It looks more like the end of the beginning

Published October 18, 2008
Businesstimes.com
By R SIVANITHY
SENIOR CORRESPONDENT

A PROMINENT businessman recently said of the US$700 billion US Treasury bailout plan that it didn't mark the beginning of the end, but rather the end of the beginning.

He meant, of course, that the US government's plan to buy toxic bank assets announced a fortnight ago marked only the end of the first phase of the bear market and that there was plenty more pain to come. Judging by the way trading went this week, he was probably right.

The Straits Times Index started the week with a two-day, 180-point burst following news of coordinated interest rate cuts, liquidity injections, bank nationalisation programmes and deposit guarantees by European governments/central banks that gave fresh hope that the credit crunch might soon be eased.

The reversal started on Wednesday, possibly because conditions in credit markets have not improved dramatically but also because investors have apparently cottoned on to the fact that a painful recession looms, the full effects of which may not have been priced in yet.

As stated in this column last week, a big reason for this is that Wall Street has probably lagged the rest of the world on the downside all throughout this year, and is only now starting to play catch-up.

Until it does, conditions are likely to stay as volatile as they've been over the past few months, with 3-5 per cent daily moves becoming increasingly frequent.

As a result, the STI promptly lost all of that 180 points gain, its 72.69 points plunge yesterday taking it to 1,878.51 or a nett loss of 70 points or 3.6 per cent for the week.

Among the worst hit of the index stocks was SingTel, whose price has tanked along with the Australian dollar.

Over the course of the week, SingTel lost 27 cents or 10 per cent to finish at $2.50.

China shipyard Cosco Corp was another STI member to bear the brunt of selling pressure because of several concerns, among them the strength of its order book.

However, two houses, JP Morgan and Kim Eng Research, stuck their necks out on Thursday with strong 'buys'.

Cosco yesterday fell six cents to 75.5 cents, bringing its loss to 34.5 cents or 31 per cent for the week.

Bank stocks held up reasonably well yesterday after news that the government will guarantee all deposits.

However, they were heavily sold off in the final hour - DBS lost 84 cents at $13, UOB 24 cents at $14.76 and OCBC 22 cents at $6.10.

Citi Investment Research said earlier in the week that it is time to sell the banks because Singapore's bear market is likely to continue until the point of maximum GDP contraction, projected to be in mid-2009. 'We see 20-25 per cent downside to consensus 2009/10 estimates,' said Citi.

Elsewhere within the finance sector is the Singapore Exchange, which reported a 35 per cent first quarter profit drop mid-week that, predictably, led to 'sell' reports being issued. The stock yesterday lost 23 cents to $5.31.

On the state of the US economy, BCA Research said that 'the worsening economic outlook is sustaining a high level of risk aversion on the part of lenders and investors'.

'Of course, this creates a self-fulfilling outcome as frozen credit markets and falling equity prices directly undermine the economy. The authorities fully understand that they must break this vicious circle. For its part, the Fed has begun to rapidly expand its balance sheet, and it is under pressure to cut interest rates again soon.' it said.