CIMB-GK put out a 48-page bullish report, upgrading the Singapore market from ‘neutral’ to ‘overweight’ and set a STI target of 2,160. Here are excerpts:
We believe the current rally still has legs. We believe that further gains until May/June are not impossible. Markets have been so pessimistic that they have thrown P/E valuations out of the window, and then cast doubt on P/BV valuations as default risks arose.
Finally, corporate fraud and dilution risks from potential capital raisings elevated risk aversion to an extreme level. Right now, the first leg of the rally is attributed to abating risk aversion.
This rally should easily carry us to 2,000 or the equivalent of 12x forward P/E. At any other time, 12x P/E would mark the lower end of the P/E band for FSSTI. This rally could potentially see the FSSTI sailing past 2,000 but to do so, corporates would have to deliver on earnings and guidance would have to come in ahead of expectations in the 1Q09 results season.
Such an event is not yet certain, which is why we speculate that reality may sink in again, in May/June. However, if one is willing to bear the pain of another sell-down, market timing looks increasingly favourable.
From the bottom, share prices are driven by a mean reversion of valuations from very depressed levels. This comes as risk aversion subsides. We believe this is already in motion.
Beyond that, equity prices are driven by earnings. We believe it would be timely to zoom in on the major sectors on the FSSTI, to assess the prospects of a sustained earnings recovery. We are mindful that for some sectors, overbuilding had occurred in the recent past and we would be wary of sectors with excess capacity.
Sectors that come to mind are shipping, ship-building, commercial and residential property. Top-down, we believe sectors that will benefit from a recovery are Financials, Offshore & Marine and Plantations.
Singapore Financials stand to gain from a less competitive lending environment, as foreign banks pull back. Offshore & Marine stands to benefit from an easing of credit. For this sector, we expect the negative news flow of further order cancellations to give way to the positive news flow of major contracts announcements as banks start to lend.
Lastly, we are optimistic on Plantations as we see the demand for basic commodities doing well when we transition to a back-to-basics world.
Is this upgrade too late?
Is it too late to chase the market after nearly a whole month of rallying? To this, the adage “better late than never” comes to mind. Investors who have been seasoned by bear markets typically won’t come back until an economic recovery is evident. By then, a good chunk of performance would have been over.
On all counts, the FSSTI is not expensive even after a good rally. We currently forecast 24% EPS growth for 2010, powered by the banks as loan loss provisions recede. Based on our market earnings, the FSSTI trades at 11.6x CY10 P/E or 13.3x 12-month rolling forward P/E, even after March’s rally.
Regressing to historical P/E bands, such valuations reflect a trough over a 12-year time span. By all counts, such valuations are not lofty.
We believe that valuations had swung to extremes on concerns over corporate defaults and book-value risks. As fear abates, markets would gravitate back to P/E valuation pillars and will realise that markets are not expensive.
The catalyst for this is when companies start to meet expectations again. We believe this will happen in the next two results seasons.
CIMB-GK: "80% chance of upside this year"
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