Stocks fly in July
The Singapore stock market had a good July, shaking off not one but two terrorist incidents in London to hit new five-and-a-half-year highs. And there are no compelling reasons why the good run cannot continue in the medium term. The long-term trend, however, suggests a limit to the upside.
The Straits Times Index (STI) gained 6.3 percent in July, closing on the last trading day of the month at 2,352.56, the highest close since January 2000, the month in which the previous bull market peaked. The two bombing incidents in London and the potentially crucial introduction of a new regime for the Chinese renminbi hardly made an impact on the stock market.
The Singapore stock market had good company in its optimism. The following table shows that all major stock markets rose in July. In Asia, the South Korean market, as represented by the KOSPI, did even better than Singapore's, rising 10.2 percent and hitting a decade high in the process.
Global stock markets have no doubt been supported by the recent spate of good economic news.
The US economy, the engine of world economic growth, grew 3.4 percent in the second quarter. Although this was slower than the 3.8 percent in the first quarter, it was marked by healthy growth in both consumer and business spending. Excess business inventories were drawn down. Price pressures moderated.
Forward-looking indicators have also looked good recently. The Conference Board's US leading index and the Chicago Purchasing Mangers' Index rose in June and July respectively. US home sales and durable goods orders for June also increased. US consumer confidence indicators moderated in July, though.
Perhaps more importantly, the positive news flow has spread to the rest of the world. Last week saw reports of both Japan's NTC Research/Nomura/JMMA Purchasing Managers' Index and Germany's Ifo business climate index rising in July, adding to earlier evidence that these two major world economies may be seeing a significant upturn.
Most importantly from the Singapore stock market's point of view, the Singapore economy has also been looking better recently. On a seasonally-adjusted annualised basis, real GDP expanded by 12.3 per cent in the second quarter, reversing the 5.5 percent contraction in the first quarter. June in particular saw turnarounds in Singapore's manufacturing output and exports, which rose 9.2 percent and 1.3 percent respectively. Non-oil retained imports of intermediate goods, a short term leading indicator of overall manufacturing activities, rose a strong 11.3 percent in June.
An announcement by the Singapore government on 19 July that it was easing rules on property financing and foreign home ownership also boosted market sentiment, especially in property and finance stocks.
Valuation-wise, the Singapore market is probably trading at a price-earnings ratio of about 16 based on 2005 earnings. It is not particularly cheap, but not high enough to suggest that low interest rates and momentum cannot bring it substantially higher.
And yet, it is important to remember that this bull cycle is already more than two years old. At this stage of the cycle, with the market looking at a likely moderation in the economy and corporate earnings growth in 2006, it is prudent to at least have an idea where the market is likely to peak.
As I have mentioned in previous commentaries, when the stock market last peaked in 2000, the STI had initially found support at around 2,000. Rebounds from that level had found resistance at around 2,200. Earlier, I had considered the possibility that the current cycle would peak between these two levels. However, after struggling for much of this year with the 2,200 level, the STI has now broken convincingly above it, so this target is obviously no longer valid.
Beyond 2,200, I see no obvious target for the STI. In last week's issue of The Edge Singapore, Goola Warden suggested a target of 2,400. To which I say: why not 2,583, the level of the last peak? This seems a more natural target to me.
This means that there is potential for the STI to rise over 200 points or almost 10 percent. Mature bull market or not, nimble traders may still fancy their chances in trying to eke out more gains on the long side.
However, if the longer-term trend holds, the STI may have trouble breaking its previous high in this cycle. Because for all its impressive showing over the past two years, over the longer-term, the Singapore stock market has looked more like it is in a secular bear market rather than a secular bull market.
The above chart shows the STI since 1993. In terms of its raw numbers, the STI has looked, at best, as if it has been going sideways. If adjusted for changes in the US$/Sing$ exchange rate or CPI inflation, the trend for the STI, if anything, looks worse. While the raw STI hit its highest level in early 2000, the exchange-rate-adjusted and inflation-adjusted STIs reached their highest levels in 1996 and 1994 respectively, and despite subsequent peaks, have not recovered those highs.
Looked at from these perspectives, one could quite plausibly argue that the Singapore stock market has been in a secular bear market for the last decade or so. The July surge notwithstanding, who is willing to bet that this is about to change?
The Straits Times Index (STI) gained 6.3 percent in July, closing on the last trading day of the month at 2,352.56, the highest close since January 2000, the month in which the previous bull market peaked. The two bombing incidents in London and the potentially crucial introduction of a new regime for the Chinese renminbi hardly made an impact on the stock market.
