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Monday, 7 April 2008

Broad-based rally not in sight yet: analysts

Lynette Khoo
875 words
7 April 2008
Business Times Singapore
English
(c) 2008 Singapore Press Holdings Limited

Recent rebound does not signal a V-shape recovery

(SINGAPORE) In just a short span of three weeks, the benchmark Straits Times Index (STI) has staged an impressive rebound, recovering over 360 points, or some 13 per cent, from its lows in March - a balm for investors' rattled nerves.

Even so, analysts say that there are no signs of a bottoming-out in valuations, and a near-term market rally is still not in the bag.

The continuing market weakness was reflected in a dip in the STI last Friday of 15.99 points or 0.5 per cent to 3,155.56, ahead of key jobs data from the US later that day.

This left the STI still reeling, with a year-to-date loss of 310.07 points or 9 per cent, largely mimicking the Hang Seng Index. The HSI is also nursing a year-to-date loss of 12.8 per cent despite steep gains over the past three weeks.

Technical chartists call the recent spike in the STI a 'rebound in a downtrend' or a bear rally, without any shift in the short-term trend of the index.

'We are at a crossroads. We have the first-quarter reporting season where the STI may face some resistance when the results start to stream in,' said Kelive Research technical analyst Ken Tai. 'It's too early to call for a bottom at this moment.'

From a technical point, the market looks overbought in the past two weeks, he said.

He is pegging STI resistance at 3,306 points and eyes a bottom for this year at 2,650 points, a level which he expects to be cleared in the next three months and a signal for re-entry into the market.

UOB KayHian analyst K Ajith believes that a V-shape recovery is unlikely but instead, sees a base formation for the STI on retesting of lows or sideways drifting over the next three to six months.

What the market could be seeing now is a 'major low' and not a real bottoming-out, Mr Ajith said.
'We are not seeing a broad-based rally - some small caps are still underperforming, some laggard stocks are rallying and property stocks are underperforming.

'It's not sufficient to bring the market index to a new high.'

Mr Ajith sees STI support at 3,050 points, which was formed earlier last week, and technical resistance at 3,190 points.

These views resonate with that of billionaire George Soros, who told Bloomberg last week that the markets would fall further this year after a temporary reprieve, and that the recent bottom touched by the market would probably not be the final bottom.

Chief investment officer of Fullerton Fund Management Chan Chia Lin also said in a recent interview with Reuters that a decisive rally in the global equity markets is not imminent, held back by the US economic woes and slower earnings.

Analysts here say that the market could see further volatility as the earnings reporting season kicks in by end-April, when investors would look for signs of further damage from the US sub-prime crisis and the global economic slowdown.

'At this stage, the market still looks attractive on a fundamental basis but if you are talking about sentiment-driven, nobody can really tell whether the worst is over,' said Terence Wong, senior vice-president for research at DMG & Partners Securities. 'I do suspect there will still be some volatility at least for the next couple of months.'

He added that, at least for the first and second quarters, there will be further revelations of collateralised debt obligation (CDO) writedowns by banks, though it would be less shocking than previously.

'Earnings may not have bottomed out but hopefully sentiment has become more resilient,' Mr Wong said.

On a medium to long-term outlook, analysts remain optimistic of the STI's uptrend since there has been no fundamental shift in the Singapore economy, and recommend stock picking in select industries.

Mr Ajith of UOB KayHian recommends switching to laggard mid-cap and low-beta defensive stocks such as SingTel, ST Engineering, Parkway Life and SMRT.

DMG's Mr Wong said that it is time to look at stocks with growth prospects and defensive qualities, such as those in the oil and gas sector and telecommunications.

In the same vein, Mr Tai of Kelive said: 'We would look at low betas to tide over.'

These are stocks that have lower sensitivity to market volatility, such as SPH and real estate investment trusts (Reits).

Investors will be looking out for Singapore's first-quarter GDP data on Thursday, Westcomb research head Goh Mou Lih said, which he expects to include some positive numbers given the stronger loans growth, index of industrial production and stronger exports and retail sales seen in January and February.

But the latest snapshot of the US job market last Friday, which showed US employers slashing 80,000 jobs and the jobless rate rising to 5.1 per cent last month, provides yet another sign of a shrinking US economy and this might cap any upside on the markets this week, analysts say.

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