A reader of The Motley Fool Singapore had recently sent in a question, asking if it?s a good time to invest in Singapore?s stock market now. The reader?s worried partly because he/she thinks that Singapore?s going into a recession soon.
I have no working crystal ball to know when a recession?s going to hit us next.
But I do feel a need to address the reader?s point about not wanting to invest due to fears that a recession might be just around the corner. It?s a dangerous misconception about how the markets work.
Here?s a chart (click for a larger image) plotting…
A reader of The Motley Fool Singapore had recently sent in a question, asking if it’s a good time to invest in Singapore’s stock market now. The reader’s worried partly because he/she thinks that Singapore’s going into a recession soon.
I have no working crystal ball to know when a recession’s going to hit us next.
But I do feel a need to address the reader’s point about not wanting to invest due to fears that a recession might be just around the corner. It’s a dangerous misconception about how the markets work.
Here’s a chart (click for a larger image) plotting Singapore’s annual gross domestic product (GDP) growth and the yearly returns of Singapore’s market barometer, the Straits Times Index (SGX: ^STI), going back to 1993:
Source: World Bank (for GDP figures); S&P Capital IQ
I trust it’s easy to see that there’s no observable relationship between GDP growth rates and stock market returns. In other words, what the stock market will do over the short-term, has nothing much to do with our country’s economic growth.
Over the long-term, the relationship’s pretty much the same – nonexistent. In a 2010 research paper titled “Is There a Link Between GDP Growth and Equity Returns,” MSCI Barra Research wrote that “the correlation between stock returns and economic growth across countries can be negative.”
This doesn’t mean that investors shouldn’t care about a country’s economic growth. It just means that trying to analyse future market returns with a single variable can be dangerous and that there can be other more important drivers for how stocks move.
Vanguard did a study in 2012 which looked at how well certain well-known U.S. economic and financial indicators fared when it comes to predicting how the country’s stocks would do 10 years later. Valuation was the clear winner here – thought it’s still worth pointing out that they only explain part of the picture. (For the record, rainfall was a better predictor than GDP growth; chew on that.)
Source: Morgan Housel at fool.com
This raises the question: Where do we stand now in terms of Singapore’s market valuation? Based on latest data from the SPDR STI ETF (SGX: ES3), an exchange-traded fund which closely tracks the fundamentals of the Straits Times Index, stocks in Singapore carry a trailing price-to-earnings (PE) ratio of around 14.
This compares favourably against the Straits Times Index’s long-term average PE ratio (from 1993 to 2012) of 16.6. Put another way, Singapore’s market may not be dirt-cheap today, but it’s certainly nowhere close to being extremely pricey either – this puts the odds of success mildly in our favour in my opinion.
But, be careful though. A market that looks somewhat cheap now does not necessarily mean you’re bound to get good returns – remember Vanguard’s study.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.