Market Focus: Equity Strategy: Fire sale

The market is oversold, and poised for a rebound on cheap valuations. But uncertainties continue to lurk amidst a tough operating environment, as recession hits and job cuts continue to rise. The bears will prevail in 2009, and we expect the STI to trade within a band of 1250 to 2100 as it base-builds towards a more convincing recovery in 2010.

Poised for technical rebound off low valuations. Post the meltdown in October 2008, the market is cheap by all measures. At current levels of 1740, forward PE of 11x is close to the regional crisis low and dividend yields of 5.2% has surpassed previous lows of 3.5%. An expansionary budget to be unveiled in January 2009, coupled with optimism over Obama’s fiscal measures to boost the US economy are key catalysts for the rebound in 1Q09.
But the bear market persists. The economy is not out of the woods yet, and bad news from the corporate sector will cap performance. We expect the STI to trade within a range of 1450 to 2180. The low end of the range reflects a P/B from the mean, which is -2 standard deviations. This is consistent with recession year valuations.
Stick to survivors of the fittest with the tenacity to ride through this recession. These will be companies backed by relatively resilient earnings, strong cash flows, and cashed-up balance sheet. They are in a favourable position to acquire cheap assets as deflation runs its course into 2009.
Our preferred picks are SMRT, SIA Engineering, SPH and ST Engineering. We would sell asset plays including property and shipping companies on the rebound, as the process of de-leveraging will lead to asset devaluation in 2009. Distressed valuation levels will spur M&A activities, potential candidates can be found among technology, oil and gas and S chips.