Below is extracted from the research report from CIMB issued to clients
Recession typically triggers earnings contraction for two years. Singapore’s
latest 2Q08 GDP figures (-0.5% yoy) officially pull the republic into recession zone.
We had cut our GDP forecasts for Singapore last week. Historically, corporate
earnings contract for two years from the onset of a recession. We are already
expecting negative earnings growth for 2008 but there is significant risk to 2009 earnings as well. Top down, we believe another year of earnings contraction in 2009 is highly probable. We are in the process of cutting our estimates.
Jobs hold the key; looking increasingly shaky. All manner of business
transactions has slowed as counterparties distrust one another. Commodity and manufacturing companies will feel the strain when end-demand weakens and commodity prices melt. The effect is compounded in the shipping industry as suppliers become wary of accepting letters of credit. Rising corporate bankruptcies and dissipating jobs will follow. Jobs hold the key for Singapore to ride out this storm but jobs are increasingly shaky. We see downside risks to banks and property earnings as unemployment rises.
Worst is not over; exploring downside targets for the FSSTI when propertyrelated defaults start. We explore downside targets for the FSSTI. Earnings visibility has dimmed significantly and setting index targets on the basis of earnings becomes increasingly meaningless. We take the book values of banks and marked down RNAV estimates for key property stocks to test downside targets for the FSSTI.
Using an average of trough values in recent crisis years, downside of 17%
from current levels for the STI (at 1,613) appears possible. If banks and properties fall back to Asian financial crisis P/BV levels, the STI could drift even lower to 974.
