HOLD: Kim Eng ResearchJan 02, 2009 The Business Times
COSCO has issued a profit warning, stating that 2008 earnings will be lower than 2007. The bulk of the lowered earnings will be caused by provisions of doubtful debts.
Cosco recorded a net profit of $336.6 million for 2007, and had already posted net earnings of $326.5 million for the first nine months of 2008. This profit guidance therefore deviates significantly from the consensus estimate of $425 million for 2008 earnings and our own forecast of $465 million.
We are downgrading Cosco to a 'hold', while we re-assess our earnings forecast and target price. Specifically, Cosco says it has recently received requests for delays in making payment by several ship owners.
Accordingly, provisions will have to be made for doubtful debts. While increased operational costs such as higher steel and sub-contracting costs and additional development costs at Zhoushan are also being cited, these issues were already well-known and have been addressed by the market.
However, Cosco says that these operational issues have also contributed to further delivery delays, and Cosco said that it is assessing the various causes of delay and considering the need for further provisions for penalties under these contracts.
In addition, Cosco has also announced that it has been asked to reschedule the delivery dates of a total of seven units of 57,000-deadweight-tonne (dwt) bulk carriers by these ship owners.
The delivery dates of four of these vessels have been rescheduled from between February 2010 and June 2010 to between February 2011 and November 2011, and the delivery dates of the other three vessels have been rescheduled from between August 2009 and November 2009 to January 2012.
We are also in the process of factoring in these delays to our forward earnings forecasts.HOLD
Cosco CorporationDec 31 close: $0.95Kim Eng Research, Dec 31
Monday, February 2, 2009
COSCO - SELL : DMG
Cosco: Sell: DMG & Partners Securities
Dec 05, 2008 The Business Times
COSCO Corporation (Cosco) announced that its 51 per cent owned subsidiary, Cosco Shipyard, has entered into a variation agreement for five units of its 57,000 dwt bulk carrier newbuilds.
This variation agreement includes cancellation of two vessels and deliveries rescheduling of the three remaining bulk carriers. The cancellation would be conditional upon an advance payment of up to 80 per cent of the total contract price (of the remaining three bulk carriers) received from the shipowner.
We are keeping our forecasts intact as we have previously factored in 20 per cent cancellation orders in our estimates. Our target price remains at $0.68. We believe Cosco's share price would be negatively affected due to concerns over further possible cancellations in the near term.
Maintain SELL.SELL
Dec 05, 2008 The Business Times
COSCO Corporation (Cosco) announced that its 51 per cent owned subsidiary, Cosco Shipyard, has entered into a variation agreement for five units of its 57,000 dwt bulk carrier newbuilds.
This variation agreement includes cancellation of two vessels and deliveries rescheduling of the three remaining bulk carriers. The cancellation would be conditional upon an advance payment of up to 80 per cent of the total contract price (of the remaining three bulk carriers) received from the shipowner.
We are keeping our forecasts intact as we have previously factored in 20 per cent cancellation orders in our estimates. Our target price remains at $0.68. We believe Cosco's share price would be negatively affected due to concerns over further possible cancellations in the near term.
Maintain SELL.SELL
COSCO - SELL: DMG
SELL: DMG & Partners Securities
Nov 01, 2008 The Business Times
ON a year-on-year comparison, Cosco Corporation's revenue surged 80.7 per cent to $987.7 million in Q3 2008 as order backlog for shipbuilding and marine engineering was recognised.
Revenue from this segment contributed 92.1 per cent (an increase of 87 per cent) or $909.9 million. Dry bulk shipping turnover grew 36 per cent to $72.5 million, lifted by more favourable charter rates renewed in the earlier part of the year. Though gross margin was lower at 23.4 per cent (compared to 37.9 per cent in Q3 2007) as a result of higher material costs and a shift in revenue contribution mix towards lower margin shipbuilding business, Cosco still managed to improve its bottom line by 16.5 per cent to $113.9 million.
