Year 2010 Outlook for Singapore Stock Market

[Dennis Ng]

Last year in January 6, 2009 article, "This year the economy will enter a cold winter", when most analysts are pessimistic about the stock market, I mentioned in the article the stock market may be bottoming out in 2009 recovery.

How will 2010 be? What can we learn from our experience in 2009?

You cannot see the Future looking at the Rear View Mirror:
Many people make the common mistakes of looking at what just happened to predict the future.

In year 2008, global stock markets fell by 50% to 70% in 2008, many people lost money investing in stocks. Thus, in early 2009 because they were "once bitten, twice shy", many people missed opportunities to buy stocks at low prices.

Now a year later, Singapore's Straits Times index rose nearly 100 percent, from the lowest point of March 9, 2009 of 1,456, up to 2,894 points on 5 Jan 2010. Some analysts from last year's extreme pessimism, reversing a 180-degree, has become extremely optimistic, some even predicted that the stock market in 2010 may exceed 2007's 3,900!

Similarly, they seem to forget the FACT that You cannot see the Future looking at the Rear View Mirror: , because the stock market did very well in year 2009 does not necessarily mean that it would repeat the same good performance in year 2010.

Singapore's stock market outlook

In my personal opinion, Singapore economy should do better in year 2010 than year 2009, Singapore's stock market could go higher and break 3,200 points, but is unlikely to break the 2007 high.

In 2010, if we want to make money in the stock market it would be much more difficult than in 2009. Even up to 3,200 points, it is merely 10% upside. Because most of the blue-chip (index shares) such as local three banks, the stock has risen a lot, not much room to continue to rise.

In contrast, a number of second-and third-line stocks, such as the Hotel Properties Limited, LKH, Yangzhijiang etc, prices have not risen as much and thus, their stock prices might have a greater upside potential

In 2010, if the U.S. economic recovery is slower than expected, global stock markets may even correct and fall in the year.

In addition, there are some stocks at current prices still giving considerable dividends, for example, Lippo Mapletree Retail REIT stock price S $ 0.51, dividends of about 11%.

As the stock markets rise, more and more real estate stock price has risen to more than its net assets (Net Asset Value), for example, CITY Development, Capitaland and so on. In contrast, Hotel Properties Limited's shares are still below their net asset value.

above is my comments (extracted from the Outlook for year 2010 article I wrote for My Paper published on 6 Jan 2010. You can read and download the article free at www.MyPaper.sg.

Below is some comments by Business Times Teh Hooi Ling in an article published on 9 Jan 2010 entitled "gazing into the crystal ball" for your reference as well.


So where are we now? According to Thomson Reuters, the historical PE for the STI is about 21 times (on the high side), and the interbank rate is now 0.625 per cent. Consequently, the ERP is now at about 4 per cent. Going by the forecast earnings for STI component stocks for next year, the forward PE of the STI is about 16.5 times. That would bring the ERP up to about 6 per cent.

Obviously, there is not as much value in the market now. And 4 per cent is precariously close to the lowest level of 3.6 per cent for the ERP in the last eight years or so. And this is at a time when interbank rate is near rock bottom.

But given the assurance from the government of major economies that interest rates will remain low for some time to come, then an ERP of 4 per cent still beats keeping money which earns next to nothing in the bank.

Meanwhile, money supply numbers are decent with November showing growth of about 10 per cent from the year before. The year-on-year change in M1 - namely currency in active circulation and demand deposits - has exhibited a stronger co-movement with stock prices. As you can see from the second chart, year-on-year changes in money supply appears to lead the stock market by some two months.

But admittedly the liquidity we've seen is by no means growing as fast as in 2007. Between March and November 2007, M2 expanded by more than 20 per cent year on year. That was when we saw the STI hitting its record high of some 3800 points.

So in the final analysis, what's the prognosis for the market? Well, it appears there is cause for caution but not alarm as yet. Liquidity and momentum could bring the market further up, particularly in a number of beat-up S-chips. But bear in mind that we are precariously near the bottom end of the ERP range with interest rates now at near zero. Any tightening will make equities ever that much less attractive.

[alvin]

I agree with Dennis that 2010 still has some upside but limited. There maybe a major correction too, which for value investors, it will be another chance to scoop up some stocks.

[Dennis Ng]

I agree with Dennis that 2010 still has some upside but limited. There maybe a major correction too, which for value investors, it will be another chance to scoop up some stocks.

yup, I just like to highlight a few things:

1. as markets move higher and stock prices move higher, Risks increase, not decrease. However, many people who did not dare to invest their money are now getting enthusiastic about investing....driven by psychology of greed, while last year they missed the market due to fear.

