Monday 24 November 2008

Encouraging to See More Experts Eat Humble Pie

As a result, the advice remains the same as it has been for months now - because the worst of the economic numbers has yet to hit the market, patience is surely a virtue.

1 comment:

Guanyu said...

Encouraging to See More Experts Eat Humble Pie

By R SIVANITHY
24 November 2008

Five weeks ago in this column (‘Hope for the best? Maybe - but better to prepare for the worst’, BT, Oct 20), we highlighted the fact that many experts had been grossly over-optimistic in over-estimating their powers of analysis while under-estimating the risks posed to financial markets by the US sub-prime collapse over the past year.

By sticking to views that were clearly wrong (and hoping they would eventually be proven correct), the message then was that these experts ran the very real risk of alienating their customers and eroding the little credibility the financial community had left.

However, in an exemplary move, Citi Investment Research, the research unit of Citigroup, in an Oct 6 report had to eat ‘humble pie’ when it confessed that it had gotten it consistently wrong throughout the year. It then revised all its targets downwards to more realistic levels, thus enhancing its standing in the eyes of an objective public.

The encouraging sign this week is that more houses are following Citi’s example. JP Morgan, in its ‘Asian Year Ahead 2009’ dated Nov 13, said: ‘Last year we were too optimistic, underestimating the de-rating impact of high inflation on valuations, the severity of the financial crisis and the potential of a significant recession ... the Year of the Rat was humbling for both portfolios and strategists.’

It went on to say that the outlook is extraordinarily uncertain as ‘all the major reactants are now colliding in the big ugly experiment’. JP Morgan’s base case assumes that the worst of the financial crisis is past but the real economic impact will continue to deteriorate.

‘Our economists are forecasting the deepest US consumer recession since WWII. The recovery, when it happens, is forecast to be weak with all developed economies growing below potential.’ Because this will lead to poor pricing power and hence profitability, JP Morgan expects a ‘severe profit recession in 4Q08 and 1Q09’.

For Singapore, it said that although the MSCI Singapore last week traded at a low 12-month forward PE of 9.5, ‘in a fast deteriorating economic climate, downside risk is looming as further earnings and balance sheet erosion are expected amidst a synchronised global slowdown’.

DBS Vickers, in the meantime, in a Nov 21 Market Outlook report said that in 3Q08, earnings for companies under its coverage dropped 7 per cent year-on-year, of which 32 per cent were below expectations. ‘Dismal outlook for 4Q08 led us to further cut estimates and we expect a 25 per cent q-o-q decline in 4Q08.’

It added that given the deterioration in earnings and assuming a recession of -2 per cent GDP next year, the Straits Times Index (STI) could test 1,250 if 1998’s valuation metrics are applied. Given that the STI ended at 1,662 on Friday (albeit with an aid of generous amounts of short-covering), this implies further downside of about 25 per cent from current levels. It did, however, set a 12-month target of 2,010, implying 21 per cent upside.

If DBS’s downside forecast is correct, then the advice would essentially be to stay one’s buying hand and to sell into strength for the time being.

This is in effect the message conveyed in this column over the past few months - last week’s column, for example, recommended readers sell into strength and to be very selective about buying any dips because Wall Street, the source of the world’s woes, has not capitulated yet.

At the time of writing last Monday, the Dow Jones Industrial Average was about 8,500, and although it subsequently plunged to 7,550 last Thursday (a loss of 11 per cent) - which brought it close to our minimum target of 7,000 - it’s unlikely that the US market has reached capitulation point yet. Earnings forecasts are too optimistic and it is hope, more than anything else, which is keeping stocks over-inflated. US analysts, it seems, have not capitulated yet.

As a result, the advice remains the same as it has been for months now - because the worst of the economic numbers has yet to hit the market, patience is surely a virtue.