With the Singapore economy expected to tip over into a technical recession according to the Citigroup's Singapore research team, investors are advised to stay on the defensive in their choice of stock picks.
It has revised its GDP growth forecast downwards for 2008 from 4.1% to 2.8%; and from 3.6% to 2.5% for 2009, while pointing to the onset of a technical recession – defined as two consecutive quarters of GDP decline – starting with the third quarter this year.
"The flash estimate for 3Q GDP growth, out in the second week of October, is expected to show a 1% contraction from a year ago, or 7.4% contraction from the previous quarter," noted the Citi report.
It added that the coming recession might possibly stretched over three to four quarters with internal factors such as the decline in the local property market compounding the effects of the global credit squeeze.
Citi's economist Kit Wei Zheng is of the view that "the GDP contraction in the third quarter of this year will not likely be the worst point of this recession. We expect the coming quarters, probably early 2009 to show a far steeper contraction."
Citi's report pointed out that there were several reasons why the looming recession would not be "short and shallow, despite arguments that the Singapore economy is in a stronger position and companies in a healthier position to weather the storm."
"First, the global economy is slowing down quite dramatically with more than half of the world's economies in terms of GDP – including US, Euroland and Japan – at risk of a recession. Three of the 4 BRIC countries – China, India and Russia – are experiencing a significant slowdown. Even the Asian crisis saw a much smaller proportion of economies slipping to recession."
"A consumer-led US recession – because of the housing bust – is much more negative for export-dependent Asia than an investment-led US recession (2001 tech bust). US consumption accounts for about 71% of US GDP versus about 15% of US GDP for US private investment. Yet, even the 2001 investment-led tech bust led to a Singapore recession, which saw four negative quarters and a bear market lasting 91 weeks. A US consumption-led recession could be if not more damaging."
Evidence of the impact of the global crunch has already been reflected in declines in Singapore trade, investment and tourist numbers slow on weaker global demand. With household wealth negatively affected by falling housing and stock markets, a slowing job market and possible retrenchments particularly in the financial sector will threaten job security and household wages, said Citi.
Noting that the current bear market in only in its 50th week, the report added that "there's therefore no compelling reason to believe that this bear market will end any earlier compared to previous recessions where the bear market lasted 85 weeks."
"Bear markets typically do not hit the trough or end until the economy is past the worst phase of the recession. In the 1985/86 recession, the bear market ended at the tail end of the recession. In the 1997/98 Asian crisis and 2001/02 tech recessions, the bear market ended in the middle of the recession, during the quarter where contraction was most severe."
Until then, Citi is recommending that investors stay defensive until tentative signs that the recession is at or just past its worst.
Citi's Picks
Its top buys under current market conditions are Starhub, A-REIT, Venture and Sembawang Marine. "Sembcorp Marine is still enjoying improving order book visibility and margin expansion despite volatile oil prices. Starhub is defensive and offers an over 7% yield with room for future capital reduction plans. A-REIT is a defensive name with astute management offering upside from its development projects and positive rental reversion from its science and business parks," said Citi.
On the flip side, the research team is negative on financials with SGX, DBS, OCBC heading its top sells list, which also include SIA and Capitaland. Citi analyst Robert Kong has a sell call on all three banks citing the effects of slowing loan growth; falling net interest margins, lower market-related non-interest income as well as the need for higher provisions.
"SGX will continue to fall until the STI finds a bottom, which will only likely occur in 2Q 2009, while SIA is a sell because of slowing traffic, especially business travel and high jet fuel prices. Capitaland remains a sell as we are concerned about its ability to maintain its capital recycling strategy and lift its depressed return on equity (ROE) under the current difficult operating environment."
Phillip's picks
Meanwhile, a separate report by Phillip Securities Research has listed REITs, shipping trusts and telecom as recommendations for a defensive strategy for the fourth quarter.
"With the slowing economy and the lower STI target, we recommend sectors that have stable revenue, high dividend yields and are defensive in nature; and shun sectors that are exposed to the luxury market," said the Phillip's report
It pointed out that "shipping trusts are classified as value stocks and the inherent value is the ability to pay out predictable dividends to unitholders. All 3 shipping trusts; FSLT, PST and
RMT, are now trading at a very attractive yield level with FSLT offering close to 20%. (see SIAS report on Shipping Trusts)
Phillip also noted that telecom stocks have fallen much less than other FTSE STI component stocks and are less volatile due to their highly defensive qualities. "Their earnings are less likely to be affected by the slowdown in the economy. Consumers will continue to make telephone calls and surf the Internet even when the economy is performing poorly. Moreover, they offer attractive dividend yields compared to other stocks.
Phillip has a hold on on both StarHub and M1 with target prices of S$2.99 and S$2.16 while SingTel, though has a lower dividend yield of 4.0% (compared to 7.1% and 6.4% respectively for Starhub and M1) is rated as a buy with a target of $4.01 for its diversified overseas operations including potential acquisitions in the lucrative China mobile market as well as its push into the higher-margin infocomm technology (ICT) business services aimed at corporate clients.
More
Towards a brighter tomorrow At a time when a lot of companies are expected to weigh in with weaker sales and profit numbers amid the current global financial turmoil and downturn, JK Yaming expects to chalk up record figures for the full financial year.
Insulated US tech companies hit by slump The US technology industry, which resisted the economy's growing weakness over the last year as customers kept buying laptops and iPhones, has finally succumbed to the slowdown.
BlackRock Global Views: 4th Quarter Amid all of the current turmoil, our best advice is for investors to focus on broad diversification among asset classes. In these circumstances, we recommend that investors remain cautious...
Commodities to outperform stocks, says Superfund Most commodities are likely to rebound and outperform stocks both in the short-term and over the next 3-5 years, according to managed futures fund provider, Superfund.
Deflation Fears Lurks as Global Demand Drops As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy – the prospect that goods will pile up waiting for buyers and prices...
Global investors see equities as undervalued Investors are waiting for the right conditions to return to equity markets amid the most pessimistic outlook yet recorded, according to Merrill Lynch's latest survey of fund managers.
Buy American. I Am by Warren Buffett I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds.
Sarasin finds silver lining in financial storm Investors are advised to take a fresh look at global markets and seek opportunities despite the financial crisis over the past four weeks...
Investors eye the Fear Index Fear is running high on Wall Street. Just look at the Fear Index.
With all those stomach-churning free falls and sharp reversals in the stock market recently...
Up to-date current Financial News for Investors
