Singapore equities look past weak second quarter
14 July 2003
The Singapore stock market defied many analysts last week with another strong run.
For the week, the Straits Times Index (STI) rose 58.6 points or 3.9 percent to close at 1544.84. This was the seventh week in the last eight that the STI has risen. The index has now risen 27.3 percent since its low for the year and 15.2 percent since the beginning of 2003.
Many analysts had expected stocks to consolidate last week after the run-up of the past two months, with an expected dearth of positive market-moving news not helping. Indeed, on the news front, things turned out worse than expected. On 10 July, the Singapore government announced that the economy had contracted 4.3 percent in the second quarter from a year ago based on flash estimates, much weaker than the 2 to 3 percent expected by most economists. And yet, after a flat performance on the day of the announcement, the marked jumped 1.7 percent the very next day.
Most economists expect some sort of recovery for the Singapore economy in the second half of the year. Investors apparently agree, as reflected in the stock market's performance. After all, the stock market always looks ahead.
In fact, economists who had been surprised by the magnitude of the second-quarter contraction should perhaps have paid greater attention to what the stock market had been trying to say since last year. While many had expected Singapore's retail sector to reel from the impact of severe acute respiratory syndrome (SARS) in the second quarter, the statistics show that the manufacturing sector also fared badly in the quarter, contracting by 7.5 percent, a performance foretold by months of decline in the stock market even before the SARS outbreak.
The next question for investors is how much longer the current rally will last.
My own guess is that we are still in a secular bear market. The current market P/E ratio of around 25 is too high for the market to start a major multi-year bull run. Rather, what we are seeing right now is probably a bear market rally.
However, it is likely to prove to be a powerful bear market rally. With rising liquidity from all the monetary and fiscal easing around the world, it is likely that the market will continue to rally at least until late this year and possibly even well into next year.
At what level is the STI likely to peak at? To answer this question, two reference points can be used. The first is the last market peak of 1808.41 in March 2002. The STI is likely to test this level, and if this is the major bear market rally that I think it is, it is likely to break through it. The second reference point is the 2,000 level. At the start of the bear market in early 2000, the STI actually found support at around the 2,000 level. It reached roughly that level in March 2000 and stayed around that level -- with transient lurches above and below it -- until March 2001, a whole year. It is likely to prove a significant level and, considering the deflationary environment that the global economy is in, the STI is not likely to break through it.
That leaves the STI with a likelihood of peaking between 1,800 and 2,000. In other words, this rally still has some way to go.
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