Friday, February 25, 2011

Market and Economic Update.

I haven't posted for a while because I'm busy looking through various economic and market indicators. I'll be back to discuss the more important issues soon as the General Election is just around the corner.

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!

11 comments:

Anonymous said...

Although unrelated to your blog, the case of a doctor overcharging a wealthy client raises the question whether ministers should be bench marking their salaries to such categories of professionals when their incomes are inelastic due to their personal skills or otherwise. If such doctors were to enter politics one could argue that they have made a great sacrifice but would you want them as your MP?

Punter said...

Interest rates are low all over the world.

But there is plenty of money everywhere... in the banks, in the companies, in the funds..except my wallet.

So, where does the money go?
It seeks returns that is higher than interest rates of course! and that means:

A) Properties ( because loans are cheap too )

B) Commodoties like oil, food,minerals ( silver, gold )

C) Stocks & shares ( for dividends or capital appreciation )

Will it go into building infrastructures? Education?
No!.. the returns take too long and it is not entirely measurable.

Therefore, inflation is not caused by lack of supply but caused by too much money buying up these things.

Traditionally, to address this, central banks will raise interest rates to attract money to soak up excess. But they cannot do that now.. because:

A) the US & European economies are weak and need the stimulus

B) the Emerging economies ( like Singapore ) dare not raise rates since otherwise,their own economies will slow down and it will be difficult to start it up again.

Yet, despite all this, have no fear... the stock market will remain.. it may collaspe but it will remain, just like it did during the world depression.

If you can stomach it, sell out and wait... otherwise, remain invested.. the world economy will survive and we all need to eat.

Leave the cash in the bank? and earn ( at best ) 0.5%???
Buy gold at US$2000???

I say, buy SPH, CDL , F&N and wait.
No choice.. migrate to Canada? and pay 27% tax?.. if you can stomach it.

layman said...

Hi Lucky, like to seek your views on the following. I am struggling with what strategy to adopt.

if inflation is coming, and assuming that I have an opportunity to exit shares at a nice price point. then do u reckon holding cash is good ?since inflation will eat away whatever miserable interest rates that are given out.

Properties are probably out too since the prices may already suggest a bubble formed.

Gold ? commodities ?

thanks

Anonymous said...

Lucky, can you put up a few more charts with Jan 2010, Jan 2009 and Jan 2008 as the base year?

Anonymous said...

High CPI in Singapore is mainly due to 18.4% increase in transportation component. The increase can be related to huge jump in COE.
see here:
http://www.singstat.gov.sg/news/news/cpijan2011.pdf

I expect the CPI to be weaken in year 2011

Anonymous said...

I think they will bump up the STI in the next few days for the GE which will be very soon before STI crashes. Interest rate will go up up and away.

Anonymous said...

QUOTE """ During 2010 GDP growth rate for Egypt, Tunisia and Libya were 5.3 percent, 3.8 percent, and 10.6 percent respectively. Simply trumpeting numbers on economic growth will not work from now onwards."""""QUOTE

The Pariah said...

Singapore's propensity towards wild swings over the last decade goes beyond the time-immemorial fact of Singapore being an open economy. We have been an "open economy" since the days of Sir Stamford Raffles.

1. I reckon that PAP govt policies wittingly caused such volatile gyrations because they are pro-cyclical (rather than counter-cyclical).

2. I also reckon that they are pro-cylical because of the pay structure of ministers and senior civil servants. When 47% of your multi-million dollar salary is VARIABLE (27% pegged to GDP Growth + 20% pegged to Job Perf), you have to be off-your-rocker NOT to be pro-cyclical.

Yawn ... Of course, none of our brilliant leaders have figured out that GDP Bonus should accrue based on moving average of GDP Growth over past electoral term or past 5 years, whichever is longer. This presumes that it is even proper to perpetuate a SINGLE Key Performance Indicator, regardless of job scope - it's like telling your Compliance Chief that his KPI is to increase sales revenue!

3. Structural shift of economic sectoral focus - pharma, semis, fund mgmt - exacerbate the cyclical swings.

I don't know about you but I'm truly astounded to read NY Times article that as at Nov 2010 Assets Under Management (AUM) in Singapore stood at US$1.2 TRILLION when our GDP (even with a 14.5% 2011 growth) was a mere US$210 BILLION!

What I'd like to know is how much is Singapore contributing to IMF these days for Tharman to be invited to chair IMF's International Monetary and Financial Committee? [In 2009, Singapore upped contribution to IMF from US$0.5bn to US$2bn - when MOH 2009 Budget was only S$2bn. That IMF pay-out took place shortly after Singapore was put on the "grey list of tax-uncooperative countries" after Wall Street implosion.]

4. Between the metamorphorical "HOT AIR" and the literal "HOT MONEY", what really is "for real over the long run" in Singapore?

Bubbles? Balloons? Whatever ...

The Pariah
www.singaporeenbloc.blogspot.com

Anonymous said...

Singapore is a SIN city. Make money while you can. Who cares about the poor when our multi-million dollar ministers don't even care?

Money rules!

jamesneo said...

Hi Lucky, the inflation in US is not as low as you think. Firstly, they only focus on core inflation ignoring food and energy. As their housing prices are still decreasing of course their core inflation will look low. Moreover, the US government have been know to massage their CPI numbers through other gimmicks. The real inflation numbers is better reflected by looking at shadowstats:
http://www.shadowstats.com/

Anonymous said...

One other reason why strengthening the S$ is unlikely to curb inflation is because most of the cost of doing business is incurred in Singapore!

Just take any goods imported into Singapore, you would realized that the actual cost of the product (in foreign currency) is pretty insignificant to the layers and layers of costs that are incurred in Singapore the moment it reaches Singapore shores, from transport to warehouse to forklift to GST etc...