Citi forecasts 2 bad quarters but believes bottom may be nigh for stocks

Thursday, 05 March 2009 15:59
JUST AS THE economic numbers start to look uglier with forecasts of up to 8% contraction this year, a new report from US investment bank Citigroup, one of the most bearish on the local market for over a year, says there is a silver lining amidst the gathering dark clouds.

Make no mistake, Citigroup still believes the economy is really bad but suggests that the worst could soon be over. “2009 will likely be Singapore’s worst ever recession, with GDP growth in the magnitude of –5%,” Citigroup said in a Singapore equities strategy report published on March 5. “We are in uncharted territory.”
Indeed, the US banking group believes that as one of the world’s most open and trade dependent economies, Singapore’s first quarter of 2009 will likely see the worst quarterly contraction in history. Citigroup actually forecasts a huge contraction — in the magnitude of –10%.The investment bank warns Singaporeans not to hold out for a quick V-shaped recovery in the real economy this year. It predicts that even in the second quarter of 2009, Singapore’s economy will shrink 8% year-on-year. “Exports have fallen off a cliff, inflation pressures have subsided, while foreign reserves have been declining as MAS intervenes more frequently to defend the lower side of the band,” the report said. Citigroup’s Southeast Asian economist Kit-Wei Zheng expects Singapore dollar to depreciate to 1.62 to a US dollar by mid-2009.

Citigroup believes the Monetary Authority of Singapore (MAS), the quasi central bank, will likely weaken the Singapore Dollar and shift the currency’s trading band downwards at its early April policy meeting.

Is the bombed-out Singapore market now starting to show up some real value for long-term investors? Yes and no, say Citigroup’s Singapore equity strategists in the report. They seemed to suggest that buying early in a downturn might be foolhardy. “Uncertainty over the duration and depth of this recession — given the global recession which is accompanied by severe global financial and banking stress — favours a patient strategy,” strategist Chua Hak Bin writes in the report. “Buying past the quarter of worst GDP contraction historically delivers higher and more consistent returns, based on the last four ‘chartered’ recessions,” they argue in the report.
A better entry point, they say, may be sometime in the second or third quarter of this year rather than the current quarter. Moreover, they say since the current slump is “the worst recession ever, with an economic recovery — when it does arrive — that is likely to be U-shaped rather than V-shaped.” The current bear market, their report says, is also only in its 73rd week, still short of the average 85 weeks seen in previous recessions. The current analysts consensus of 12 months forward earnings growth is –21%, still far away from the –30% to –33% seen in past recessions, suggesting further analyst downgrades.

Still, Citigroup analysts readily concede that valuations are now looking “compelling” though they go on to argue that the benchmark STI is unlikely to stage a convincing recovery until macroeconomic conditions improve. The current 1,500 mark for the STI would represent a price to book value or PBV of about 0.9 times, far lower than the troughs seen in the aftermath of 2001 tech bubble burst (1.25x PBV) and 2003 SARS-induced slump (1.16x PBV), but still above that seen in 1998 Asian crisis (0.7x PBV). Citigroup’s worst-case scenario for STI is 1,200 (or 0.7 times PBV) but the investment bank’s strategist concede “we may not get there”.

Little wonder then that Citigroup strategists who have been fairly bearish about Singapore equities for more than year have now turned neutral at current STI level of 1,500 because many key STI component stocks have fallen below its own most bearish “recession-based” target prices.“We prefer telcos over property developers,” Citi strategists wrote. “Banks are no longer Top Sells.” Its Top Buys include real-estate trust Ascendas REIT which has addressed its refinancing issues, media giant Singapore Press Holdings which offers a mouth-watering 12% dividend yield, mobile operator MobileOne which offers great value at 9% dividend yield, integrated regional telco Singapore Telecommunications and ST Engineering.Its Top Sells include flag carrier Singapore Airlines which is beset with slumping passenger demand, cargo & jet fuel hedging losses as well as container shipping giant Neptune Orient Lines whose revenues remain weak as global trade stagnates while containership over-supply looms and regional property giant Capitaland.