Singapore STI approaches the 2105 level

The STI is in its fifth consecutive month of decline, having fallen by more than 1,000 points since May this year. Earlier expectations of a short term rebound in the STI failed to materialize as skittish investors turned their attention to the potential economic fallout of the global financial crisis. While we are maintaining our long term bearish stance, we are keeping an open view that a rebound may still occur as the STI approaches the 2105 level - the objective of the measured move from 3906 to 2745.

Our prognosis for the long-term downtrend is predicated on concerns that 4-5% official GDP growth forecast is no longer realistic and that the Singapore economy may even dip into a technical recession as early as 3Q08. This is reinforced by the monthly NODX growth figures, which has been deteriorating since May 08. Although the inflation may have peaked, this could be a reflection of a weakening demand rather than an easing of cost pressures. This is likely to hurt corporate earnings in 2H08 and 2009, putting current market valuations at risk of further downgrades.

Going forward, markets will be on the lookout for continued volatility in credit spreads and banking/corporate failures in the US or Europe. Until the credit markets show signs of stability, the credit crunch is unlikely to end anytime soon. Given these uncertainties, we are recommending traders to take short positions on the local banks as we anticipate earnings to be adversely impacted by prospects of slower loans growth, fee-based income and higher loans provisioning.

Ken Tai Chee Ming, CMT Technical Strategist KELIVE RESEARCH Part of the Kim Eng Group