But as compared to Q2 2008, Cosco's revenue declined 5.7 per cent. Turnover from ship building fell 10.7 per cent while marine engineering dropped 24.4 per cent, bringing the overall top-line contribution from ship repair, shipbuilding and marine engineering down by 6 per cent. Coupled with a lower gross profit margin of 23.4 per cent (a decline of 260 basis points), Cosco's profit after tax and minority interests fell by 11.5 per cent.
Only one of the first 10 dry bulk carriers would be delivered this year. The remaining nine carriers, which are currently being built in Zhoushan shipyard, would be delivered progressively in 2009. The management attributed the delay to several reasons:
1. Zhoushan shipyard was not operating at optimal capacity as the yard was undergoing expansion works concurrently.
2. Over-ambitious vessel delivery schedule, overlooking the fact that Cosco only ventured into the newbuilding business segment in 2007. Going forward, we remain concerned on the tight schedule and further possible delay in vessel deliveries as the management hinted that not all 40 vessels scheduled for delivery in FY 2009 have commenced construction work. A typical bulk carrier newbuild takes 12-15 months to build.
The Baltic Dry Index (BDI) plunged below 1,000 recently (This is a fraction of the 10,000 a year ago). While Cosco would not expect any material negative impact from this falling BDI in the short term as the current charter contracts had been locked in based on higher freight rates previously, we believe the protracted low BDI rates would impact Cosco's shipping contribution in FY 2009 significantly.
The management guided that Cosco's shipping business division would be loss making should its bulk carriers be chartered at the current spot rate.
Cosco has always been a relatively high-beta stock, and this is especially evident in today's volatile market environment. As we continue to take a cautious stance on our sector outlook pertaining to the shipping industry, we are lowering our price-to-book valuation parameter to 1.0 times (from 1.2 times previously), deriving a target price of $0.680 (from $0.860 previously). Maintain SELL.
Cosco Corporation
Sell
DMG & Partners Securities
Oct 31 close: $0.775
Nov 01, 2008 The Business Times
ON a year-on-year comparison, Cosco Corporation's revenue surged 80.7 per cent to $987.7 million in Q3 2008 as order backlog for shipbuilding and marine engineering was recognised.
Revenue from this segment contributed 92.1 per cent (an increase of 87 per cent) or $909.9 million. Dry bulk shipping turnover grew 36 per cent to $72.5 million, lifted by more favourable charter rates renewed in the earlier part of the year. Though gross margin was lower at 23.4 per cent (compared to 37.9 per cent in Q3 2007) as a result of higher material costs and a shift in revenue contribution mix towards lower margin shipbuilding business, Cosco still managed to improve its bottom line by 16.5 per cent to $113.9 million.
But as compared to Q2 2008, Cosco's revenue declined 5.7 per cent. Turnover from ship building fell 10.7 per cent while marine engineering dropped 24.4 per cent, bringing the overall top-line contribution from ship repair, shipbuilding and marine engineering down by 6 per cent. Coupled with a lower gross profit margin of 23.4 per cent (a decline of 260 basis points), Cosco's profit after tax and minority interests fell by 11.5 per cent.
Only one of the first 10 dry bulk carriers would be delivered this year. The remaining nine carriers, which are currently being built in Zhoushan shipyard, would be delivered progressively in 2009. The management attributed the delay to several reasons:
1. Zhoushan shipyard was not operating at optimal capacity as the yard was undergoing expansion works concurrently.
2. Over-ambitious vessel delivery schedule, overlooking the fact that Cosco only ventured into the newbuilding business segment in 2007. Going forward, we remain concerned on the tight schedule and further possible delay in vessel deliveries as the management hinted that not all 40 vessels scheduled for delivery in FY 2009 have commenced construction work. A typical bulk carrier newbuild takes 12-15 months to build.
The Baltic Dry Index (BDI) plunged below 1,000 recently (This is a fraction of the 10,000 a year ago). While Cosco would not expect any material negative impact from this falling BDI in the short term as the current charter contracts had been locked in based on higher freight rates previously, we believe the protracted low BDI rates would impact Cosco's shipping contribution in FY 2009 significantly.
The management guided that Cosco's shipping business division would be loss making should its bulk carriers be chartered at the current spot rate.
