Downside risks for economic recovery, upside potential for
Asian stocks
29 April 2002
According to the latest forecasts by the National University of Singapore's Centre for Business Research & Development (CBRD), the Singapore economy will start to expand towards the end of the second quarter, and perhaps hit double-digit growth by the final quarter. For the year as a whole, the CBRD forecasts that GDP will grow 3.5 percent.
Advance estimates by the Ministry of Trade and Industry based on just January and February data show that the economy contracted 2.6 percent year-on-year in the first quarter. The CBRD's forecast for the second quarter, based on a technique called X11-Arima, sees the economy expanding by 0.6 percent. For the third and fourth quarters, the CBRD forecasts strong growth of 5.3 percent and 10.8 percent respectively.
However, there are clear downside risks to the forecasts. The third and fourth quarter forecasts in particular assume a strong recovery on the basis of the strong upturn seen in the second and third quarters of 1999 when the economy was last in a recession. But there is widespread concern that the recovery this time around may not be as robust as in previous recoveries. Indeed, on 24 April, the US Census Bureau reported that March durable goods orders fell 0.6 percent, with orders for non-defence capital goods, a key indicator of business plans to expand and modernise, dropping 2.8 percent.
In general, though, the economic recovery still appears to be on track; Singapore's March industrial output, for example, grew 3.9 percent compared to February based on the seasonally adjusted three-month moving average series. Forecasters just need to refrain from making overly optimistic assumptions based on previous recessions, as the current conditions are not exactly the same.
Being overly optimistic is apparently what stock market investors had been. After hitting a high of 1,808.41 on 19 March 2002, the Straits Times Index closed at 1,728.32 on 26 April. A year-to-date gain of 11.4 percent has been reduced to 6.4 percent.
At the beginning of the year, I had suggested that the STI, at 1,623.60, was too finely poised to call. Well, I might have been a tad too pessimistic. The market has been trading well above that level ever since. But I think the possibility of the STI dropping significantly below 1,700 remains real. The market has apparently only begun to realise this risk over the past month or so.
But being overly pessimistic would also not be helpful. At just over 20 times P/E, the market is not particularly expensive after taking into account the depressed earnings on which it is based. 2003 P/E is about 17, which is reasonable when compared to the historical range. State Street Global Advisors, the manager behind the recently-launched streetTRACKS STI tracker fund, has found that over more than 20 years from 1981, the market largely trades within a P/E range of between 15 and 30.
However, other Asian markets may be even more compelling. In his 22 April article for The Straits Times, Lim Say Boon, director of OCBC Investment Research, wrote that with the US market being overvalued but the global system still flush with liquidity, investors may turn to Asia ex-Japan. Many others have pointed to the low valuations of Asian stocks. In an interview given to Fundsupermart.com earlier this month, chief economist for Henderson Global Investors, Shane Oliver, sees Asian markets rising 20-30 percent through the year as they benefit from the cyclical upswing, helped by attractive market valuations.
Korea has been a favourite among international investors because of its resilient economy which is buttressed by domestic demand. In The Business Times today, an article noted that a resilient economy and improving corporate governance is attracting foreign fund managers to the Malaysian market. Henderson likes Malaysia, as well as Taiwan and India.
So investment opportunities abound in Asia. Investors just need to keep level heads and avoid making overly optimistic or pessimistic forecasts.
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.