BT: Go defensive on stocks, urges Citigroup (06 Jun 2006)

Go defensive on stocks, urges Citigroup

It's not time to bottom-fish yet, says the bank

By OH BOON PING

DESPITE the recent selldown in regional equities, Citigroup said it is not time to 'bottom-fish' yet. Instead, it recommended a defensive equity strategy.

In a report dated June 2, the bank noted that while the market has already pulled back 9 per cent from its high in mid-May, sharp stockmarket corrections had in the past preceded economic slowdowns or recessions.

'Sharp market corrections, for instance, were seen preceding the 2H96 slowdown, 1998 Asian financial crisis, 2001-02 tech slump and 2003 Sars recession,' its report said, adding: 'It is also interesting to note that recessions or severe downturns were also often preceded by two or more months of monthly declines of more than 5 per cent in the STI.'

While the correction of some 8.6 per cent in May occurred after about three-and-a-half years of relative stability, in which sharp corrections have been rare and may forecast 'a modest economic slowdown rather than a protracted downturn', Citigroup remains cautious until visibility improves.

Moreover, the bank noted a rise in the downside risks over the global outlook, particularly with clear signs of a US economic slowdown, and that this is aggravated by a possible slowdown in China, higher global interest rates and oil prices.

This will adversely affect Singapore's economy and Citigroup expects a moderation in economic growth to about 5 per cent in 2H06, 'which is a significant deceleration from the 10.6 per cent peak seen in 1Q06'.

Against such a backdrop, the bank recommended a defensive stance and identified a basket of stocks that 'offer defensive characteristics through high yields and have the potential to recover should sentiments improve'.

'Aside from high yields, we looked for companies where its analysts expect total returns of over 15 per cent,' the report said. Such stocks with dividend yield of more than 4 per cent include ST Engineering with a price target of $3.64, MobileOne ($2.40), SATS Services ($3.20) and SembCorp Industries ($3.98). ComfortDelGro ($1.80), Parkway Holdings ($2.82), SembCorp Marine ($3.66), SingTel ($3.10), Starhub ($2.60) and UOB ($17) are also found on that list.

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