Cosco has always been a relatively high-beta stock, and this is especially evident in today's volatile market environment. As we continue to take a cautious stance on our sector outlook pertaining to the shipping industry, we are lowering our price-to-book valuation parameter to 1.0 times (from 1.2 times previously), deriving a target price of $0.680 (from $0.860 previously). Maintain SELL.
Cosco Corporation
Sell
DMG & Partners Securities
Oct 31 close: $0.775
Thursday, January 29, 2009
SGX Q2-0809 Results - OCBC
Singapore Exchange Ltd
Cutting fair value to S$4.50
SINGAPORE Company Update
Carmen Lee
(65) 6531 9802
e-mail: carmen@ocbc-research.com
16 January 2009
Maintain
HOLD
Previous Rating: HOLD
S$4.99
Fair Value: S$4.50
General Data
Issued Capital (m) 1,069
Mkt Cap (S$m/US$m) 5,334/3,569
Major Shareholder SEL Hldgs (24%)
Free Float (%) 51
NAV per share (S$) 0.62
Daily Vol 3-mth (‘000) 8,383
52Wk High (S$) 10.960
52Wk Low (S$) 4.150
Year to Turnover EBIT PAT EPS PER Net DPS Net Div Yield
30 Jun (S$m) (S$m) (S$m) (cents) (x) (cents) (%)
FY 07* 576.2 365.2 421.8 40.8 12.2 36.0 7.2
FY 08* 768.6 529.0 478.3 44.7 11.2 38.0 7.6
FY 09F 556.0 341.7 280.4 26.2 19.0 22.0 4.4
FY 10F 600.1 384.3 315.5 29.5 16.9 25.0 5.0
* Note: Included one-off from SGX Centre in FY07 and distribution from SGX-DT Compensation Fund in FY08
Severe market decline dragged down 2Q performance.
Singapore Exchange Ltd (SGX) posted a 52% YoY or 12% QoQ decline in 2QFY09 earnings to S$74.7m, dragged down by adverse market conditions, but in line with market expectation of S$73m. For 1H, earnings fell 44% to S$159.2m, or down 37% if S$34m distribution in previous period was excluded. All segments posted QoQ decline, resulting in a 7% QoQ or 28% YoY decline in operating revenue to S$146.7m in 2QFY09. It came as no surprise that Securities Market revenue fell 7% QoQ or 43% YoY to S$69.6m, while Derivatives was down 7% QoQ but up 11% YoY to S$42.8m. Even Stable Revenue fell 9% QoQ and 20% YoY to S$34.3m. Refer to
Exhibit 1 for more details. SGX has declared a 2Q dividend of 3.5 S cents, payable on 18 Feb 2009.
Uncertainty remains.
Volatility in the market is likely to stay for a while, and this cautious environment could curtail trading activities, affecting Securities Market revenue. Management emphasized that it will look at cost containment. The decline in the global equity market has also taken a toll on capital raising exercises, IPOs and derivatives trading activity, which were clearly seen in SGX's 2Q results. The launch of the Extended Settlement contacts (single stock contracts) has been pushed back to 3Q FY09.
Retain HOLD,
cutting fair value to S$4.50. With cautious market sentiment, corporates are finding it hard to raise funds. This has led to the sharp decline in capital raising activities, which now look likely to persist into 4QFY09, and could impact SGX's corporate and listing fees. Management has indicated that it will continue to develop its Derivatives business, but we expect the slump in the equity market to be the present over-riding concern for the stock. Internally, we expect management to keep a close watch on costs in line with other corporates dealing with the present market uncertainty. In view of the unresolved turmoil in the market, we are cutting our 2HFY09 earnings, resulting in a decline in FY09 earnings from S$327.9m to S$280.4m. We have also cut our FY10 earnings from S$362.3m to S$315.5m. As a result of this, but still maintaining our valuation parameter of 16x, our fair value estimate is now S$4.50 (previous: S$5.80).
We retain our HOLD rating.
