Slowing economy may weigh on Singapore stock market
The Singapore economy is clearly slowing, as indicated by the latest export figures. While economists expect the economy to continue to grow moderately in 2005, the slowdown does leave the question of what is likely to drive the Singapore stock market higher going forward.
In the latest survey of economic forecasters by the Monetary Authority of Singapore (MAS), the forecasted growth rate for 2005 was 4.3 percent, well below the 8.3 percent expected for this year as well as the 5.0 percent forecasted for 2005 in the middle of this year.
Recent economic indicators have provided good reasons for expecting a slowdown for the Singapore economy. For example, third quarter gross domestic product had been down 3 percent on an annualised seasonally-adjusted quarter-on-quarter basis.
The November trade report released by International Enterprise Singapore on Friday shows that non-oil domestic exports (NODX) rose 16.5 percent from a year earlier, but fell 9.1 percent on a seasonally-adjusted month-on-month basis, well below economists' expectations. NODX had risen 1.0 percent in October.
On a more positive note, non-oil retained imports of intermediate goods (NORI), a short term leading indicator of overall manufacturing activity, rose 4.1 percent on a month-on-month seasonally-adjusted basis in November, similar to the 4.2 percent increase in October.
While economists surveyed by the MAS expect the manufacturing sector to grow by over 5 percent in 2005, this represents a marked slowdown from the 12.8 percent growth expected for 2004.
On the domestic front, the economists expect private consumption to grow about 4 percent in 2005. Again, this represents a slowdown from the expected 7.6 percent gain in 2004.
Last Thursday, the Ministry of Manpower had reported that Singapore's unemployment rate had fallen to 3.4 percent in September from 4.5 percent three months before. Also, the economy added 14,100 workers in the third quarter of 2004, up from 10,900 in the second quarter. This was the fifth consecutive quarter of gains.
However, the ministry expected the growth to ease as the Singapore economy "transits to a slower rate of growth amidst the anticipated slowdown in global IT demand and weaker growth in the world economy". It also expressed concern over structural unemployment. Indeed, neither the ministry nor the economists surveyed by the MAS expect the unemployment rate to fall significantly next year.
The property sector has been in the doldrums for the past few years, and while many analysts have been expecting a pick-up soon, that pick-up keeps getting pushed back. The latest figures from the Urban Redevelopment Authority show that the vacancy rate of private residential properties at the end of September was 8.5 percent, after the stock of empty private properties had risen 4 percent from three months earlier.
However, with the US dollar weakening of late, capital flow into Singapore has caused interest rates to fall, with ten-year treasury bonds falling below 3 percent. This may conceivably boost property and the rest of the domestic sector in Singapore, although economists still forecast a rise in interest rates in 2005.
Apart from this, things currently do not look good for the Singapore economy. The next question then is: How vulnerable is the Singapore stock market to a correction as a result of the economic slowdown?
To answer this question, let us look at valuation. The Singapore stock market as a whole is currently trading at a price-earnings ratio of about 14. While low compared to its historical trading range, it does not necessarily mean that the market is cheap. The economy's long-term secular growth rate has slowed down markedly from historical rates, so lower valuations are to be expected. Furthermore, the on-going slowdown means that earnings growth is likely to moderate substantially next year.
Indeed, a price-earnings ratio of 14 is actually close to the historical average for the US stock market, which means that the Singapore stock market may already be fully valued.
There is, of course, still a possibility that the stock market will continue higher. Markets seldom trade at average or fair value, and often overshoot the latter on the way to a peak.
I had pointed out in July last year (see article) -- when the current cyclical bull run was still in its infancy, with the Straits Times Index (STI) at 1,544.84 -- that at the start of the last bear market in early 2000, the STI had found support at around the 2,000 level. I thought then that this provided a technical basis for the bull market to end with the STI between 1,800 and 2,000. The STI closed on Friday at 2,057.98, slightly above the top end of my forecast.
So the stars seem aligned. Are they pointing to the start of a bear market?
In the latest survey of economic forecasters by the Monetary Authority of Singapore (MAS), the forecasted growth rate for 2005 was 4.3 percent, well below the 8.3 percent expected for this year as well as the 5.0 percent forecasted for 2005 in the middle of this year.
Recent economic indicators have provided good reasons for expecting a slowdown for the Singapore economy. For example, third quarter gross domestic product had been down 3 percent on an annualised seasonally-adjusted quarter-on-quarter basis.
The November trade report released by International Enterprise Singapore on Friday shows that non-oil domestic exports (NODX) rose 16.5 percent from a year earlier, but fell 9.1 percent on a seasonally-adjusted month-on-month basis, well below economists' expectations. NODX had risen 1.0 percent in October.
On a more positive note, non-oil retained imports of intermediate goods (NORI), a short term leading indicator of overall manufacturing activity, rose 4.1 percent on a month-on-month seasonally-adjusted basis in November, similar to the 4.2 percent increase in October.
While economists surveyed by the MAS expect the manufacturing sector to grow by over 5 percent in 2005, this represents a marked slowdown from the 12.8 percent growth expected for 2004.
On the domestic front, the economists expect private consumption to grow about 4 percent in 2005. Again, this represents a slowdown from the expected 7.6 percent gain in 2004.
Last Thursday, the Ministry of Manpower had reported that Singapore's unemployment rate had fallen to 3.4 percent in September from 4.5 percent three months before. Also, the economy added 14,100 workers in the third quarter of 2004, up from 10,900 in the second quarter. This was the fifth consecutive quarter of gains.
However, the ministry expected the growth to ease as the Singapore economy "transits to a slower rate of growth amidst the anticipated slowdown in global IT demand and weaker growth in the world economy". It also expressed concern over structural unemployment. Indeed, neither the ministry nor the economists surveyed by the MAS expect the unemployment rate to fall significantly next year.
The property sector has been in the doldrums for the past few years, and while many analysts have been expecting a pick-up soon, that pick-up keeps getting pushed back. The latest figures from the Urban Redevelopment Authority show that the vacancy rate of private residential properties at the end of September was 8.5 percent, after the stock of empty private properties had risen 4 percent from three months earlier.
However, with the US dollar weakening of late, capital flow into Singapore has caused interest rates to fall, with ten-year treasury bonds falling below 3 percent. This may conceivably boost property and the rest of the domestic sector in Singapore, although economists still forecast a rise in interest rates in 2005.
Apart from this, things currently do not look good for the Singapore economy. The next question then is: How vulnerable is the Singapore stock market to a correction as a result of the economic slowdown?
To answer this question, let us look at valuation. The Singapore stock market as a whole is currently trading at a price-earnings ratio of about 14. While low compared to its historical trading range, it does not necessarily mean that the market is cheap. The economy's long-term secular growth rate has slowed down markedly from historical rates, so lower valuations are to be expected. Furthermore, the on-going slowdown means that earnings growth is likely to moderate substantially next year.
Indeed, a price-earnings ratio of 14 is actually close to the historical average for the US stock market, which means that the Singapore stock market may already be fully valued.
There is, of course, still a possibility that the stock market will continue higher. Markets seldom trade at average or fair value, and often overshoot the latter on the way to a peak.
I had pointed out in July last year (see article) -- when the current cyclical bull run was still in its infancy, with the Straits Times Index (STI) at 1,544.84 -- that at the start of the last bear market in early 2000, the STI had found support at around the 2,000 level. I thought then that this provided a technical basis for the bull market to end with the STI between 1,800 and 2,000. The STI closed on Friday at 2,057.98, slightly above the top end of my forecast.
So the stars seem aligned. Are they pointing to the start of a bear market?
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