Market Focus: Deceleration Mode.

This report was compiled by DBS Vickers this morning:

Our strategy to stay defensive paid off last quarter, underpinned by strong performance of SingTel, SPH and REITS. We are turning cautiously optimistic, as P/E valuations have hit a three-year low, and we would bargain hunt on market dips for recovery in 2H08. We have cut our 12 month target to 3450 for the FSSTI, representing PEG of 1x.

Cuts in GDP growth and EPS downgrades.

We expect earnings growth to slow to 13.8% in 2008 from 28% last year, following earnings downgrades on the back of the slower GDP growth of 6%. The most significant cuts in earnings came from the property division, due to the delay in new launches and expectations of lower ASPs.

In addition, we have shaved margin assumptions for consumer goods and basic materials sector given the inflationary environment, while rising steel cost and the weak US$ will be negative for shipyards.

Cautiously optimistic, positioned for 2H08 recovery.

Following the sell-down in 1Q08, we are turning cautiously optimistic on the market, although we expect volatility to continue to rule in 2Q08 as confidence has yet to be restored, in the face of continued uncertainties from the US.

The market is trading at P/E of 13x(FY08F) and 11x(09F), making it the cheapest in the region.

This is also below its average rolling forward P/E of 14.9x. However, we believe EPS downgrades have yet to fully run its course. Investors will be watching the release of the 1Q08 results closely, which is unlikely to bring cheer given drastic changes in operating dynamics and the rising cost environment.

We expect volatility and uncertainties to prevail in 2Q08, which will present opportunities for bargain hunting in 2H08. Following our earnings cuts, we have cut our 12 month target for FSSTI to 3450, on a bottom-up basis.

This translates into 13.8x on FY09 earnings, which we believe is fair at this juncture in the earnings cycle (implied PEG of 1x). Our stock picks this quarter reflects a balanced approach, featuring stocks with stable cash flows (Sing Post) and REITS (CMT), while our beta picks are Cosco, SMM and SIA, which are value buys after the sell-down last quarter.