Singapore market outlook 2017: could be better, but not all doom and gloom
2016 has been a year of political surprises in the United Kingdom and the United States. The UK voted to leave the European Union in a referendum on 23 June and Donald Trump won the US presidential election on 9 November.
Financial markets were totally wrong-footed in both instances and everything seemed to plunge in the immediate aftermath. Yet there was also a quick turnaround, which was equally unexpected.
The Straits Times Index (STI) ended the year nearly flat or just 0.07% lower at 2,881, which is quite remarkable considering all the bad news it has been hit with throughout the year.
Exactly a year ago, I had predicted that despite the challenging economic outlook, the downside for the STI would be limited due to its attractive valuation.
For 2017, the main risk for global financial markets is, in my opinion, souring international relations, especially between the US and China.
The fragile global economy can little afford its two biggest economies engaged in diplomatic, trade or even armed conflicts. In spite of this, there are still reasons for the STI to perform better.
Improving macroeconomic environment
First of all, the global macroeconomic picture is generally better. Going by official GDP data, China has been able to avoid a hard landing thus far, growing at about 6.5%.
The US economy continues to improve, so much so that the Fed is now projecting to raise interest rates three times instead of twice in 2017.
Commodity prices have recovered significantly from their lows in early 2016. Oil prices are currently hovering at above US$53/barrel, 70% higher than its lowest price level of about US$30/barrel.
Strengthening US greenback is actually a good thing
Secondly, there is a great deal of nervousness surrounding the Fed raising interest rates and a stronger USD, which is unwarranted.
Rising interest rates from near-zero level should be viewed in the context of normalization, made possible by a stronger US economy. Even so, interest rates would still be historically very low.
Similarly, the rising USD is really nothing to fret about if we remember that the greenback had fallen a lot during and after the global financial crisis of 2008.
For example, US$1 was worth about S$1.70 around the year 2000 before trending all the way down to below S$1.25 around the year 2013. A stronger USD is also beneficial for exporting countries such as Japan and Singapore.
The Great Rotation
Thirdly, there is abundant liquidity in the form of cash waiting on the sidelines or cash misallocated in assets such as bonds with very low or even negative yields.
With rising interest rates, investments in bonds are no longer safe.
In the last few years, financial commentators have talked about a great rotation from bonds into equities. Perhaps this is already happening in the US, which recently experienced a spike in 10-year treasury yields alongside a strong stock market performance.
Plenty of room for upside
Fourthly, valuation of the local index remains attractive. While US stock indices have climbed about 10% in 2016 and repeatedly reached new record highs in November, the STI is still a far distant from its 2007 record level of above 3,500.
Its price-to-earnings (P/E) and price-to-book (P/B) ratios are about 14 and 1.1 respectively, compared to 19 and 2.9 for the S&P 500, according to The Business Times.
Another indicator of cheap valuation is the noticeable number of majority shareholders taking their companies private in 2016, such as Osim, Eu Yan Sang, Tiger Air, Sim Lian and ARA.
Economy still ticking along
Finally, despite the many challenges in 2016, the local economy averted recession and still managed to grow, albeit slowly, at about 1%. The economy is expected to grow 1% to 3% in 2017, says The Sunday Times. Slow economic growth is probably the new normal going forward and it’s not such a bad thing.