Singapore stock market: Review and preview
2 January 2002
The Straits Times Index (STI) finished the year 2001 at 1,623.60. That represents a 15.7 percent fall in the STI over the year, the second down year in succession.
In my article of 6 September 2001, I had forecasted that the STI would finish the year above 1,600; it barely did so. I could stop here and claim some level of prescience. That would be futile, though, since it is relatively easy to go back to that article and realise that the actual forecast made then was for the STI to finish the year between 1,600 to 1,900. That's a pretty wide band, and reflects the cautious optimism I had then for the market. The caution proved correct, but the optimism did not.
There was considerable variation in the performance of the various sectors. The construction sector performed the worst, falling by a third. The transport and communications sector performed almost as badly, as did Sesdaq. On the other hand, the electronics, finance and manufacturing sectors fell one, two and three percent respectively.
So what's the outlook for 2002?
In my opinion, this year should not see any spectacular movements. As noted in my previous article on 28 December, the direction of the economy from here on is likely to be up. That, plus liquidity, will tend to push equities up. However, earnings recovery is likely to be weaker than in previous economic recoveries. The key question is: what has the market discounted?
At the close of trading for 2001, based on announced results, the P/E ratio for the STI stood at 14, dividend yield at 2.6 percent and price-to-book at 1.5. These values are low compared to historical Singapore market valuations, current US market valuation and even historical US market valuations.
But comparison of valuations can be misleading. Historical Singapore market valuations may be higher, but the Singapore economy is no longer the high-growth newly-industrialising economy it once was. And the much-higher valuation of the US market is hardly a consolation, as it probably means that the latter is expensive more than that the Singapore market is cheap, especially if the earnings recovery proves weak.
The abnormally low Singapore market valuation also reflects the expected earnings decline for the fiscal year just ended, which should knock about 20 percent off earnings and bring the P/E ratio to about 17. But for a bottom in the earnings cycle, that is not too high.
In a nutshell, there appears no compelling case for either a bull or a bear market.
Analysts in the industry seem equally divided. In yesterday's The Business Times, DMG & Partners and Morgan Stanley were reported to expect a good performance from the Singapore stock market this year, while Kim Eng Securities and Salomon Smith Barney see poorer prospects. OCBC Securities was reported to be "more circumspect". The bulls mostly cited liquidity, while weak earnings were the main concern for the bears.
While weak earnings are a valid concern, it is important to put it in proper perspective, which I have attempted to do above. The Business Times editorial yesterday put a more unusual spin to the earnings concern. It said: "In order for US technology stocks to justify current valuations for example, it is estimated that profits will have to grow by at least 50 per cent, a figure which may not be achievable given that global demand for electronics is still sluggish". I have no arguments there; as I intimated earlier, US stocks are expensive and are vulnerable to earnings disappointment.
The Business Times editorial then goes on to add: "Analysts counter this objection by saying that buying stocks today is not based on fundamentals but on expectations of a recovery". There must be confusion here, surely, since the recovery mentioned here must be referring to the recovery of economic fundamentals. The editorial was probably trying to say that buying stocks today is not based on current fundamentals.
"Since the worst appears to be over - a perception encouraged by Wall Street's performance in the past two months - then the logic is that one should buy today to position oneself for the inevitable growth that must come tomorrow," the editorial continued. "This line of reasoning is reminiscent of the days when investors were urged to buy loss-making tech stocks because the fact that they suffered losses must have meant they were ploughing back their earnings to ensure future growth."
I must say that The Business Times is unfairly comparing the market's anticipation of a recovery to the Nasdaq high-tech bubble of the past few years. The fact is, stock markets have always anticipated recoveries, or downturns for that matter. It would be stupid for an investor not to do so. The problem with the high-tech bubble was not that there was an anticipation of earnings growth but that new, unproven and unrealistic business models were being used to justify that growth. While such a practice probably continues in some corner of the securities industry, most projections of earnings recovery are based on more conventional models.
Ultimately, though, the editorial reached the same conclusion as I have, that "even though hopes are high that 2002 will be a good year for equities, it may pay to be prudent". So I am not making any projection for the STI for the moment. The stock market is too finely poised to call.
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.