Cutting fair value to S$4.50
SINGAPORE Company Update
Carmen Lee
(65) 6531 9802
e-mail: carmen@ocbc-research.com
16 January 2009
Maintain
HOLD
Previous Rating: HOLD
S$4.99
Fair Value: S$4.50
General Data
Issued Capital (m) 1,069
Mkt Cap (S$m/US$m) 5,334/3,569
Major Shareholder SEL Hldgs (24%)
Free Float (%) 51
NAV per share (S$) 0.62
Daily Vol 3-mth (‘000) 8,383
52Wk High (S$) 10.960
52Wk Low (S$) 4.150
Year to Turnover EBIT PAT EPS PER Net DPS Net Div Yield
30 Jun (S$m) (S$m) (S$m) (cents) (x) (cents) (%)
FY 07* 576.2 365.2 421.8 40.8 12.2 36.0 7.2
FY 08* 768.6 529.0 478.3 44.7 11.2 38.0 7.6
FY 09F 556.0 341.7 280.4 26.2 19.0 22.0 4.4
FY 10F 600.1 384.3 315.5 29.5 16.9 25.0 5.0
* Note: Included one-off from SGX Centre in FY07 and distribution from SGX-DT Compensation Fund in FY08
Severe market decline dragged down 2Q performance.
Singapore Exchange Ltd (SGX) posted a 52% YoY or 12% QoQ decline in 2QFY09 earnings to S$74.7m, dragged down by adverse market conditions, but in line with market expectation of S$73m. For 1H, earnings fell 44% to S$159.2m, or down 37% if S$34m distribution in previous period was excluded. All segments posted QoQ decline, resulting in a 7% QoQ or 28% YoY decline in operating revenue to S$146.7m in 2QFY09. It came as no surprise that Securities Market revenue fell 7% QoQ or 43% YoY to S$69.6m, while Derivatives was down 7% QoQ but up 11% YoY to S$42.8m. Even Stable Revenue fell 9% QoQ and 20% YoY to S$34.3m. Refer to
Exhibit 1 for more details. SGX has declared a 2Q dividend of 3.5 S cents, payable on 18 Feb 2009.
Uncertainty remains.
Volatility in the market is likely to stay for a while, and this cautious environment could curtail trading activities, affecting Securities Market revenue. Management emphasized that it will look at cost containment. The decline in the global equity market has also taken a toll on capital raising exercises, IPOs and derivatives trading activity, which were clearly seen in SGX's 2Q results. The launch of the Extended Settlement contacts (single stock contracts) has been pushed back to 3Q FY09.
Retain HOLD,
cutting fair value to S$4.50. With cautious market sentiment, corporates are finding it hard to raise funds. This has led to the sharp decline in capital raising activities, which now look likely to persist into 4QFY09, and could impact SGX's corporate and listing fees. Management has indicated that it will continue to develop its Derivatives business, but we expect the slump in the equity market to be the present over-riding concern for the stock. Internally, we expect management to keep a close watch on costs in line with other corporates dealing with the present market uncertainty. In view of the unresolved turmoil in the market, we are cutting our 2HFY09 earnings, resulting in a decline in FY09 earnings from S$327.9m to S$280.4m. We have also cut our FY10 earnings from S$362.3m to S$315.5m. As a result of this, but still maintaining our valuation parameter of 16x, our fair value estimate is now S$4.50 (previous: S$5.80).
We retain our HOLD rating.
Keppel Corp FY08 Results - Cautiously forward :OCBC
Keppel Corporation
Cautiously forward
SINGAPORE Company Update
23 January 2009
Maintain
HOLD
Previous Rating: HOLD
S$4.04
Fair Value: S$4.40
General Data
Issued Capital (m) 1,593
Mkt Cap (S$m/US$m) 6,436 / 4,296
Major Shareholder Temasek Holdings (21.2%)
Free Float (%) 78
NAV per share (S$) 2.81
Daily Vol 3-mth (‘000) 9,680
52Wk High (S$) 12.500
52Wk Low (S$) 3.350
Kelly Chia
(65) 6531 9817
e-mail: kelly@ocbc-research.com
Offshore surprises.
Keppel Corporation (KepCorp) reported topline growth of 13.2% YoY to S$11.8b for FY08 while net profits inched ahead 6.9% YoY to S$1.09b. The results exceeded our expectations in view of a S$3b revenue spurt from the Offshore and Marine business in the final quarter. KepCorp's order book of S$10.8b consists of deliveries stretching till 2012.
