3-day selling spree cuts 5% off STI

by R SIVANITHY (19 Nov)

Weak global economy, shaky Wall Street and poor earnings visibility weigh on index

THE fortunes of the Straits Times Index (STI) were almost entirely dictated yesterday by Hong Kong's Hang Seng Index. The local index exhibited a near-perfect correlation on a minute to minute basis with the former British colony's main benchmark throughout the day. As a result, it registered the same volatility as the Hang Seng, eventually finishing a net 26.96 points down at 1,665.59.

The Hang Seng, which spiked higher at mid-afternoon, closed with a net loss of 0.8 per cent. At 5pm, the December futures on the Dow Jones Industrial Average had lost 105 points, suggesting a weak Wednesday opening for Wall Street.

It was the STI's third consecutive fall, for a loss of 94 points or 5.3 per cent since the start of the week. The sick global economy, the shaky and probably overvalued Wall Street and poor earnings visibility in the wake of the US sub-prime crisis are the main reasons for the slide.

Brokers say sentiment continues to be influenced by a seemingly never-ending stream of bad news.

Coal mining firm Straits Asia Resources' (SAR) shares stood out in terms of weakness yesterday, by virtue of a 14.5-cent or 19 per cent crash to 60.5 cents on volume of 66 million.

OCBC Investment Research called a 'buy' on SAR. 'Its Q308 earnings have surged 707 per cent year on year and we expect FY09 to be even stronger, driven by record coal prices locked in during the commodity boom in 2008, coupled with easing production costs and retreating fuel prices.

Its 60 per cent dividend payout offers an attractive year-to-date yield of 9.5 per cent. Following our chat with management, we have tweaked our FY08 and FY09 estimates by -9 to +7 per cent. This raises our fair-value estimate to $1.35 from $1.25.'

Kim Eng Research said yesterday its top pick among conglomerates is ST Engineering (ST Engg). 'While having fallen 24 per cent since the onset of the global financial meltdown, ST Engg has been a relative outperformer in the current market, with the STI down 38 per cent over the same period.

ST Engg has also stabilised at its current level, making it an attractive pick in a volatile market, crucially backed by its FY09 dividend yield of 8.4 per cent.' ST Engg fell one cent yesterday to $2.13.

DMG & Partners said it has spent the past few weeks reviewing the financial forecasts and price targets for all the stocks under its coverage. 'With the cuts in price targets, we now arrive at a fair STI target of 2,080 over the next 12 months,' it said.

'However, in the short term we see further weakness that could take the STI to as low as 0.95 times P/B, or a 1,560 level. With the downside of about 10 per cent from the current STI level and difficulty in pinpointing the exact bottom, we recommend investors start nibbling at stocks that will survive this crisis.' The broker recommended companies with strong balance sheets.

In a Hong Kong Economics report dated Tuesday, Merrill Lynch said the unemployment rate there rose to 3.5 per cent in August-September, from 3.4 per cent in July-September.

'Given this is a lagging indicator, the already-worsened labour market is yet to be seen,' it said. 'We expect unemployment to hit 5 per cent in 2009. The weakening employment market once again lends support to our view that the economy has fallen into a recession. We continue to expect Hong Kong to post negative year-on-year GDP growth for the next two quarters and eventually finish the year with zero growth.'

-Research Report by R SIVANITHY (19 Nov)