Singapore economy catching up with the stock market's fall
12
October 2002
The stunning fall in Singapore's third quarter gross domestic product (GDP) announced on 10 October only serves to confirm what the stock market has been indicating for several months now.
Singapore's GDP for July to September is estimated by the Ministry of Trade and Industry to have risen 3.7 percent from a year earlier. However, it fell 10.3 percent on a quarter-on-quarter annualised basis. Compare that to the fall in the Straits Times Index (STI) this year from a peak of 1,808.41 on 19 March to 1,373.69 on 11 October; that represents a 24.0 percent decline over a period of just under seven months, or slightly more than two quarters. The Singapore economy appears to be playing catch-up with the stock market.
The key question for investors is: Does the stock market itself have further to fall?
Obviously, it is impossible to say for sure. The 24 percent fall in the market since its peak in March this year appears to have discounted quite a lot, including a war in the Middle East, high oil prices, weak capital spending, weakening consumer sentiment in the US and the lockout of the US West Coast ports.
As a result, market valuation is low, with the STI trading at an estimated 2002 PE of about 17 -- cheap by historical standards. Unfortunately, history has not been so gloomy for Singapore for a long while. As Morgan Stanley's Anita Chung noted in the Global Economic Forum on 11 October, "Singapore is halfway to its next recession". In other words, it is facing the prospect of a double-dip, and its third recession in five years.
Technically, there are three potential areas of support for the STI. The first support is the 2001 low of 1,241.29 made on 21 September not long after the terrorist attack on the World Trade Center. The second possible support is the psychological 1,000. The third support goes back to the depths of the Asian Financial Crisis on 4 September 1998 when the STI bottomed at 805.04.
The first support is only 10 percent away, a gap that can conceivably be closed within a week or so; there is a good chance it will not hold. The third support requires a whopping 41 percent fall from the last STI close. It might possibly be the ultimate bottom for this secular bear market, but it is unlikely for the STI to make such a big move without a significant intervening rebound. So, at least for the near term, the STI is likely to find strong support around 1,000.
After that, the STI is likely to make a strong rally, beginning most probably around the coming year-end. Whether that is the start of a new bull market or just another dead cat bounce will depend on exactly what levels the market reaches and how future economic indicators come out over the next few months.
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