Wave of heavy selling hits bourses

by R SIVANITHY (19 Nov)

Worries that Wall Street might tank send STI below 1,700; one billion units worth $863 million traded

THE region's stock markets were engulfed by a wave of heavy selling yesterday afternoon, resulting in the Straits Times Index (STI) losing the 1,700 mark when it plunged 57.12 points or 3.3 per cent to 1,692.55.

As always, expectations of how Wall Street might perform later in the day provided the main impetus, which means that going by yesterday's loss, the US market could tank when it opens.

Hong Kong's Hang Seng Index was also instrumental in setting the tone, with a 4.5 per cent loss. In addition, China's indices collapsed almost 7 per cent and Europe opened with an average loss of 1.5 per cent.

Turnover, which was poor before lunch, picked up in the afternoon. Excluding foreign currency issues, one billion units worth $863 million were traded, up from Monday's weak $638 million but still below last week's low average of $950 million.

Brokers said news that Citigroup plans to lay off 50,000 staff worldwide provided a sobering reminder to many investors that the downturn is only just starting.

In a Nov 14 report on Asia-Pacific banks, Morgan Stanley analyst Matthew Wilson said that in the current environment, earnings visibility is very poor and using book value as a gauge of value can be a problem.

'At this stage we have no clear view on the likely depth and breadth of the credit and macro cycle,' he said. 'Book value is a function of accounting. Consequently, it usually differs materially from economic value.'

In particular, Mr Wilson said goodwill impairment is a risk, and he sees no fundamental reason why investors should pay a multiple on goodwill. Nine Asian banks were identified for which goodwill accounts for more than 25 per cent of book value, among them DBS. The stock dropped 20 cents to $9.90 yesterday with 8.1 million done.

The property sector took a hit after news that a record low 112 units were sold in October and that some buyers were returning units. Goldman Sachs said yesterday it is cautious on developers, with a 'sell' on City Developments and Wing Tai because of their exposure to the prime residential segment.

The broker said that even though developer stocks are trading at an average 46 per cent discount to net asset values, it still prefers selected commercial real estate investment trusts. CityDev plunged 50 cents or 8 per cent yesterday to $5.75.

Elsewhere, commodities play Olam International was the subject of differing broker recommendations. JP Morgan, for example, in a Nov 14 report called an 'overweight' on Olam with a $1.19 price target, describing the company's first-quarter 2009 results as encouraging.

Merrill Lynch, on the other hand, on Monday rated Olam an 'underperform', down from 'neutral' and with a $1 price target. 'Our price objective is based on the Gordon growth model and implied 1.5x book.

We have cut our FY09/10 estimates by 10-18 per cent and expect lower sustainable ROE (return on equity) of 16-17 per cent as the company adopts a less geared capital structure,' said Merrill Lynch. Olam dropped 16 cents to $1.06 yesterday.

The US investment bank also downgraded another commodity firm, the Noble Group, setting a 70-cent price target compared with $3.15 previously. 'We acknowledge the stock is down 50 per cent since September but believe there is more downside risk given our prognosis that the slowdown in commodity trade will stretch into 2009,'

Merrill Lynch said. 'The stock traded at 0.6-0.7x in the 1999/2000 post-Asian crisis period and 0.8x during Sars and 9/11. We think it could trade at those levels again.' Noble ended 9.5 cents down at 87 cents yesterday.

-Research Report by R SIVANITHY (19 Nov)