Upwards, but cautiously.
We have revised our previously bearish FY09F estimates to cater for better guidance from management that KepCorp's "yards will be busier in 2009 than 2008" and its plan to deliver up to 14 rigs will load its coffers with delivery payments. KepCorp's Infrastructure division will become a major revenue contributor (~30%) in FY09F and this has also aided in bumping up our forecasts. However, our enthusiasm is tempered by the possibility of delays in payments and rig deliveries. Overall, our FY09F revenue and bottomline estimates are revised 18% and 21%
higher.
Property drags.
Keppel Land's (KepLand) revenue for 4Q08 plunged 46.8% YoY to S$197.4m due to completion of projects in previous quarters and a slowdown in property sales. No provisions were made but we reckon that there is still looming risk over write-downs of its investment properties. KepLand's high earnings concentration towards the residential and office sectors puts it at high earnings risks. As such, we have incorporated lower forecasts and decided to peg a higher effective group discount rate of 50% to our valuation.
Possible positive surprises.
KepCorp also announced that its Sino-Tianjin venture has entered into an MOU with Sembawang Engineers and Constructors for feasibility study for the development of a US$1b solar polysilicon production plant. While details are not available yet, we are hopeful that this could translate to an EPC contract. On the M&A front, management updated that it is on the prowl for good companies that are currently heavily geared and have become cash strapped due to an aggressive expansion drive in the last 2 bull years.
Maintain HOLD.
Since our last report that iterated our cautious stance, KepCorp fell ~11%. However, our SOTP fair value has been bumped up to S$4.40 (prev. S$4.00) as we work in less bearish estimates. We are maintaining our HOLD rating as we take a wait-and-watch stance for the time being to let any residual delays and cancellations be flushed out of the system. We will become buyers at its recent lows of ~S$3.95.
Cautiously forward
SINGAPORE Company Update
23 January 2009
Maintain
HOLD
Previous Rating: HOLD
S$4.04
Fair Value: S$4.40
General Data
Issued Capital (m) 1,593
Mkt Cap (S$m/US$m) 6,436 / 4,296
Major Shareholder Temasek Holdings (21.2%)
Free Float (%) 78
NAV per share (S$) 2.81
Daily Vol 3-mth (‘000) 9,680
52Wk High (S$) 12.500
52Wk Low (S$) 3.350
Kelly Chia
(65) 6531 9817
e-mail: kelly@ocbc-research.com
Offshore surprises.
Keppel Corporation (KepCorp) reported topline growth of 13.2% YoY to S$11.8b for FY08 while net profits inched ahead 6.9% YoY to S$1.09b. The results exceeded our expectations in view of a S$3b revenue spurt from the Offshore and Marine business in the final quarter. KepCorp's order book of S$10.8b consists of deliveries stretching till 2012.
Upwards, but cautiously.
We have revised our previously bearish FY09F estimates to cater for better guidance from management that KepCorp's "yards will be busier in 2009 than 2008" and its plan to deliver up to 14 rigs will load its coffers with delivery payments. KepCorp's Infrastructure division will become a major revenue contributor (~30%) in FY09F and this has also aided in bumping up our forecasts. However, our enthusiasm is tempered by the possibility of delays in payments and rig deliveries. Overall, our FY09F revenue and bottomline estimates are revised 18% and 21%
higher.
Property drags.
Keppel Land's (KepLand) revenue for 4Q08 plunged 46.8% YoY to S$197.4m due to completion of projects in previous quarters and a slowdown in property sales. No provisions were made but we reckon that there is still looming risk over write-downs of its investment properties. KepLand's high earnings concentration towards the residential and office sectors puts it at high earnings risks. As such, we have incorporated lower forecasts and decided to peg a higher effective group discount rate of 50% to our valuation.
Possible positive surprises.
KepCorp also announced that its Sino-Tianjin venture has entered into an MOU with Sembawang Engineers and Constructors for feasibility study for the development of a US$1b solar polysilicon production plant. While details are not available yet, we are hopeful that this could translate to an EPC contract. On the M&A front, management updated that it is on the prowl for good companies that are currently heavily geared and have become cash strapped due to an aggressive expansion drive in the last 2 bull years.
