Welcome to 2008! 2007 was a year of rollercoaster rides, where investors faced a series of scares in the form of US sub-prime woes, rising oil prices and inflation. It is the time for us to look into the hot picks for 2008. Shares Investment feels that 2008 is going to be a bumpy year as the effects of the US sub-prime problems are unlikely to ease in 1H08. However, we expect the situation to be more stable by 2H08, where the dust will start to settle. Let us first look back to the top events in 2007.

LOOKING BACK

2007 translated into a year of happiness and fear. The first half of 2007 made several millionaires whereas fear of mounting losses crept into investors in the second half of 2007. While the STI was having its steepest rise in Jul-07, news of the US sub-prime woes soon sent stocks tumbling down. Nonetheless, investorʼs confidence were boosted when the US Federal Reserve cu interest rate by 50 basis points in Sep-07, pushing the STI to a historical new high of 3,906 points, with the 4,000 points threshold in its sights. However, all good things must come to an end. Renewed concerns over the sub-prime woes caused the market to go into free-fall as news over major banks such as Citibank and Merrill Lynch making substantial write-downs in Collaterialised Debt Obligations (CDOs) and loans were reported. In view of the uncertainty that looms ahead, Shares Investment has chosen some sectors which have good growth potential or are defensive in nature.

TELECOM SECTOR

Telecom stocks such as Sing- Tel, StarHub and MobileOne have always been considered as good defensive stocks in a bruised market. The high entry barriers mean that the telco market is controlled mainly by these three parties. Also, mobile phone and Internet usage will only increase in the future as Singaporeans get more and more tech-savvy. Technological advancement in mobile services will ensure costs get cheaper and affordable for users. In Dec-07, the Infocomm Development Authority of Singapore opened its request-for-proposal for Singapore’s next-generation national broadband network, calling for bids to design, build and operate the network’s infrastructure layer. The phases of network building and operating of the network will by undertaken by different bidding operators to ensure that there is no monopoly. With the local telco companies and foreign ones vying for the tender, we believe that the local telcos have a better chance of winning as they have the experience to deal with the local market.

FINANCIAL SECTOR

Although the stock market was badly hurt by the US sub-prime woes, some analysts remain bullish over the financial sector in Singapore over the mid to long term. Despite massive write downs by major US banks on their losses on CDOs, Singapore banks have limited exposure to them and are partially supported by the robust economy in Singapore. All the local banks are anticipated to post at least single digit profit gains for FY07 other than UOB, whose gains were reduced due to the absence of a one-time gain in FY06 from the divestment of Overseas Union Enterprise and Hotel Negara. Looking into 2008, we expect our local banks to sail smoothly through this heavy storm. With the new bid system in place for 2008, Singapore Exchange is expected to post more gains for FY08. The new system creates more flexibility for retail investors and thus would increase trading in the stock market.

ENVIRONMENTAL SECTOR

With the new Bali roadmap and the expiration of the Kyoto Protocol, we expect more countries to cut down their greenhouse gas emissions by requesting companies to either reduce gas emissions or purchase carbon credits. Global warming has been a hot subject in recent years and there will be a huge demand for recycling companies which sells off any unutilized carbon credit. Recycling companies such as ecoWise and Centillion Environment & Recycling stand to benefit the most from these good news. The demand for carbon credits will increase, as most companies would find it hard to fulfill orders by being eco-friendly or do not have the expertise to do so.

SHIPPING SECTOR

We saw the Baltic DryIndex set a new historical high of 11,039 points in Nov-07 and is confident that the index is going through some correction due to a high influx of shipping companies competing for business. As oil prices soar higher, shipping companies that are fundamentally poor will lose out to the more established ones, resulting in a consolidation of the smaller shipping companies. This would strengthen the shipping industry and give confidence to investors. Demand for commodities will rise in 2008 and it should cause the Baltic Dry Index to bounce back. We recommend investors to stocks such as COSCO Corporation & STX Pan Ocean. Both are blue chip stocks and considered safer investments due to their proven earnings track record.

COMMODITIES SECTOR

Prices of commodities such as gold, platinum, oil and oil-related items have soared during the past few years. Reasons for them rising at such a fast pace include depreciation of the US$, tensions in the Middle East and inflation. Considering the fact that oil prices have reached a historical high of US$100/barrel recently, it is everybodyʼs guess that bio-diesel is the next hot thing. Crude palm oil (CPO) commodity companies such as Wilmar International, Golden Agri- Resources & First Resources are well positioned to ride on rising CPO prices in 2008. Even the prices of commodities such as wheat & soya beans futures have risen by at least 40% since 2006. We are bullish on this sector, as demand is well supported by factors including high crude oil prices and palm oil demand from both edible and non-edible oil market.

VOLATILE PERIOD AHEAD

How the stock market will fare in 2008 depends on whether the US goes into a recession due to its current problems and how Asia responds to it. Oil prices are strongly expected to fall by 2H08 to around US$80/barrel unless the geopolitical tensions in Middle East continue to intensify. As the stock market is anticipated to be choppy at the start of the year, we advise investors to either pick defensive stocks as long-term investments or invest when the coast is clear. Letʼs all look forward to a happy Chinese New Year!