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Banks caught in sub-prime limbo

AFTER the excitement of the previous week during which the Straits Times Index (STI) enjoyed a 156-point bounce, this week was much more sombre as US recession fears reared its head while oil crossed US$100 per barrel.

For the most part, trading exhibited the same two-tier pattern evident in previous weeks with large-cap blue chips and small-cap penny stocks occupying most of the market’s energies.

As always, direction was set by Wall Street’s overnight close and Hong Kong, though in yesterday’s case, plunges in China also played a part in causing weakness here. After dropping to an intraday low of 3,013 yesterday, a late bout of short-covering in mainly the banks and Keppel Corp lifted the index to a close of 3,048.64 for a net loss of 6.17 points.

For the week, the index dropped 40 points or 1.3 per cent.

There was a brief mid-week play on mid-caps from the water treatment sector such as Hyflux and Epure, thanks to a Morgan Stanley report that pointed out the burgeoning demand in this part of the world for clean water.

Banks, in the meantime, appear to be caught in a sub-prime-induced limbo. Prudent provisioning for sub-prime losses hasn’t yet restored the market’s confidence in their future bottom lines, at least judging by their share prices. However, also judging by share price behaviour, it does appear that downside could be limited from here onwards.

For the week, DBS was unchanged at $17.90 while UOB rose 40 cents to $18.68 and OCBC gained 18 cents to $7.68.

Analysts appear unsure of how to play the banking card over the next few months – most seem to be hedging their bets with ‘neutral’ or ‘hold’ recommendations until greater clarity emerges.

Citigroup, in a results preview on Monday, probably summed the situation up best when it said that because economic risks remain to the downside, banks may remain depressed. ‘So despite price falls of up to 33 per cent to 5-8 per cent above trough valuations, we fear banks could be near-term dead money until a clear catalyst emerges,’ said Citigroup.

The other finance sector counter to come under pressure was the Singapore Exchange (SGX) whose shares yesterday dropped 26 cents to $8.79. Apart from the overall soft sentiment, a Goldman Sachs downgrade was probably instrumental on the grounds that slowing growth, high inflation and US recessionary forces will likely dampen market sentiment and hence, SGX earnings.

‘Our new target price of $8.20 implies 9 per cent downside potential. We have also set a ‘suggested entry level’ of $5.70 based on our worst-case EPS estimate (daily stock turnover of $1.6 billion, assuming velocity reverts to historical average),’ said Goldman Sachs.

On the state of the US economy, research outfit Ideaglobal during the week released a study of how the US Treasury yield curve tends to behave during V-shaped or U-shaped recessions and concluded that the present curve implied the latter. It said that the combination of high oil prices, collapsing property prices and financial market-induced slowdown is likely to result in a prolonged period of below-trend performance.

On what the charts say for the STI, Kim Eng’s online research unit KELive said in its ‘Long & Short Report’ yesterday that notwithstanding the recent post-Chinese New Year bounce, the long-term trend is down with a mid-term target of 2,650.

Source: Business Times 23 Feb 08

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