Maintain HOLD.
Since our last report that iterated our cautious stance, KepCorp fell ~11%. However, our SOTP fair value has been bumped up to S$4.40 (prev. S$4.00) as we work in less bearish estimates. We are maintaining our HOLD rating as we take a wait-and-watch stance for the time being to let any residual delays and cancellations be flushed out of the system. We will become buyers at its recent lows of ~S$3.95.
Keppel Corp Full Year 08 Results
Keppel Corp
Jan 28 close: $4.18
DMG & Partners Securities, Jan 23
FY08 earnings in line with market expectation:
Keppel Corporation reported record FY08 revenue of $11.8 billion (+13.2 per cent year-on-year) aided by higher contributions from O&M and Infrastructure divisions. Core recurring FY08 profit after tax and minority interest (Patmi) of $1.1 billion (+6.9 per cent y-o-y) was in line with the market consensus' estimates of $1.07 billion. While Keppel's FY08 results were credible, total distribution of 35 cents/share declared was slightly disappointing. This implied a gross dividend payout of 51 per cent - the lowest in five years - and at the lower end of management's guidance of 50-60 per cent.
O&M to face headwinds:
O&M's FY08 revenue of $8.6 billion (+18 per cent y-o-y) accounted for 73 per cent of Keppel's revenue, while O&M's FY08 Patmi of $705 million (+35 per cent y-o-y) contributed to 64 per cent of Keppel's Patmi as the division saw the successful completion of 13 jack-ups and three semis. Having current backlog orders of $10.8 billion, the management maintained that the yards would still be busy, with 10 jack-ups and six semis stipulated for delivery in FY09. However, we reiterate our cautious stance on the O&M sector, and opine any significant newbuild contract to occur only in H209 soonest. Our FY09 and FY10 new order estimates stay at $2.2 billion and $2.6 billion respectively.
Not time for a 'buy' yet, downside risks persist:
We advocate that it is still too early to turn buyers on this counter. Downside risks persist, including potential orderbook cancellations and sustained period of depressed oil price. However, we are comforted that Keppel's improved ROE of 22.4 per cent, strong free cash flow of $1.9 billion and net cash position of 0.04x will strengthen Keppel's ability to weather through this crisis.
Our recommendation stays at 'neutral', with a revised TP of $4.48 (from $4.53 previously) due to DMG's revised TP of $1.80 (from $2 previously) for Keppel Land and updated market values for the listed entities. NEUTRAL
Jan 28 close: $4.18
DMG & Partners Securities, Jan 23
FY08 earnings in line with market expectation:
Keppel Corporation reported record FY08 revenue of $11.8 billion (+13.2 per cent year-on-year) aided by higher contributions from O&M and Infrastructure divisions. Core recurring FY08 profit after tax and minority interest (Patmi) of $1.1 billion (+6.9 per cent y-o-y) was in line with the market consensus' estimates of $1.07 billion. While Keppel's FY08 results were credible, total distribution of 35 cents/share declared was slightly disappointing. This implied a gross dividend payout of 51 per cent - the lowest in five years - and at the lower end of management's guidance of 50-60 per cent.
O&M to face headwinds:
O&M's FY08 revenue of $8.6 billion (+18 per cent y-o-y) accounted for 73 per cent of Keppel's revenue, while O&M's FY08 Patmi of $705 million (+35 per cent y-o-y) contributed to 64 per cent of Keppel's Patmi as the division saw the successful completion of 13 jack-ups and three semis. Having current backlog orders of $10.8 billion, the management maintained that the yards would still be busy, with 10 jack-ups and six semis stipulated for delivery in FY09. However, we reiterate our cautious stance on the O&M sector, and opine any significant newbuild contract to occur only in H209 soonest. Our FY09 and FY10 new order estimates stay at $2.2 billion and $2.6 billion respectively.
Not time for a 'buy' yet, downside risks persist:
We advocate that it is still too early to turn buyers on this counter. Downside risks persist, including potential orderbook cancellations and sustained period of depressed oil price. However, we are comforted that Keppel's improved ROE of 22.4 per cent, strong free cash flow of $1.9 billion and net cash position of 0.04x will strengthen Keppel's ability to weather through this crisis.
