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‘Profits to slump’

Analysts prepare for bleak results, predict slowdown will extend well into 2009

ANALYSTS are bracing themselves for some bleak financial results for the quarter ended Sept 30 - which included the first shocks of the global financial crisis.

Already, bourse operator, Singapore Exchange, last week reported a 35 per cent slump in net profit for the three-month period - its first quarter.

Market watchers are suggesting that the writing is on the wall for other companies after they were hit by downgrades.

Buy or outperform calls have turned into hold or sell calls overnight. Analysts have slashed target share prices as much as 50 per cent - as seen in the case of Chinese shipbuilder Cosco Corp.

They expect a slowdown in earnings growth that will last for at least the next few quarters, given the dark clouds gathering over the global economy. Singapore is already in a technical recession.

Analysts are in the midst of revisiting assumptions and spreadsheets in the light of falling asset prices, possible refinancing problems due to tight credit markets, and weakening demand for their products, which erodes profits.

‘We will see quite a significant downgrade in corporate earnings this quarter, as the outlook and prospect have substantially changed during the past one month,’ said Westcomb Securities head of research Goh Mou Lih.

‘Third-quarter earnings will come down because most of the bad events happened in the last month of the quarter,’ he said. ‘Going forward, because of the credit freeze, we will see more impact on corporate earnings.’

Earnings downgrades are expected to extend well into next year.

‘We are already expecting negative earnings growth for 2008 but there is significant risk to 2009 earnings as well. Another year of earnings contraction in 2009 is highly probable,’ said CIMB-GK head of research Kenneth Ng.

In the previous four recessions, corporate earnings fell 28 per cent on average.

‘We expect the knock-on effects from a sharp fall in global trade to trigger Singapore’s worst recession ever in the next two years,’ he said, adding that the most severe quarters of contraction should occur in the first half of next year.

While the recent losses in the benchmark Straits Times Index (STI) have priced in much of the bad news, making valuations seem relatively cheap, consensus estimates still remain far too high.

Citigroup analyst Robert Kong said in a report that consensus profit forecasts for the 30 STI component stocks have fallen just 4 per cent from the recent cycle peak in early August, compared to earnings falls of as much as 30 per cent in the downturns of 1998 and 2001.

UBS strategist Min Lin Tan sees a further 5 to 8 per cent cut in earnings per share as a result of further downgrades, bringing next year’s growth to between zero and 2 per cent.

The brokerage’s current estimates show a 0.3 per cent contraction for this year.

Merrill Lynch sees a further 7 to 9 per cent downside for earnings growth.

In general, the banking and property sectors are the most vulnerable to downward revisions in earnings as they are expected to face more earnings risks than those belonging to the defensive sectors, such as the telcos and transport companies, say analysts.

‘Jobs hold the key for Singapore to ride out this storm, but jobs are increasingly shaky. We see downside risks to banks and property earnings as unemployment rises,’ said CIMB’s Mr Ng.

Citigroup expects a 20 to 25 per cent downside to consensus 2009 and 2010 earnings estimates for banks.

Given the heavy weightings of banks and property counters on the STI, there will be a further fall in the index to below 1,800, and some are not ruling out the possibility of it heading down to 1,600.

‘Earnings visibility has dimmed significantly and setting index targets on the basis of earnings becomes increasingly meaningless,’ said Mr Ng.

Also at risk are companies which are ‘highly geared and those that face near-term refinancing obligations’ as they will find it increasingly difficult to secure financing, considering the tight credit situation and soaring finance costs, said OCBC Research.

FerroChina and China Printing & Dyeing, for instance, have been rendered technically insolvent, owing to their inability to service debt obligations.

Source : Straits Times - 20 Oct 2008

But this is provided the right policy actions are taken, says official

THERE are ‘tough times ahead’ for the world economy in the wake of the financial crisis, but the risk of another Great Depression is ‘virtually nil’ provided the right policy actions are taken, IMF economic counsellor Olivier Blanchard declared yesterday.

The global economy should grow by 3 per cent this year, with continuing expansion in China and other emerging markets offsetting zero or negative growth in advanced countries, he said.

The 3 per cent growth is ‘on the borderline of recession’ and things could turn out much worse if coordinated monetary and fiscal actions are not taken by leading economic powers, he added. He described the 50 basis point coordinated interest rate cut announced yesterday by major central banks as a ’step in the right direction’, but emphasised that more needs to be done on the monetary front.

