Recovery More V than U - Raising STI Target to 2700, Recession May Be Over by 3Q

Upgrading STI target to 2700 (from 2400), PBV mean (1.62x) – This recession may be over by 3Q rather than 4Q, in line with durations of past recessions. With a more normal V-shaped recovery, we have removed the 0.5 standard deviation discount from the PBV mean. Ample liquidity raises the risk of an overshoot, as governments and central banks worldwide will likely maintain policy stimulus at least until early 2010.

Recovery looks more like a normal V rather than U – Industrial production contracted only 0.5% in April. PMI is back above 50 in May. Job losses and loan activities have turned out better than past recessions. Economist Kit is forecasting GDP growth of -5% in 2009 and +6.2% in 2010, with risk now on the upside.

Pullbacks during recovery cycles are few, short and limited – This pullback maybring the STI down to about 2,150, in line with average pullbacks in past cycles (- 10% over 5 weeks), which is about one standard deviation below the PBV mean. We view this market pullback as a buying window for the next leg up.

In past recovery cycles, STI reverts to P/B mean in less than a year – 1998 Asian crisis (32 weeks), 2001 tech recession (15 weeks) and 2003 SARS recession (45 weeks). These past recovery cycles also saw the STI overshoot the P/B mean by at least +0.5 standard deviation. This STI recovery rally is still in its early stage, at 13 weeks, well short of the average 101 weeks seen in past recoveries.

Local banks are biggest beneficiaries in post-crisis world – Banks are benefiting from wider interest margins, re-intermediation (from corporate bond market) and retreat by foreign banks from corporate lending. The impact is significant in Singapore, as foreign banks account for a large 40% share of total lending. This NPL cycle moreover looks benign compared to past recessions.

Outperformers vs. underperforms – Banks are typically outperformers at every phase of recovery cycle, while developers tend to overshoot in early stage and underperform or even fall in late recovery phase. Even defensive laggards tend to catch up, with sector variations in beta converging as STI approaches P/B mean.

Top Buys & Sells – Top Buys: DBS, UOB, SGX, Keppel, ST Eng., Singtel, NOL and Parkway. Top Sells: SIA, Capitaland and Keppel Land. Overweight financials & commodity-related names, underweight property developers and land transport, and neutral on telcos. Prefer playing also the laggards in this phase of recovery.

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