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SINGAPORE stocks could be buoyed by 'significant' upgrades to earnings forecasts in the weeks ahead as property prices and other asset values recover, prompting firms to take smaller write-downs on their assets than initially feared, JPMorgan analysts said yesterday.
Equity analysts are scaling back their worst-case assumptions for corporate earnings this year, due to the recent rebound in the property market, a fall in borrowing costs and the impact of aggressive economic stimulus measures that were introduced since the financial crisis started last year, said Christopher Gee, head of JPMorgan's Singapore research team.
Initially, his team of analysts had forecast a 50 per cent drop in corporate earnings from the peak in 2007 - similar to the drop seen during the Asian financial crisis, he said. Now, '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', he added.
As a result, 'the recovery could be a lot stronger than what we saw in the Asian financial crisis', Mr Gee said.
'And the liquidity conditions, given the significant monetary stimulus that has been injected, are better than what we had in the Asian financial crisis.
'Today, monetary conditions are very loose, the cost of capital is very low. We can see reflationary expectations come back into the marketplace, which helps stock prices and asset prices in general,' he added.
He expects the earnings upgrades to be prompted mainly by lower-than-expected charges for asset impairments at property firms - costs that can be adjusted to some extent at the discretion of company managers.
Analysts had been expecting large writedowns on assets as property prices fell at the onset of the crisis. Now, 'that's unlikely to happen in the severe magnitude that was once worried about', Mr Gee said. '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.'
The same is 'probably also true for the banks', which could set aside smaller sums than previously expected for losses on bad loans, he said.
'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.'
In keeping with that view, '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', he said.
These include Singapore Press Holdings, Singapore Airlines, commodities trader Olam International, property developer CapitaLand, oil-rig builder Sembcorp Marine, and palm oil group Wilmar International.
'In terms of sectors, we're concentrated on property, offshore and marine, and consumer staples,' Mr Gee said. JPMorgan analysts have an 'underweight' rating on the Singapore banks - mainly because they expect increased competition amid improving market conditions to squeeze profit margins in the second half of the year - and 'neutral' ratings on the telecommunications and transportation sectors.
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