JPMorgan analysts claimed yesterday that ‘significant’ upgrades are likely to sustain stocks to earn forecast for the following weeks, as asset values and property prices recover, encouraging firms to take minor write-downs on their assets.
Christopher Gee, head of JPMorgan’s Singapore research team, said that the equity analysts for this year are reducing worst-case assumptions for corporate earnings. This is because of the drop in borrowing costs, the effect of the fast-growing economic stimulus measures that commenced during the previous year’s financial crisis, as well as the recent improvement in the property market.
Mr. Gee’s team has initially estimated a drop of 50 percent in corporate earnings from 2007, which is the same with the drop in Asian financial crisis. “It won’t surprise me if we get only a 25-30 per cent drop over the two years from 2007 to 2009, so there are prospects for significant earnings upgrades”, Gee said.
The head of the research team also anticipates that lower-than-expected charges for asset impairments at property firms are most likely to prompt the earnings upgrades.
Large write-downs on assets were already expected by analysts due to the drop of property prices by the commencement of the crisis.
“That’s unlikely to happen in the severe magnitude that was once worried about”, Gee stated. “There might be some exceptions – there might be some kitchen-sinking in the second quarter – but in general, there’ll be less than what was anticipated for the whole year”.
Gee also noted that it is “probably also true for the banks”, which may suspend minor sums than previously projected for deficiencies on bad loans.
“All those one-off items, those asset impairment charges that have a bit of discretion from management – that’s where I think the change is going to come from”.
“Our stock strategy is concentrated on the stocks that have the greatest upside in terms of earnings or net asset value upgrades over the next few quarters”, Gee stated.
These include the Singapore Airlines, Singapore Press Holdings, Wilmar International (palm oil group), Olam International (commodities trader), Sembcorp Marine (oil-rig builder) and CapitaLand (property developer).
“In terms of sectors, we’re concentrated on property, offshore and marine, and consumer staples,” he said. Singapore banks have received an ‘underweight’ rating from the JPMorgan analysts as they have expected increased competition in the middle of bettering market conditions to force profit margins for the year’s second half. On the other hand, transportation and telecommunications sectors obtained ‘neutral’ ratings from the team.