Singapore stocks down despite good 1Q results
Corporate first-quarter results in Singapore have been excellent, generally meeting or surpassing analysts' expectations. The Singapore stock market, however, has largely ignored the results and has turned decidedly bearish instead, focusing on negative factors elsewhere.
In the United States, following the strong job growth in March and April, recent economic indicators have reinforced the notion that the Federal Reserve is likely to raise interest rates soon, which may hurt stock prices.
On 14 May, the US Labor Department announced that the consumer price index rose 0.2 percent in April, but the core number, which excludes the volatile food and energy components, was up 0.3 percent. On the same day, the Commerce Department reported that business inventories rose 0.7 percent in March to a record US$1.205 trillion, the seventh straight monthly increase. Also on the same day, the Federal Reserve issued a report showing that industrial production in the US gained a larger-than-expected 0.8 percent in April while capacity utilization rose to 76.9 percent, its highest level since July 2001.
In China, inflation is also very apparent. Consumer prices in April were 3.8 percent higher than a year ago. Retail sales were also strong, up 13.2 percent. In an effort to cool down the economy, the Chinese government has ordered banks to hold more capital in reserve. So far, though, the government's efforts have achieved little in slowing down the economy. Economists fear that interest rates may eventually have to go up. That would put the whole economy at risk of a hard landing, and adversely affect other Asian economies as well.
Rising oil prices threaten to aggravate global inflation further. Last week, US light crude shot past US$41 a barrel. Strong global economic growth, especially in China, has led to strong demand for oil. This has put a strain on global oil supply. If oil prices stay high, it will affect economic growth around the world, especially in oil-dependent Asia.
All these negative news is weighing down the Singapore stock market even as companies report sparkling first-quarter results. Of the 147 companies that have reported first-quarter earnings yesterday, 134 were profitable while only 13 were in the red. The companies collectively earned $2.9 billion, 72.1 percent more than they did a year ago. Most analysts reported that the results have generally met or exceeded their expectations.
The three big local banks -- generally regarded as proxies for the overall Singapore economy -- did well, with all three reporting double-digit growth. So did logistics and transportation companies, with Neptune Orient Lines reporting a stunning 7-fold net profit jump for the first quarter.
Technology stocks also generally did well. Chartered Semiconductor Manufacturing surprised analysts by posting a net profit of US$1.9 million in the first quarter, after 12 straight quarters of losses. However, Venture Corp, disappointed analysts with only a 10.7 percent earnings growth for the first quarter. The hard disk drive sector also has not done well.
Property stocks saw mixed first quarter performances. Allgreen Properties, for example, saw its first-quarter net profit fall 12.7 percent to $19.4 million, but City Developments managed a 5 percent gain with a net profit of $40 million.
Despite the generally good results, however, the Straits Times Index fell 4.8 percent last week to close at 1,754.96 on Friday, weighed down by interest rate fears, China's overheating economy and rising oil prices. As a result, the market is now marginally down for the year to date.
Similar concerns afflict most other major bourses around the world. For example, in the United States, the Standard & Poor's 500 fell 0.3 percent last week to close at 1,095.70. It was its third consecutive week of losses. It is now down 1.5 percent since the beginning of the year.
In view of the rising inflation, many economists have compared the current conditions to that of 1994, when the Federal Reserve raised interest rates several times to ward off inflation. In 1994, the tightening cycle began with the federal funds rate at 3 percent and ended with the target rate at 6 percent after the February 1995 meeting. Stock markets around the world fell in reaction to the interest rate hikes. If the Federal Reserve does the same thing again in 2004, many analysts fear that global stock markets would also be badly hit again.
However, there are some differences between the present situation and 1994.
First of all, job growth has been weak. On a year-to-year basis, non-farm payrolls have risen only 0.9 percent in April. In contrast, back in February 1994, non-farm payrolls were 2.5 percent higher than a year earlier.
Secondly, easy monetary policy for the past few years means that households now are in much greater debt than in 1994. Despite low interest rates, the financial obligations ratio -- that is, the ratio of household debt, rent, auto lease, homeowners' insurance, and property tax payments to disposable income -- are near historical highs. A large increase in interest rates this time would almost certainly choke off consumer spending.
So, as Federal Reserve chairman Alan Greenspan has said, interest rate increases this time round are likely to be "measured".
However, there is another difference between the present situation and 1994. I am referring here to the stock market.
Back in 1994, most markets, especially in Asia, had spent the previous year surging, oblivious to the impending interest rate increases. This time, in 2004, even before the start of interest rate hikes, stock markets are already falling.
Such caution reflects a market that is skeptical. This is not typical of a market top. Such skepticism actually makes it less likely that the market is overvalued or overbought. It is also possible that the market may already have discounted much of the impending interest rate hikes.
What this means is that the current pull-back may just be a temporary correction. In other words, it is a wall of worry that the bull market has to climb over before continuing its run.
Admittedly, mine is a relatively optimistic view. Many other analysts suspect that this may be the start of a bear market. However, I am far from alone in my view. For example, DBS Vickers research head Timothy Wong told The Business Times recently that there is still upside potential for stocks. He thinks that the market has yet to price in all the growth "largely because it doesn't believe the numbers at this moment".
Regardless of the upside potential, though, I think investors need to prepare for a rough ride over the next few weeks. I expect the current correction to be a major one, which may take the Straits Times Index below 1,700.
