Week shows the worst not over

by R SIVANITHY (20 Nov)

NOTWITHSTANDING yesterday's short - covering bounce, the week just passed has served as a grim reminder to investors everywhere that the worst is not yet over for equities.

Wall Street's collapse throughout the week on deflationary worries as oil prices continued to crash, Citibank's plummet to US$4.71 per share on Thursday on worries about its future, the likelihood that General Motors might go bust, the awful US jobless and housing numbers, the US Treasury abandoning its supposedly crucial US$700 billion bailout plan - the list goes ever on.

Whatever the case, few observers placed any faith in yesterday's 48.15-point gain for the Straits Times Index (STI), most probably taking the opportunity to sell into short-covering strength.

For the week, the STI lost 97 points or 5.5 per cent to 1,662.10, falling continuously between Monday and Thursday. Not surprisingly, banks were hit again - DBS started the week at $10.34 but ended at $9.60 for a loss of more than 7 per cent, UOB's loss was one per cent and OCBC's 6 per cent.

Daiwa Institute of Research's Nov 19 report on the banks probably summed it up best when it said there is no reason to change its negative view on the sector after the Q3 results. 'We believe the quarterly net profit declines (average of 23 per cent) experienced by all banks for Q3 are a precursor of the weak operating conditions they face in 2009 and 2010,' said Daiwa.

Morgan Stanley (MS), in the meantime, said in its Nov 19 Asia Pacific Banks report that it has identified 39 banks in its regional coverage that may require some form of equity raising (ordinary equity issuance, dividend policy change, divestment, etc), to just increase their core equity tier one ratio to at least 9 per cent which amounts to about US$80 billion in new equity.

'The US$80 billion does not include capital strain/destruction from the emerging credit cycle and macro slowdown. At this stage, we have no clear view on the likely depth and breadth of these cycles, but suffice to say US$80 billion is unlikely to be enough.

Moreover, as the developed world moves to higher levels of absolute capital adequacy, will rating agencies and capital providers require Asia to maintain the previous relative gap ... ie, is even 9 per cent core equity tier one enough?' asked MS.

In his weekly roundup, AMP Capital's strategy head Shane Oliver said with the US's leading indicator of economic growth at its lowest reading in over 15 years, the worsening outlook means the US Federal Reserve will have to cut its short-term interest rates again at next month's meeting.

Next week, Wall Street will be closed on Thursday for Thanksgiving but will have to deal with a barrage of economic reports such as home sales, house prices, consumer confidence and durable goods orders.

As for the local market, DBS Vickers yesterday released a Singapore Market Focus entitled 'Cautious' in which it said with earnings deteriorating and assuming a recession with -2 per cent GDP growth, the STI could test 1,250.

-Research Report by R SIVANITHY (20 Nov)