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US sub-prime bailouts help stocks but STI runs into headwinds

IT HAS been bailout week as far as stock markets were concerned but judging by the performance of the past two days, scepticism abounds.

First, it was Fed officials dropping blatant hints about cutting interest rates at their Dec 11 meeting, then came the Bush administration’s mortgage-freeze offer to ease the sub-prime pressure.

It looks like everyone is pulling out the stops to try and make sure there’s no 2008 recession which, if it does occur, would be disastrous given that it’s an election year.

Even though many experts believe lower interest rates and the Bush bailout package are only temporary band-aids for a gaping housing wound, the short-term response last week was a large bounce in the major indices led by those on Wall Street.

The outcome here was that the Straits Times Index managed to rise 36 points or one per cent over the five days to 3,557.95.

But looking at the aggregate performance over the week doesn’t tell the whole story – on Thursday, the index reversed a 55-point rise to finish a nett 7 points down, a pattern that was repeated yesterday when it first shot up by 60-odd points only to collapse to a nett gain of just 5.4 points.

SingTel and the banks were the main index drivers throughout the week, displaying heightened volatility as the days passed. For SingTel there were no fresh broking reports to justify the vast swings. However, for the banks, several ‘overweight’ calls were issued, including those from Kim Eng, DBS-Vickers, Credit Suisse and BNP Paribas.

Most of these were written after the latest loan figures were issued. Using varying valuation methodologies, analysts still believe the banks to be undervalued, though upside from current levels appears to be between 10 and 20 per cent.

In the second line there was continued play on oil palm/commodity stocks such as Golden Agri, Indoffod Agri, Wilmar and Olam, supposedly because of rising oil prices. Also in focus was the construction sector, mainly featuring Lian Beng and Koh Brothers, while penny stocks such as E-Nets, Jade Technologies and Armada enjoyed some respite from the pressure they sustained throughout November.

In its weekly roundup, AMP Capital Investors said it expects equities to move higher into the year-end, thanks to the prospects of more US interest rate cuts and positive seasonal forces. ‘December has been the strongest month of the year on average over the last 20 years so . . . January is also a strong month.’

However, the fund manager said the next six months will be volatile because of US-led uncertainty.

US investment bank Morgan Stanley said in a Dec 6 currency report that the odds of a US recession are now about one in two.

‘As we expected, and despite the Fed cut, credit market conditions have deteriorated considerably and equity market performance has taken a dive. Accordingly, our preferred model implies a risk of US recession of 48 per cent in the coming 12 months,’ said MS.

In a Dec 3 US Economics report, Morgan Stanley said it believes an earnings recession has already begun, judging by Q3 reported profits. It said the market has not priced this in yet and thus poses a downside risk.

‘Earnings disappointments likely will drag equities lower,’ it said.


Source: Business Times 8 Dec 07

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