For those who are interested, these are some of the things I've been looking at and some thoughts on the market.
The above is a chart showing the Dow Jones performance va our STI. You notice the 2 charts are closely correlated until sometime in Nov 2010. Following that there is a divergence resulting in the DOW Jones Industrial outperforming the STI by a whopping 18% over the short period. I have not seen something like this except during the Asian Crisis. The reason for this is money has been pouring into EM (emerging markets) for the last 2 years as investors saw the promise of higher growth (vs developed markets) generating higher returns. Towards the end of last year, a new thesis took hold of global investors - developed markets are now better investments vs EM because the developing countries now have inflation and will need to tightien by raising interest rates & other measures. Such tightening will slow these countries' growth - developed western countries are now preferred because they are now growing and there is little inflation. Based on this, funds have sold off their EM holdings aggressively in a herd like manner for the past 2 months causing this huge performance difference between the markets.
Fueled by QE2 and inflow of funds from EM, the DOW saw an unusual continuous rise (with very few "down days") from the end of last year.
If you examine the thesis closely, there are few things to consider. The Singapore economy is an open one and hence we are exposed to global inflation - commodities, oil, food etc. Tharman's strategy is allow the appreciation of the S$ to keep out imported inflation. So why do our inflation numbers look much worse than those of US. The main factor I believe is housing. In Singapore we had a housing boom (bubble?) as the western developed countries are having a housing bust. The effects of the housing bust keeps the component of home prices and rentals down in developed countries masking the effects of inflation in food and energy. What I'm saying is things are not so good in US vs Singapore to see such a big gap in market performance. Our economies are inextricably linked and we typically go into recessions and recovery together. Remember this "decoupling" theory was suggested at the onset of the last crisis suggesting that Singapore can avoid recession as US & Europe sank into one - it was quickly proved false although our MM Lee said he believed it was true.
Singapore also has been lumped together with India and China, countries that have to raise interest rates aggressively to prevent overheating.Going forward, I think there a few possibilities - the US markets falter and close the gap or US continues to perform or remain steady and investors start to be more discerning and some money start to flow back to developed Asian countries such Singapore and Hong Kong. Frankly, I don't really know especially in the short 2-3 months period but I don't believe the global economy is a healthy one in the longer term - just that it can look healthy for the short term when the US & European recovery pick up steam. Inflation is a real threat to the global economy and when it starts to show up in western developed countries, it can prove troublesome for economies and markets. Right now we are in a sweet spot for Europe and US. For those who missed the fine exits when the market euphoria took hold at the begiinning of this year, depending on how steadily the US & European economy recover, you may or may not have another nice (nicer?) exit in the coming months - I suggest you don't miss the next one....that is if there is a next one!