Singapore stock market outlook
21 December 2000
The Singapore economy is currently in the middle of the growth phase in its 4-5 years' cycle. This has historically been a crucial time for the stock market. A strong performance by the market during this phase often leads to continued good performance in the latter phase of the cycle. Past examples include the second half of 1992, 1988 and 1980; all these periods saw rising markets that were followed by further rises in the following year. A weak or lackadaisical performance leads to continued poor performance in the latter phase of the cycle. Examples include 1996 and 1984; both years saw weak market performances which were followed by recessions and bear markets.
The performance of the Singapore stock market so far this year has been disappointing. Sentiment in the Singapore market has been negative, in spite of the apparently good fundamentals of the Singapore economy and the good results announced by most of the listed companies so far this year. Uncertainty over the sustainability of Asia's economic recovery is probably a factor. Interest rate rises, especially over the first half of the year, are weighing down the US economy and stock market which Singapore depends so much on. Oil price increases in the second half of the year have no doubt added to the uncertainty.
Based on the historical pattern described at the beginning of this report, the poor performance of the Singapore stock market this year would indicate a poor performance next year as well. However, the overall technical picture is not clear as there are some contradictory signals. After a steep descent in the first quarter of the year, the Singapore stock market appears to be settling into a consolidation phase. The Straits Times Index hit a year low of 1795.13 on 31 May 2000, rebounded, and then made a higher low at 1818.45 on 17 Oct 2000, before moving back up. This is a bullish technical pattern, but it should be noted that the All-Singapore Equities and the Morgan Stanley Capital International (Singapore) indices made lower lows on 17 Oct 2000.
Fundamentally, the picture is also unclear. The consensus of economists is that the world economy is slowing down. However, the stock market is a leading indicator and may already have discounted this slowdown. More important is the question of how severe and how long is the expected slowdown. Oil prices are expected to peak by the middle of next year, which could boost the economy late next year. More important, however, is the prospect of interest rate cuts. With the US economy slowing down and inflation still relatively muted, the US Federal Reserve has shifted its stance away from controlling inflation towards maintaining economic growth. Most economists expect the US Federal Reserve to cut interest rates by the middle of next year, possibly as early as the first quarter. This would also be positive for the economy.
The final question is valuation. The US stock market remains overvalued based on historical norms, although, after several years of good corporate earnings growth and this year's market decline, not to the extent of previous years. The Singapore stock market appears more reasonably valued, with many so-called old economy stocks trading at P/E ratios below historical norms and new economy stocks having declined substantially from highs at the beginning of the year. Furthermore, the Singapore economy is flush with liquidity, and interest rates are low, having not responded visibly to the interest rate tightening in the US. This liquidity would underpin an increase in the flow of funds into the stock market.
On balance, the forecast is for the Singapore stock market to rise from current levels over the next six months. Specifically, there is potential for the Straits Times Index to exceed 2600 some time next year.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.