Investors should brace for more volatility, warns analyst

Investors should brace for more volatility in Asia as the current de-risking trend on worries about a double dip global recession and a worsening of the Europe debt crisis continues. In a worse case scenario of a financial dislocation due to banking crisis on the possible breakup of the monetary union, this could trigger a selldown similar to the GFC crisis. While this scenario appears fairly remote at this juncture, developments thus far do not suggest an end to the crisis so soon, casting a pall over the markets.

Stress test STI yields recession target of 2600 and GFC target of 2025. Against this backdrop, we have stress tested the STI component stocks based on a) recession scenario and b) valuations pegged to global financial crisis levels. Our base case scenario, based on DBS economics team’s view assumes Singapore GDP growth at 5% for 2012, US heading for slower economic growth, yielding STI target of 2930 based on 12.4x on FY12 earnings. In a recession scenario, our bottom up STI target will be 2600 and 2025 using GFC valuations in the event of a financial dislocation.

Stay with yield plays, buy stocks which have priced in a recession scenario and sell cyclicals on rebound. We will stay defensive preferring yield plays, REITS and Telecom stocks over cyclicals, buy stocks with minimal downside to our recession TPs and stocks trading at close to trough price to book levels(GFC levels). Among the STI components, stocks which have priced in a recession scenario are Comfort Delgro, ST Engineering, Capitaland, CMA, Genting and Global Logistics. We will sell cyclicals on rebound and stocks which have limited upside to base Targets with downside to recession targets –NOL, SATS and UIC.