Among the coordinated policy actions needed are recapitalisation of banks, using public funds, and also the public purchase of impaired assets from the financial system, the IMF official added. Fiscal steps should also be directed mainly at shoring up the financial system.

Countries in Asia with large foreign exchange reserves, such as China and South Korea, are expected to draw on their holdings to offset problems in their economies. This is ‘proper use’ of such reserves to buffer against domestic shocks and should not have any major adverse impact on the US government debt market where the bulk of those reserves are invested, Mr Blanchard said.

In its latest World Economic Outlook released yesterday, the IMF said that the world economy was entering a major downturn in the face of the ‘most dangerous financial shock in mature financial markets since the 1930s’.

Global economic growth will slow sharply this year and even a modest recovery is unlikely before the second half of 2009, the IMF said, adding that ‘the situation is exceptionally uncertain and subject to considerable downside risks’.
‘Coming in combination with the UK Treasury announcements this should be enough to assist equity markets, at least for now.’

- Geoff Kendrick,
strategist, UBS

The report came as finance ministers and central bank governors gathered in Washington for this week’s annual meetings of the IMF and World Bank. The meeting is their first chance to hammer out joint policy action since the financial system crisis gained dramatic momentum last month. Hope is particularly focused on this weekend’s meeting of G-7 finance ministers.

IMF officials said yesterday that concerted action by governments is essential to contain a crisis that has taken a huge toll on banking and financial systems and could trigger a global economic crash.

IMF managing director Dominique Strauss-Kahn has said that ‘the time for piecemeal solutions is over’, and has called on governments to ‘coordinate efforts to bring about a return to stability in the international financial system’.

Source : Business Times - 09 Oct 2008

Dow ends 157 pts down as mood sours after rescue Bill is passed

FOR many investors, the unfolding drama on Wall Street resembles Hong Kong director Benny Chan’s latest movie Connected in many ways.

Those who stayed up on Friday night to watch the outcome of the US House of Representatives’ vote on a US$700 billion (S$1 trillion) bailout package would find one scene from the action-packed film particularly relevant.

In it, the car driven by the hero (Louis Koo) lurched out of control and went hurtling down a slippery slope. He managed to get out only seconds before the vehicle plunged down a cliff.

On Wall Street last Friday, feverish anticipation that the rescue package for financial institutions would be approved sent the Dow Jones Industrial Average up by as many as 313 points in early trading.

But the mood soured after the Bill was passed. The Dow slipped precipitously and ended 157 points down as selling accelerated in an alarming manner.

So what should investors do? Are financial markets careening out of control like Louis Koo’s car before it crashed?

The US$700 billion rescue package was supposed to inject a massive vote of confidence into financial markets, buy troubled assets off US banks and get them to start lending to each other again.

But the global credits markets have stayed frozen, despite efforts to unclog them.

The squalls unleashed by the death of Lehman Brothers and near-collapse of American International Group last month have transformed into a gale-force wind threatening even the world’s biggest banks.

The Libor rate - the interest rate for US dollars at which banks lend to each other - is almost double the US Federal Reserve’s short-term interest rate of 2 per cent.

There are reports that some banks are charging much higher rates and lending only on an overnight basis, in case their borrowers run into financial difficulties.

Even the world’s largest companies are not immune to the credit crisis.

Last week, rather than try to draw down on its massive credit lines, General Electric sold US$3 billion worth of preference shares to investor Warren Buffett on very generous terms.

The state government of rich and powerful California was forced to approach the US government for emergency funding to pay its bills.

To traders here, all these gloomy reports have a surreal feel. But beneath the sea of calm, there is increasing anxiety. Last week, the benchmark Straits Times Index fell 4.7 per cent to a 26-month low of 2,297.12.

Among the worst hit were biggies such as Keppel Corp and Sembcorp Marine which were considered to be strong defensive plays because they could ride out the financial storm with their fat order books.

But the credit crunch has also severely affected hedge fund managers, as they cope with the big flood of redemption orders from jittery investors. So it is no surprise that rig-builders should come under selling pressure, since these stocks were among their favourite picks last year.

How will it all end?

In Connected, Louis Koo was shown on top of a mountain resembling a Master of the Universe, back in charge of his destiny after his near-death experience.