2. the STI average PE is about 21, quite high, means the market as a whole might not have much upside left.

3. if one really want to invest in stocks, a possible strategy is to invest in laggards, 2nd liners and 3rd liner stocks which have not moved up as much, Hotel Properties, Yangzhijiang, NOL etc, are some of the examples.

4. don't put all your eggs into one basket (stocks), based on current market value, I personally only have about 40% in stocks currently, another 30% in Other investments and another 30% or so in Cash.

[wemakebread]

I agree with Dennis that 2010 still has some upside but limited. There maybe a major correction too, which for value investors, it will be another chance to scoop up some stocks.

yup, I just like to highlight a few things:

1. as markets move higher and stock prices move higher, Risks increase, not decrease. However, many people who did not dare to invest their money are now getting enthusiastic about investing....driven by psychology of greed, while last year they missed the market due to fear.

Cash.

One of Warren Buffet's famous quote comes to mind:
"be fearful when others are greedy and greedy when others are fearful"

My opinion is that there is still great uncertainty over global economic recovery. Even if there is a significant rise in stock price, this could be fuelled primarily by speculators.

If STI and general stock prices goes up, personally I would not chase.
But if prices come down, I would be more inclined to find good bargains to buy.

One of the stock that I am watching is Golden Agri.

[Dennis Ng]

I agree with Dennis that 2010 still has some upside but limited. There maybe a major correction too, which for value investors, it will be another chance to scoop up some stocks.

yup, I just like to highlight a few things:

1. as markets move higher and stock prices move higher, Risks increase, not decrease. However, many people who did not dare to invest their money are now getting enthusiastic about investing....driven by psychology of greed, while last year they missed the market due to fear.

Cash.

One of Warren Buffet's famous quote comes to mind:
"be fearful when others are greedy and greedy when others are fearful"

My opinion is that there is still great uncertainty over global economic recovery. Even if there is a significant rise in stock price, this could be fuelled primarily by speculators.

If STI and general stock prices goes up, personally I would not chase.
But if prices come down, I would be more inclined to find good bargains to buy.

One of the stock that I am watching is Golden Agri.

yes, I will not chase those stocks where prices have gone up too much, eg. if the Price to Book is too high for property and banking stocks.

I have some Golden Agri, bought at 36 cents a few months back.

[wemakebread]

Hi sifu,

A friend once shared with me about 3 phases of bull run:

1) Start: value stocks at bargain prices (Mar 09)
2) Middle: value stocks reach or exceed par value
investors turn their attention to penny stocks
3) End: penny stocks soar in price

My hunch is that we are already in the End stage of bull run.
I wonder what is your opinion on this?


In fact, I am not ashamed to share that one of the most valuable lessons I learnt (before getting proper financial education) was buying Golden Agri at $1 in Jun 08, just before the Great Fall.

Therefore I would be extra careful & selective when evaluating the laggards. Just my conservative opinion.

[Dennis Ng]

Hi sifu,

A friend once shared with me about 3 phases of bull run:

1) Start: value stocks at bargain prices (Mar 09)
2) Middle: value stocks reach or exceed par value
investors turn their attention to penny stocks
3) End: penny stocks soar in price

My hunch is that we are already in the End stage of bull run.
I wonder what is your opinion on this?


In fact, I am not ashamed to share that one of the most valuable lessons I learnt (before getting proper financial education) was buying Golden Agri at $1 in Jun 08, just before the Great Fall.

Therefore I would be extra careful & selective when evaluating the laggards. Just my conservative opinion.

Hi wemakebread,

I don't dare to call myself sifu.

In my personal opinion, we are probably in 2nd phase of the bull run. Why? Many penny stocks, including Hot Stocks such as Golden Agri are currently still 40% to 50% below historical high, thus, the market has not gone into overly euphoric yet.

Furthermore, when market is over-priced, it is impossible to find stocks giving 8% to over 10% dividend yield, currently, there are still stocks giving such yield at current prices.

I am getting more careful in year 2010. As I mentioned, year 2010 will be a more difficult year to make money in stocks than year 2009, becos the market has already gone up 100% in year 2009, and would need "fresh stimulants" to go further higher from current levels.

That said, I personally think it is a matter of time before market hit above 3,000 level, and when it does, it will have another wave of buying from people who missed the boat.

Dow's magic figure will be 11,000 psychological break-through.

STI's current level of 2,900 is actually similar to Jan 2008's level.