Our recommendation stays at 'neutral', with a revised TP of $4.48 (from $4.53 previously) due to DMG's revised TP of $1.80 (from $2 previously) for Keppel Land and updated market values for the listed entities. NEUTRAL
Saturday, January 17, 2009
MONEY MATTERS 2009: A year of two halves
Business Times - 14 Jan 2009
MONEY MATTERS 2009: A year of two halves
Market volatility likely to persist, yet opportunities may surface in second half
By NORMAN VILLAMIN
AS unprecedented stress struck the core of the global financial system last year, it was clear to many observers that a worldwide recession was on the way. Citi analysts expect major industrial economies to contract well into 2009 as adjustments occur to raise the level of savings in these economies. And while the pace of contraction in global growth is expected to ease moving into the second half of the year, next year's expected economic recovery is forecast to be modest, with growth likely to remain below trends seen before the current crisis.
From a market perspective, this backdrop suggests investors should continue to expect 2008-style volatility in the early part of this year. Looking further ahead, though, downside risks to economic growth are expected to dissipate as global fiscal stimulus efforts gather speed and de-leveraging pressures ease. When this happens, the extreme valuations in equity and credit markets seen today should provide attractive opportunities for investors. For more tactically oriented investors, as we observed in our December column, a global recession does not preclude bear market rallies, even as markets continue on an underlying trend of decline. Such rallies, as seen in previous downturns, may be big, providing opportunities for more trading-oriented investors.
The Japanese experience of the 1990s has served us well so far in navigating the current crisis, and our experience with the latest global equity rally has been no different. During the 1990s when the Japanese market declined to below 1.5x book value, sizeable fiscal stimulus proposals tended to coincide with bear market rallies. On three occasions, prices rose as much as 45 per cent.
Likewise, after global equities fell to 1.2x book value in mid-November last year, and sizeable fiscal stimulus plans were announced around the same time, global markets rallied 25 per cent at their peaks last week. Fiscal stimulus proposals to date have come up relatively short of the stimulus delivered by Japan in the 1990s, which came up to 4-10 per cent of GDP. As a result, it is no surprise then that the recent rally was less robust.
Looking forward and with this sizeable rally behind us, investment returns are expected to shift from a focus on valuation and fiscal stimulus back towards the trends of economic contraction and earnings risk, as seen last September to October. Once again, drawing on Japan's experience in the 1990s, investors should find that, just as signs signalling the start of bear market rallies existed, a similar set of signs signalling their end existed. In particular, the Japanese bear market rallies of the 1990s tended to end near valuation peaks before the start of the valuation bubble years, or near 2.3x book value. Going back to the 1970s, Japanese equities tended to trade in a relatively stable range between 1.5x and 2.3x book value before they were dramatically re-rated during the Japanese asset bubble in the late-1980s. So, coincidentally or not, as the Japanese asset bubble burst, valuations proceeded to return to their pre-bubble valuation ranges of 1.5x to 2.3x book value. Putting the Japanese framework into the context of global equities, the equivalent pre-bubble range was about 1.0x to 1.6x book value. At last week's highs, global valuations, as measured through the MSCI World index, stood at near 1.5x to 1.6x book value, close to the high end of their pre-bubble range. This suggests that the supportive backdrop for a bear market rally, prospective fiscal stimulus notwithstanding, has eroded with the market rally.
For longer-term investors, Citi analysts believe further progress in the current downcycle is needed to create attractive opportunities to enter the accumulation phase for long-term equity exposure. In particular, moderation in expectations for global equity markets, such as 14 per cent year-on-year consensus earnings growth for global equities in 2010, is likely necessary before markets begin to bottom out in coming quarters.
Driving this troughing process, we anticipate, should be an easing of de-leveraging pressures in the global financial system. While large-scale capital raisings took place among global financials in the fourth quarter of 2008, to a large extent these fund-raisings have served only to stabilise balance sheets following losses earlier in the year. In 2009, we anticipate further capital-raisings and asset sales to drive the needed de-leveraging. Only as these catalysts emerge do we expect to see an increase in the historically extreme valuations and a sustained rally in equity and credit markets.
