Stock markets around the world have recovered from their summer snooze. The Straits Times Index (SGX: ^STI) has climbed from an August low of around 2,800 points to around 3,000 points. Shares, it would seem, have managed to rebound despite continuing signs of weakness around the world. The question for many investors is whether this will be good as it will get for Singapore shares, given that global growth is slowing? It is almost undeniable that global economies are still having problems coping with the aftermath of the financial crisis of 2008. It might be some seven years since the…
Stock markets around the world have recovered from their summer snooze.
The Straits Times Index (SGX: ^STI) has climbed from an August low of around 2,800 points to around 3,000 points. Shares, it would seem, have managed to rebound despite continuing signs of weakness around the world.
The question for many investors is whether this will be good as it will get for Singapore shares, given that global growth is slowing?
It is almost undeniable that global economies are still having problems coping with the aftermath of the financial crisis of 2008. It might be some seven years since the collapse of Lehman Brothers. But the US is still struggling to grow, even though it has pumped trillions into its economy.
Japan is still trying to figure out how to restructure its dysfunctional economy, boost anaemic inflation and drive consumer spending. Elsewhere, China is grappling with a delicate balance of much-needed economic reforms and implementing vital transformations without creating social disruption. Meanwhile, the economic recovery in the Eurozone is hazy at best and beyond repair at worst.
To add even more confusion to the mix, stubbornly-low oil prices are making the jobs of central bankers harder to inject even the smallest amounts of inflation into their economies. Additionally, low price of crude is having an impact on many emerging nations from Russia to Brazil. Russia has been in recession since last year, while Brazil officially entered a technical recession after two successive quarters of economic shrinkage.
The signs are not good. Both the International Monetary Fund (IMF) and the World Bank are now lukewarm over global growth. The World Bank expects the global economy to grow around 3% next year, while the IMF thinks that the world’s economy could grow 3.1% this year and 3.6% the following year.
By all accounts, things are looking quite unappetising for investors the world over. However, nothing is ever quite as bad as it seems.
China could still grow around 7% this year, though that depends on the reliability of the numbers. That said, Premier Li Keqiang has stressed that the growth target is an aspiration rather than a goal. It is not set in stone.
But even if China should grow at half its aspired rate, the US$10 trillion economy could still expand some US$400 billion by the end of 2015. That is equivalent to the annual production of a country the size of Singapore.
Long way to normality
On a global scale, a 3% expansion is even more impressive. If the world economy, which is worth almost US$80 trillion, could grow at 3%, it would be equivalent to producing an economy the size of the UK every year.
The sluggish growth around the world speaks volumes. It could mean that interest rates could stay lower for longer.
Additionally, if and when the US does get round to raising interest rates, it is likely that it could be a very long time before they reach normality again. In the case of the US normal interest rates are around 6%. In the UK it could be a long while before they hit 8% again.
It is sometimes easy to miss the point about investing. It should not be about trying to second-guess the direction of interest rates. Nor should it be about predicting the direction of any economy. Instead it should be about looking for companies that have been undervalued by the market but still have products and services that are valued by customers.
Transport companies such as ComfortDelGro (SGX: C52) could fall into this category. So too could consumer staples such as BreadTalk (SGX: 5DA) and QAF (SGX: Q01). In telecom services there could be Singapore Telecoms (SGX: Z74), while in the financial services sector Great Eastern (SGX: G07) could fit the bill too.
These companies have good track records of paying dividends, in both good times and bad. Currently, their payouts are adequately covered by profits, which could suggest that the dividends are sustainable. In a world where there is so much uncertainty about economic growth and interest rates, there could be something quite reassuring about regular dividends.
What’s more, if those dividends are frequently reinvested, they could even add up to a decent investment over time.
A version of this article first appeared in The Independent on Sunday.
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