Singapore stock market outlook
31 March 2001
The middle of the growth phase of the Singapore economic cycle, which normally lasts between 4 to 5 years, has historically been a crucial time for the Singapore 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.
Taking 1999 to be a turnaround year for the Singapore economy, 2000 would represent the middle of the growth phase of the current economic cycle. Although the economy grew by a remarkable 9.9 percent, investors had apparently discounted this growth in 1999, when the stock market shot up by over 70%. Last year, investors were looking at 2001 economic growth, and were obviously not too happy. The Singapore stock market performed poorly in 2000, with the Straits Times Index (STI) declining by 22.3 percent. Therefore, based on the historical pattern, stock market performance in the remainder of this cycle would probably be poor, possibly culminating in a recession.
Indeed, in the first three months of 2001, the STI has declined by 13.1 percent, hitting a closing low of 1628.03 on 29 March 2001 before rebounding to 1674.19 the following day. In the process, the triangle pattern that the chart of the STI had been forming since the beginning of 2000 and the STI's consolidation pattern between 1800 to 2100 formed since October 2000 have both been broken on the downside. These technical signals further reinforce the bearish outlook.
Ideally, these technical indicators need to be supported by fundamental indicators. Unfortunately, the economic picture is unclear. The consensus of economists is that the world economy, and in particular, the US economy, is slowing down. However, the severity of the slow-down is uncertain as economic indicators are contradictory. And with the severity of the slow-down uncertain, so is the prospect of interest rate cuts by the US Federal Reserve.
The final question is valuation. The US stock market remains significantly overvalued based on historical norms, even after several years of good corporate earnings growth and the past year's market decline. It is therefore vulnerable to further sharp declines. 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 reached in 2000. Nevertheless, should the US market tumble further, it is unlikely that the Singapore market would remain unscathed. However, the sheer cheapness of Singapore stocks should provide some support to the market, and based on this consideration, the Singapore market is probably close to a bottom now.
In conclusion, the forecast is for the Singapore stock market to remain weak, with the STI possibly declining further to around 1500 to 1600, where it would probably find a bottom. Subsequently, the market would probably rebound to around 1900 to 2000 towards the end of 2001.
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.