STI approaching level of last major peak
With the Straits Times Index (STI) closing at 2,168.86 on Friday, the Singapore market is around levels not seen since 2000, the year of the last major peak. Is the Singapore stock market ready to scale new heights? Or are we nearing a new peak?
To have an idea, let us first look at the economic backdrop.
The Singapore economy grew 7.9 percent in the fourth quarter on an annualised quarter-on-quarter basis. Manufacturing was the strong driver of growth in the fourth quarter, rising 14.1 percent over the previous year, with biomedical manufacturing outstanding.
The outlook for 2005, however, is for slower growth. The Ministry of Trade and Industry expects growth of 3-5 percent. Reflecting this slowdown, the composite leading indicator fell 1.9 percent in the fourth quarter over the previous quarter, following a 1.2 percent fall in the previous quarter.
Electronics, is likely to be a major victim of the slowdown. Non-oil domestic exports decreased by 0.6 percent in January on a month-on-month seasonally-adjusted basis, following a revised 0.2 percent rise in December, with electronics in particular rising only 5.9 percent from a year earlier after an 8.3 percent growth in the preceding month. Non-electronic products, though, grew 12.4 percent last month, thanks to strong exports of petrochemicals, electrical machinery and raw chemicals.
An outright downturn appears unlikely at the moment. The trade picture shows that non-oil retained imports of intermediate goods, a short term leading indicator of overall manufacturing activities in the months ahead, rose 8.8 percent on a month-on-month seasonally-adjusted basis in January, reversing the revised 3.7 percent contraction in December 2004.
The trend in the economy has analysts recommending investors move to the domestic sector, for example, property, banking and retail.
The property sector has seen particularly buoyant sentiment. This has often been fed by property companies themselves.
CapitaLand chairman Richard Hu was recently quoted in The Business Times as saying: "The outlook is positive given the growth in real estate markets in Asia, and we are well positioned to take advantage of this growth."
In the same report, the newspaper mentioned that Keppel Land is expanding into the property markets of China, Thailand, Vietnam, Indonesia and India, and also expects to see stronger growth in Singapore's residential and property market this year.
Both CapitaLand and Keppel Land recently reported a good sets of results for 2004.
The main risk for property stocks is the possibility that the good prospects for the sector have been discounted by investors. Remember that the Property Index outperformed the STI in 2004 by one percentage point and has outperformed the STI by about the same margin so far in 2005.
In contrast, the Finance Index underperformed the STI by about 7 percentage points in 2004 and continued to underperform the STI by about 3 percentage points in 2005 so far.
In even greater contrast is the Electronics Index, which underperformed the STI by a whopping 24 percentage points in 2004, reflecting the current malaise of the electronics sector, and continued to underperform the STI by almost 7 pecentage points in 2005 so far.
Indeed, many people think that while the electronics sector may be seeing a slowdown, things may turn up towards the end of the year. If that is the case, it may be about time for electronics stocks to start outperforming the rest of the market.
But what is the outlook for the market as a whole?
Interest rates have been rising and the yield curve has been flattening since around the middle of 2004. This trend is likely to persist. Such a trend is bad for the economy, but more importantly, it is bad for the stock market as well.
Asia-Pacific stock markets are generally perceived to be more resilient than US stocks. However, in a survey by Merrill Lynch recently, fund managers were found to be underweight on Singapore.
I had previously indicated that at the start of the last bear market in early 2000, the STI had found support at around the 2,000 level. I had thought that this provided a technical basis for the bull market to end with the STI below 2,000. With the STI now trading significantly above 2,000, this forecast has to be reviewed.
While the STI had found support at around 2,000 at the start of the last bear market, it had also found resistance at around 2,200. Can this be a target? It is only about 2 percent higher than Friday's close.
If the market breaks this level, then the next likely target is none other than the peak of 2,583 hit on the very first trading day of 2000. Now that's almost 20 percent higher than Friday's close. A mouth-watering prospect.
But is it realistic?
To have an idea, let us first look at the economic backdrop.
The Singapore economy grew 7.9 percent in the fourth quarter on an annualised quarter-on-quarter basis. Manufacturing was the strong driver of growth in the fourth quarter, rising 14.1 percent over the previous year, with biomedical manufacturing outstanding.
The outlook for 2005, however, is for slower growth. The Ministry of Trade and Industry expects growth of 3-5 percent. Reflecting this slowdown, the composite leading indicator fell 1.9 percent in the fourth quarter over the previous quarter, following a 1.2 percent fall in the previous quarter.
Electronics, is likely to be a major victim of the slowdown. Non-oil domestic exports decreased by 0.6 percent in January on a month-on-month seasonally-adjusted basis, following a revised 0.2 percent rise in December, with electronics in particular rising only 5.9 percent from a year earlier after an 8.3 percent growth in the preceding month. Non-electronic products, though, grew 12.4 percent last month, thanks to strong exports of petrochemicals, electrical machinery and raw chemicals.
An outright downturn appears unlikely at the moment. The trade picture shows that non-oil retained imports of intermediate goods, a short term leading indicator of overall manufacturing activities in the months ahead, rose 8.8 percent on a month-on-month seasonally-adjusted basis in January, reversing the revised 3.7 percent contraction in December 2004.
The trend in the economy has analysts recommending investors move to the domestic sector, for example, property, banking and retail.
The property sector has seen particularly buoyant sentiment. This has often been fed by property companies themselves.
CapitaLand chairman Richard Hu was recently quoted in The Business Times as saying: "The outlook is positive given the growth in real estate markets in Asia, and we are well positioned to take advantage of this growth."
In the same report, the newspaper mentioned that Keppel Land is expanding into the property markets of China, Thailand, Vietnam, Indonesia and India, and also expects to see stronger growth in Singapore's residential and property market this year.
Both CapitaLand and Keppel Land recently reported a good sets of results for 2004.
The main risk for property stocks is the possibility that the good prospects for the sector have been discounted by investors. Remember that the Property Index outperformed the STI in 2004 by one percentage point and has outperformed the STI by about the same margin so far in 2005.
In contrast, the Finance Index underperformed the STI by about 7 percentage points in 2004 and continued to underperform the STI by about 3 percentage points in 2005 so far.
In even greater contrast is the Electronics Index, which underperformed the STI by a whopping 24 percentage points in 2004, reflecting the current malaise of the electronics sector, and continued to underperform the STI by almost 7 pecentage points in 2005 so far.
Indeed, many people think that while the electronics sector may be seeing a slowdown, things may turn up towards the end of the year. If that is the case, it may be about time for electronics stocks to start outperforming the rest of the market.
But what is the outlook for the market as a whole?
Interest rates have been rising and the yield curve has been flattening since around the middle of 2004. This trend is likely to persist. Such a trend is bad for the economy, but more importantly, it is bad for the stock market as well.
Asia-Pacific stock markets are generally perceived to be more resilient than US stocks. However, in a survey by Merrill Lynch recently, fund managers were found to be underweight on Singapore.
I had previously indicated that at the start of the last bear market in early 2000, the STI had found support at around the 2,000 level. I had thought that this provided a technical basis for the bull market to end with the STI below 2,000. With the STI now trading significantly above 2,000, this forecast has to be reviewed.
While the STI had found support at around 2,000 at the start of the last bear market, it had also found resistance at around 2,200. Can this be a target? It is only about 2 percent higher than Friday's close.
If the market breaks this level, then the next likely target is none other than the peak of 2,583 hit on the very first trading day of 2000. Now that's almost 20 percent higher than Friday's close. A mouth-watering prospect.
But is it realistic?
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