larger caps instead of small caps.


Source: Business Times 21 Sept 07

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