The Singapore stock market had good company in its optimism. The following table shows that all major stock markets rose in July. In Asia, the South Korean market, as represented by the KOSPI, did even better than Singapore's, rising 10.2 percent and hitting a decade high in the process.
| 30 June close | 29 July close | Percent change | |
| S&P 500 | 1,191.33 | 1,234.18 | 3.6 |
| Nikkei 225 | 11,584.01 | 11,899.60 | 2.7 |
| FTSE 100 | 5,113.20 | 5,282.30 | 3.3 |
| DAX | 4,586.28 | 4,886.50 | 6.5 |
| CAC 40 | 4,229.35 | 4,451.74 | 5.3 |
| Hang Seng | 14,201.06 | 14,880.98 | 4.8 |
| KOSPI | 1,008.16 | 1,111.29 | 10.2 |
Global stock markets have no doubt been supported by the recent spate of good economic news.
The US economy, the engine of world economic growth, grew 3.4 percent in the second quarter. Although this was slower than the 3.8 percent in the first quarter, it was marked by healthy growth in both consumer and business spending. Excess business inventories were drawn down. Price pressures moderated.
Forward-looking indicators have also looked good recently. The Conference Board's US leading index and the Chicago Purchasing Mangers' Index rose in June and July respectively. US home sales and durable goods orders for June also increased. US consumer confidence indicators moderated in July, though.
Perhaps more importantly, the positive news flow has spread to the rest of the world. Last week saw reports of both Japan's NTC Research/Nomura/JMMA Purchasing Managers' Index and Germany's Ifo business climate index rising in July, adding to earlier evidence that these two major world economies may be seeing a significant upturn.
Most importantly from the Singapore stock market's point of view, the Singapore economy has also been looking better recently. On a seasonally-adjusted annualised basis, real GDP expanded by 12.3 per cent in the second quarter, reversing the 5.5 percent contraction in the first quarter. June in particular saw turnarounds in Singapore's manufacturing output and exports, which rose 9.2 percent and 1.3 percent respectively. Non-oil retained imports of intermediate goods, a short term leading indicator of overall manufacturing activities, rose a strong 11.3 percent in June.
An announcement by the Singapore government on 19 July that it was easing rules on property financing and foreign home ownership also boosted market sentiment, especially in property and finance stocks.
Valuation-wise, the Singapore market is probably trading at a price-earnings ratio of about 16 based on 2005 earnings. It is not particularly cheap, but not high enough to suggest that low interest rates and momentum cannot bring it substantially higher.
And yet, it is important to remember that this bull cycle is already more than two years old. At this stage of the cycle, with the market looking at a likely moderation in the economy and corporate earnings growth in 2006, it is prudent to at least have an idea where the market is likely to peak.
As I have mentioned in previous commentaries, when the stock market last peaked in 2000, the STI had initially found support at around 2,000. Rebounds from that level had found resistance at around 2,200. Earlier, I had considered the possibility that the current cycle would peak between these two levels. However, after struggling for much of this year with the 2,200 level, the STI has now broken convincingly above it, so this target is obviously no longer valid.
Beyond 2,200, I see no obvious target for the STI. In last week's issue of The Edge Singapore, Goola Warden suggested a target of 2,400. To which I say: why not 2,583, the level of the last peak? This seems a more natural target to me.
This means that there is potential for the STI to rise over 200 points or almost 10 percent. Mature bull market or not, nimble traders may still fancy their chances in trying to eke out more gains on the long side.
However, if the longer-term trend holds, the STI may have trouble breaking its previous high in this cycle. Because for all its impressive showing over the past two years, over the longer-term, the Singapore stock market has looked more like it is in a secular bear market rather than a secular bull market.
The above chart shows the STI since 1993. In terms of its raw numbers, the STI has looked, at best, as if it has been going sideways. If adjusted for changes in the US$/Sing$ exchange rate or CPI inflation, the trend for the STI, if anything, looks worse. While the raw STI hit its highest level in early 2000, the exchange-rate-adjusted and inflation-adjusted STIs reached their highest levels in 1996 and 1994 respectively, and despite subsequent peaks, have not recovered those highs.
Looked at from these perspectives, one could quite plausibly argue that the Singapore stock market has been in a secular bear market for the last decade or so. The July surge notwithstanding, who is willing to bet that this is about to change?
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