Nimble traders may still have time to sell. Longer-term investors should probably hold on to their shares and wait for the subsequent rally.
In the United States, following the strong job growth in March and April, recent economic indicators have reinforced the notion that the Federal Reserve is likely to raise interest rates soon, which may hurt stock prices.
On 14 May, the US Labor Department announced that the consumer price index rose 0.2 percent in April, but the core number, which excludes the volatile food and energy components, was up 0.3 percent. On the same day, the Commerce Department reported that business inventories rose 0.7 percent in March to a record US$1.205 trillion, the seventh straight monthly increase. Also on the same day, the Federal Reserve issued a report showing that industrial production in the US gained a larger-than-expected 0.8 percent in April while capacity utilization rose to 76.9 percent, its highest level since July 2001.
In China, inflation is also very apparent. Consumer prices in April were 3.8 percent higher than a year ago. Retail sales were also strong, up 13.2 percent. In an effort to cool down the economy, the Chinese government has ordered banks to hold more capital in reserve. So far, though, the government's efforts have achieved little in slowing down the economy. Economists fear that interest rates may eventually have to go up. That would put the whole economy at risk of a hard landing, and adversely affect other Asian economies as well.
Rising oil prices threaten to aggravate global inflation further. Last week, US light crude shot past US$41 a barrel. Strong global economic growth, especially in China, has led to strong demand for oil. This has put a strain on global oil supply. If oil prices stay high, it will affect economic growth around the world, especially in oil-dependent Asia.
All these negative news is weighing down the Singapore stock market even as companies report sparkling first-quarter results. Of the 147 companies that have reported first-quarter earnings yesterday, 134 were profitable while only 13 were in the red. The companies collectively earned $2.9 billion, 72.1 percent more than they did a year ago. Most analysts reported that the results have generally met or exceeded their expectations.
The three big local banks -- generally regarded as proxies for the overall Singapore economy -- did well, with all three reporting double-digit growth. So did logistics and transportation companies, with Neptune Orient Lines reporting a stunning 7-fold net profit jump for the first quarter.
Technology stocks also generally did well. Chartered Semiconductor Manufacturing surprised analysts by posting a net profit of US$1.9 million in the first quarter, after 12 straight quarters of losses. However, Venture Corp, disappointed analysts with only a 10.7 percent earnings growth for the first quarter. The hard disk drive sector also has not done well.
Property stocks saw mixed first quarter performances. Allgreen Properties, for example, saw its first-quarter net profit fall 12.7 percent to $19.4 million, but City Developments managed a 5 percent gain with a net profit of $40 million.
Despite the generally good results, however, the Straits Times Index fell 4.8 percent last week to close at 1,754.96 on Friday, weighed down by interest rate fears, China's overheating economy and rising oil prices. As a result, the market is now marginally down for the year to date.
Similar concerns afflict most other major bourses around the world. For example, in the United States, the Standard & Poor's 500 fell 0.3 percent last week to close at 1,095.70. It was its third consecutive week of losses. It is now down 1.5 percent since the beginning of the year.
In view of the rising inflation, many economists have compared the current conditions to that of 1994, when the Federal Reserve raised interest rates several times to ward off inflation. In 1994, the tightening cycle began with the federal funds rate at 3 percent and ended with the target rate at 6 percent after the February 1995 meeting. Stock markets around the world fell in reaction to the interest rate hikes. If the Federal Reserve does the same thing again in 2004, many analysts fear that global stock markets would also be badly hit again.
However, there are some differences between the present situation and 1994.
First of all, job growth has been weak. On a year-to-year basis, non-farm payrolls have risen only 0.9 percent in April. In contrast, back in February 1994, non-farm payrolls were 2.5 percent higher than a year earlier.
Secondly, easy monetary policy for the past few years means that households now are in much greater debt than in 1994. Despite low interest rates, the financial obligations ratio -- that is, the ratio of household debt, rent, auto lease, homeowners' insurance, and property tax payments to disposable income -- are near historical highs. A large increase in interest rates this time would almost certainly choke off consumer spending.
So, as Federal Reserve chairman Alan Greenspan has said, interest rate increases this time round are likely to be "measured".
However, there is another difference between the present situation and 1994. I am referring here to the stock market.
Back in 1994, most markets, especially in Asia, had spent the previous year surging, oblivious to the impending interest rate increases. This time, in 2004, even before the start of interest rate hikes, stock markets are already falling.
Such caution reflects a market that is skeptical. This is not typical of a market top. Such skepticism actually makes it less likely that the market is overvalued or overbought. It is also possible that the market may already have discounted much of the impending interest rate hikes.
What this means is that the current pull-back may just be a temporary correction. In other words, it is a wall of worry that the bull market has to climb over before continuing its run.
Admittedly, mine is a relatively optimistic view. Many other analysts suspect that this may be the start of a bear market. However, I am far from alone in my view. For example, DBS Vickers research head Timothy Wong told The Business Times recently that there is still upside potential for stocks. He thinks that the market has yet to price in all the growth "largely because it doesn't believe the numbers at this moment".
Regardless of the upside potential, though, I think investors need to prepare for a rough ride over the next few weeks. I expect the current correction to be a major one, which may take the Straits Times Index below 1,700.
Nimble traders may still have time to sell. Longer-term investors should probably hold on to their shares and wait for the subsequent rally.
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