Business

Are valuations justified by the growth outlook?

Last Monday's column suggested the Straits Times Index was likely to remain stuck within a trading range that loosely spanned the 3,200 level (or just below) up to around 3,280.

For the most part, this was the case, though the index finally managed to break out of this range on Friday, after Global Logistic Properties (GLP) announced details of the takeover offer it had received.

The subsequent surge in GLP's price added 21 points to the index, enabling it to close at 3,287.43.

This breakout might prompt technically-inclined observers to recalibrate their charts while raising the upside resistance to 3,300, a level not seen since mid-2015.

This is entirely possible in the days ahead because support will come from a Wall Street that now thinks there's only roughly a 50-50 chance of a third interest rate hike for 2017 in December and that the US economy could find itself in a "Goldilocks" position - that is, not too hot, not too cold.

Oddly enough on Friday, the Dow Jones Industrial Average rose to its 25th all-time high this year despite the banks JP Morgan, Citigroup and Wells Fargo reporting second-quarter earnings that were below expectations. The Dow needs just one more all-time high to equal last year's total of 26.

Despite Wall Street's inexplicable optimism, upside resistance could come from weak oil prices, geopolitical risk from North Korea and possible earnings disappointments, both here and in the US.

There's also the possibility that Friday's sobering numbers, which showed the Singapore economy just avoided a technical recession, could cap prices.

News that first-quarter GDP was revised down from 2.7 to 2.5 per cent year-on-year and that Q2 growth was also 2.5 per cent prompted Nomura to say it remains comfortable with its view that the economy overall remains weak outside of the surge in semiconductor output, which is supporting the manufacturing sector but not services.

"We still forecast overall GDP growth of 2.5 per cent in 2017, similar to the official 1-3 per cent forecast range," said Nomura.

"However, we believe GDP growth will slow more noticeably to 1.5 per cent in 2018, as the tech cycle enters a more significant downturn and the economy continues to grapple with unfavourable demographics, weak productivity growth and the risk of rising structural unemployment from technological and industrial change."

Bank of America Merrill Lynch is similarly cautious with a 2017 GDP growth estimate of just 2.1 per cent, but Maybank Kim Eng (MKE) and Morgan Stanley (MS), on the other hand, are more optimistic.

MKE on Friday said it is maintaining its full-year GDP forecast at +3 per cent this year and 2.4 per cent next year.

"Growth is broadening to services, but the recovery in services is picking up a lot more slowly than we envisaged," said the broker.

"We expect the government to upgrade and narrow its GDP growth forecast to 2-3 per cent for 2017, from the current 1-3 per cent, when final Q2 GDP is released in mid-August."

MS, in the meantime, said it expects the economy to see "a cyclical rebound this year amid a more conducive external environment and our expectation that the global synchronous recovery will be sustained."

In a nutshell, there is economic growth here, like the US, but it isn't spectacular.

This in turn brings up the issue of stock-market valuations, which many experts have said are too high, even if there is growth support.

Perhaps this tussle between modest growth and extended valuations is what lies behind the market's current "wait-and-see" mode, which is marked by low volatility, increased caution and, Friday's spike aside, subdued liquidity.


This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts

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