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Analysts lower estimates after another bleak day

Key resistance levels pitched down as panic selling persists

(SINGAPORE) If Monday was the day when fear stalked the markets, then yesterday saw a phase when it took a firmer hold. There was no let-up in the selling frenzy and bourses around Asia bled for the second straight day with the ‘R’ word very much in the frame.

Hours before the US Federal Reserve slashed interest rates in the US, fear of a US economic recession saw investors in Asia diving for cover. Many equity analysts here have started revising their market estimates for 2008 – mostly downwards.

The Singapore stock market was by no means the worst hit yesterday. Hong Kong’s Hang Seng Index slumped another 8.65 per cent yesterday, while the Jakarta Composite sank 7.7 per cent and the Shanghai Composite fell 7.22 per cent. In contrast, the revamped Straits Times Index slipped 50.6 points or 1.73 per cent to 2,866.55 at the end of the day. At one point it appeared headed for a steeper fall, having slumped 5.84 per cent during intra-day trading, before being propped up by a late-afternoon rebound. But most analysts believed that it was a technical bounce rather than a signal of bottoming out.

In less than four months, the STI has shed 26 per cent off its record high of 3,875.77 points achieved last October.

Analysts are now re-doing their forecasts.

Gabriel Yap of DMG & Partners cut his end-2008 STI target to 3,568 points from 3,875. He fears that even after the worst of the selling is over, a bearish market sentiment could still persist.

Some analysts are also lowering their baseline estimates for the STI after the index breached the support line of 3,000 points on Monday – a level that now becomes a key resistance level from a technical point of view.

DBS retail market strategist Yeo Kee Yan revised his baseline estimate to 2,650 points from 3,000, while UOB Kay Hian analyst K Ajith cut his STI baseline estimate from 3,000 points to a long-term support line at the 2,760 mark.

Mr Yeo now advises that investors enter the market when the STI hits 2,650 points, down from his earlier recommendation to ‘buy at 3,000-3,100 and sell at 3,700-4,000’. Mr Ajith expects the STI to trade at 2,700-3,600 points rather than an earlier estimate of 2,960-3,900 points.

‘As it stands, valuations are already at depressed levels. We recommend selective bottom-fishing,’ Mr Ajith said.

He noted that although the jury is still out on whether the US economy is entering a recession, the market is already selling ahead of the release of some key economic data.

‘The question is whether one should even wait for two quarters, as a technical recession is simply two consecutive quarters of contraction,’ Mr Ajith said. From the looks of it, ‘the market is not waiting’, he added.

Speaking to BT before the US central bank acted, analysts had indicated that its moves would be critical. ‘If (Federal Reserve chairman) Ben Bernanke follows or indicates, like Greenspan, to bring interest rates down to one per cent, then a deep recession can be avoided,’ said Mr Yap of DMG.

But he said he did not expect the ‘Asian Crisis ghost to come haunt us’ – a period between Oct 7, 1997 and Sept 27, 1998 when the STI dropped 58 per cent from 1,921 to 801.

He advocates trading stocks that have been sold down indiscriminately, particularly those that have dropped 40-50 per cent from their recent highs without material changes in their fundamentals.

OCBC Investment Research head Carmen Lee said that she does not have a year-end STI target and is maintaining her ‘overweight’ calls on the oil and gas stocks and defensive stocks, which she believes are safe havens.

In a note released this week, CIMB-GK said it is maintaining a cautious view on the stock market even though valuations are cheap now.

‘Our preferred sectors are telecommunications, transport and multi-industry. Sectors that we advocate avoiding are manufacturing and property,’ it said.

But given the lingering uncertainty in the US economy and sub-prime loan-related writedowns by banks, it is not clear when the market will hit the bottom and how close it is to staging a rebound.

Mr Yeo of DBS said that he believes that the stock market has not hit bottom till investors start to dump even quality shares and trading volume escalates further. If that happens, even the safe haven stocks will get sold-down, he said.

But Mr Yap of DMG said that a technical bounce could start just as quickly as the market had corrected. ‘We are close to hitting the bottom simply due to the rapidity at which we have fallen,’ he added. ‘In terms of magnitude, we are another 8 per cent from the worst of the lows we have seen so far from corrections in the past 30 years. In terms of speed, this is the fastest ever in the past 30 years.’

Providing a contrarian view was Wong Sui Jau, general manager of Fundsupermart, who believes that now is a good time to enter the market. He is looking at a longer investment timeframe and also believes that the fundamentals are still in place.

‘The market is oversold,’ Mr Wong said. ‘Whether this is the bottom or not, at the current levels, I would expect gains for those buying in now and holding for two years or more.’

 

Source: Business Times 23 Jan 08

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