Market rebound: Looking in the right market
4 May 2001
Even as the US Federal Reserve continues to cut interest rates, economic indicators continue to provide conflicting evidence of an impending turnaround in the US economy. Last week, the US Commerce Department revealed that GDP growth in the first quarter was 2 per cent on an annualised basis, much higher than expected. This week, the US National Association of Purchasing Management reported that its index of business activity for April was 43.2, up 0.1 from March but below 50, implying contraction in the manufacturing sector. The Commerce Department also reported that new orders placed with US factories for goods other than transportation equipment fell 1.2 percent in March for a fourth straight month, but orders for transportation equipment rose 24.8 percent. First-quarter earnings for the S&P 500 companies fell 4.8 percent and analysts expect profits to fall 11 percent in the second quarter.
But most equity analysts are already looking beyond these figures. They see the economy making a turnaround by next year, helped by the Fed's interest rate cuts, and think that the stock market should bottom soon in anticipation, if it has not done so already.
If indeed equity prices should rebound soon, then investors should start to look for places to invest right now. Which markets are likeliest to rebound soonest and fastest? Should the Singapore-based investor be satisfied with prospects in the local market, or look to the major developed markets? There can be no guarantees, but below are some things to consider.
The US and most major European stock markets enjoyed marvellous bull runs in the second half of the 1990s. The S&P 500 more than trebled from 1995 to 2000, and many of the European markets performed similarly. In the meantime, the Singapore market largely stagnated in the mid-1990s, then plunged in 1997-98 -- together with most of its Asia neighbbours -- in the wake of the Asian Financial Crisis, recovering only in 1999. And when the US market finally tanked in 2000, so did the Singapore market, thus maintaining the latter's long-term underperformance.
As a result, the Singapore market, as represented by the DBS 50 Index, is now trading at a P/E ratio of about 16. This compares favourably with its level in the early and mid-1990s -- before the Crisis -- when the P/E fluctuated around 20. In fact, in the 1980s, the P/E ratio exceeded 20 most of the time and only dropped to around 15 in 1990 during the Gulf War. In contrast, the US market, as represented by the S&P 500, is trading at a P/E ratio of about 25. Prior to the 1990s, the S&P 500 had not traded at P/Es above 20 -- except just prior to the crash of Oct 1987 -- since the early 1960s. In fact, according to Dr Edward Yardeni, Chief Investment Strategist for Deutsche Bank, the US and some of the other major European stock markets are already trading at or above their fair values as at end April.
As for the respective economies, projected growth rates vary, but practically all projections put the Singapore economy at a higher growth rate than the major developed economies. The International Monetary Fund, for example, in its latest report on the world economic outlook, projected a growth rate of 5 percent for the Singapore and 1.5 percent for the US economies respectively for 2001. Of the major European economies, France and the UK are expected to do best, but at a growth rate of only 2.6 percent.
A higher growth rate at a lower P/E ratio; that, in a nutshell, is the Singapore market compared to the US and most other major markets. The case for Singapore stocks seems compelling.
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.