For the central bankers charged with saving the global financial markets from hubris, a similar miracle will be appreciated.

Source : Straits Times - 6 Oct 2008

Few questions confound economists more: What might tip China into the meltdown that so many have feared for so many years? Possibilities include overheating, social instability, corruption, pollution, debt crises, war over Taiwan and a post-Olympics growth swoon. It’s a perfectly rational expectation. No rapidly industrialising nation has ever avoided some kind of crisis, least of all upstarts in Asia.

The list rarely, if ever, included a Wall Street crash. And yet, financial troubles in the US may be the catalyst that devastates the world’s fourth-biggest economy.

This will sound like a reach to those viewing Asia’s strengths. China, for example, is enjoying 10 per cent growth as US lawmakers argue over rescuing markets and averting a depression. With its US$1.8 trillion of reserves, China could bail out the US without batting an eye.

Japan is returning to acquisition mode after its banks avoided the toxic debt devastating US peers. Mitsubishi UFJ Financial Group Inc’s US$9 billion investment in Morgan Stanley this week is a case in point. After years of lecturing Japan about its shaky banks, the US is coming hat-in-hand to Tokyo.

Yet China’s chances of avoiding the US crisis are dwindling by the day. ‘US consumers are tapped out and they’re going to stop buying Chinese exports,’ says Simon Grose-Hodge, a strategist at LGT Group in Singapore. ‘There’s no way China’s domestic demand can take up that slack.’

Adds Michael Pettis, a finance professor at Peking University in Beijing: ‘We should all hope the recession associated with the US financial crisis is very, very mild.’

The odds of a mild US slowdown are declining almost as fast as stock prices. Even with hundreds of billions of dollars worth of Wall Street bailouts, consumption decreases and big job cuts will probably intensify.

The slow drip, drip, drip nature of Wall Street’s swoon should concern officials in Beijing. China’s mercantilist model makes the most populous nation dangerously dependent on consumers in the biggest economy.

Growth in Asia will experience quite a setback if the US enters a prolonged period of weakness. While a Japan-like ‘lost decade’ isn’t the best-case scenario, Americans aren’t sitting on the kind of savings that Asians are. As US growth slows, debt is reduced and households increase savings, exporters such as Hong Kong, South Korea and Thailand must look elsewhere for demand.

Europe and Japan may be of little help. Japan is on the verge of a recession, while Europe is becoming increasingly vulnerable to events in the US. China will be hurt by all of the above, ridding Asia of a key source of stability.

Many say China’s slowing from 10 per cent growth to 8 per cent isn’t a disaster. Yet if a government relies on rising prosperity to conceal domestic challenges - including the widening gap between rich and poor - slowing growth is a major problem. Nothing less than a drastic rebalancing will be required: More domestic consumption, a strengthening currency and greater investment in healthcare, pensions and education. Pulling that off quickly and with minimal disruption would be a feat like no other in economic history.

Asia decoupling

Anyone who believes China is set for smooth-sailing as the US sinks is likely to be as wrong as those arguing a year ago that the sub-prime-loan crisis was containable.

One of the key points here is the importance of Asia decoupling itself from the US once and for all. It’s easier said than done. It’s often pointed out that Asia is holding the cards. Were China to dump its US$519 billion of Treasuries, the US would be in for a shock. So would China, as the fallout in the US would drag on China’s all-important export industries.

Many Chinese are recession virgins - they are far more used to booming than slowing growth. Equity investors are far more accustomed to double-digit gains than big drops in shares. It’s an open question how this year’s 58 per cent plunge in Chinese shares affects sentiment.

There is reason to think Asia can stand its ground. The region’s improvements since the 1997 crisis left banks stable, markets humming and currency reserves at comfortable levels. Turmoil in the US is encouraging Asia to take steps to become more independent from bigger economies. Nations such as China are succeeding by ignoring advice from officials in Washington. After years of being lectured to bolster its banks, China is watching as the financial system the US espoused as optimal crumbles.

The reluctance of Asian banks to buy hard-to-value securities such as collateralised debt obligations left them in ‘rock solid’ financial shape, says Marc Faber, managing director of Marc Faber Ltd in Hong Kong. Also, central banks have been taking steps to boost investor and consumer confidence. If things get shakier, though, Asia could be dragged down with the US economy.