Norman Villamin is head of investment analysis & advice, global wealth management & global consumer group, Citi, Asia Pacific.
MONEY MATTERS 2009: A year of two halves
Market volatility likely to persist, yet opportunities may surface in second half
By NORMAN VILLAMIN
AS unprecedented stress struck the core of the global financial system last year, it was clear to many observers that a worldwide recession was on the way. Citi analysts expect major industrial economies to contract well into 2009 as adjustments occur to raise the level of savings in these economies. And while the pace of contraction in global growth is expected to ease moving into the second half of the year, next year's expected economic recovery is forecast to be modest, with growth likely to remain below trends seen before the current crisis.
From a market perspective, this backdrop suggests investors should continue to expect 2008-style volatility in the early part of this year. Looking further ahead, though, downside risks to economic growth are expected to dissipate as global fiscal stimulus efforts gather speed and de-leveraging pressures ease. When this happens, the extreme valuations in equity and credit markets seen today should provide attractive opportunities for investors. For more tactically oriented investors, as we observed in our December column, a global recession does not preclude bear market rallies, even as markets continue on an underlying trend of decline. Such rallies, as seen in previous downturns, may be big, providing opportunities for more trading-oriented investors.
The Japanese experience of the 1990s has served us well so far in navigating the current crisis, and our experience with the latest global equity rally has been no different. During the 1990s when the Japanese market declined to below 1.5x book value, sizeable fiscal stimulus proposals tended to coincide with bear market rallies. On three occasions, prices rose as much as 45 per cent.
Likewise, after global equities fell to 1.2x book value in mid-November last year, and sizeable fiscal stimulus plans were announced around the same time, global markets rallied 25 per cent at their peaks last week. Fiscal stimulus proposals to date have come up relatively short of the stimulus delivered by Japan in the 1990s, which came up to 4-10 per cent of GDP. As a result, it is no surprise then that the recent rally was less robust.
Looking forward and with this sizeable rally behind us, investment returns are expected to shift from a focus on valuation and fiscal stimulus back towards the trends of economic contraction and earnings risk, as seen last September to October. Once again, drawing on Japan's experience in the 1990s, investors should find that, just as signs signalling the start of bear market rallies existed, a similar set of signs signalling their end existed. In particular, the Japanese bear market rallies of the 1990s tended to end near valuation peaks before the start of the valuation bubble years, or near 2.3x book value. Going back to the 1970s, Japanese equities tended to trade in a relatively stable range between 1.5x and 2.3x book value before they were dramatically re-rated during the Japanese asset bubble in the late-1980s. So, coincidentally or not, as the Japanese asset bubble burst, valuations proceeded to return to their pre-bubble valuation ranges of 1.5x to 2.3x book value. Putting the Japanese framework into the context of global equities, the equivalent pre-bubble range was about 1.0x to 1.6x book value. At last week's highs, global valuations, as measured through the MSCI World index, stood at near 1.5x to 1.6x book value, close to the high end of their pre-bubble range. This suggests that the supportive backdrop for a bear market rally, prospective fiscal stimulus notwithstanding, has eroded with the market rally.
For longer-term investors, Citi analysts believe further progress in the current downcycle is needed to create attractive opportunities to enter the accumulation phase for long-term equity exposure. In particular, moderation in expectations for global equity markets, such as 14 per cent year-on-year consensus earnings growth for global equities in 2010, is likely necessary before markets begin to bottom out in coming quarters.
Driving this troughing process, we anticipate, should be an easing of de-leveraging pressures in the global financial system. While large-scale capital raisings took place among global financials in the fourth quarter of 2008, to a large extent these fund-raisings have served only to stabilise balance sheets following losses earlier in the year. In 2009, we anticipate further capital-raisings and asset sales to drive the needed de-leveraging. Only as these catalysts emerge do we expect to see an increase in the historically extreme valuations and a sustained rally in equity and credit markets.
Norman Villamin is head of investment analysis & advice, global wealth management & global consumer group, Citi, Asia Pacific.
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