Amid unprecedented upheaval, it almost seems fitting that a risk few considered a year ago could be the one to undermine China.
By WILLIAM PESEK
William Pesek is a Bloomberg News columnist. The opinions expressed are his own.

Source : Business Times - 4 Oct 2008

The amended financial package authorises the government to buy troubled assets

WASHINGTON: The US House of Representatives passed the eagerly-awaited US$700 billion (S$1 trillion) financial market rescue package yesterday (early this morning Singapore time), sending the Bill to President George W. Bush to be signed into law.

Needing 218 votes to pass, Congress passed the Bill by a majority of 263 votes to 171.

The legislation, a bipartisan effort to restore confidence in the nation’s banking system, authorises the government to buy troubled assets from financial institutions reeling from a record number of home foreclosures.

The measure also contains a US$149 billion package of tax breaks, a higher limit on federal bank-deposit insurance and changes in securities law.

It also restates securities regulators’ authority to suspend asset-valuing rules that corporate executives blame for fueling the crisis.

Some of these features were added to the Bill after it failed by a dozen votes to gain passage through Congress earlier this week. Mr Bush made more than a dozen phone calls to Republican lawmakers to lobby for the Bill.

The Bill’s defeat on Sept 29 caused a 778-point drop in the Dow Jones Industrial Average, prompting dozens of lawmakers to reverse their vote on the legislation, the government’s largest intervention in the markets since Franklin Roosevelt’s New Deal.

The Senate approved the revised Bill on Wednesday by an overwhelming majority of 74 votes to 25.

Before the tally began, vote counters said there was enough support for the plan to clear Congress. More than two dozen House members said they were dropping their earlier opposition to the plan.

‘I don’t like this at all,’ said Tennessee Republican Zach Wamp, who now supported the measure. ‘As a matter of fact I hate it. But we’re out of options. Congress has to act.’

‘The issue is stopping the panic,’ said Mr Adam Posen, deputy director of the Peterson Institute for International Economics in Washington.

‘The plan’s not perfect, but it’s certainly better than doing nothing. Now Treasury has to be very aggressive about purchasing a wide range of assets very quickly.’

Indicating its expectation that the Bill would pass, the Dow Jones Industrial Average pared early gains of more than 250 points immediately after the passage of the Bill. At 1.45am Singapore time, the Dow was up 120 points.

Even as US lawmakers sew up legislation to aid the financial markets, their counterparts in Europe are just starting the process of coming to grips with the current credit crisis.

France will hold a summit of European leaders today, amid sharp disagreement over how to respond to the crisis.

French President Nicolas Sarkozy will host a meeting in Paris of counterparts from Britain, Italy and Germany, in addition to the European Central Bank president Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker to prepare a European position on the financial crisis.

Mr Sarkozy’s office said the summit would help European members coordinate positions before next week’s meeting of rich world finance ministers in Washington.

Mr Sarkozy will ‘propose Europe secure its banking systems, unfreeze credit’ and coordinate its economic and monetary strategy, French Prime Minister Francois Fillon told lawmakers yesterday.

The build-up to the Paris talks, meanwhile, has revealed deep divisions between the European powers on how to protect the banking sector, with Germany dismissing calls for a joint European fund to bail out failing banks.

On Thursday, the Dutch government said it had come up with the idea, while France angrily denied that it had ever suggested such a plan, as had been claimed Wednesday by a European official in Berlin.

Many media commentators blamed France for the confusion, suggesting Mr Sarkozy was so keen to take credit for leading Europe’s response to the crisis that he had forged ahead with summit plans without consulting his partners.

Paris has been keen to develop a European response to the credit crisis but its European partners have so far preferred unilateral and bilateral measures to protect their own institutions and are looking forward to the G7 meeting of world finance ministers in Washington next week.

Separately, South Korean President Lee Myung Bak proposed yesterday that his country’s Finance Minister meet counterparts from China and Japan to discuss their response to the crisis.

‘It would be beneficial to seek a meeting of finance ministers of South Korea, China and Japan in order to strengthen regional cooperation,’ Mr Lee said at a meeting of economic ministers, according to his spokesman.

BLOOMBERG, AGENCE FRANCE-PRESSE, ASSOCIATED PRESS

Source : Straits Times - 4 Oct 2008