Is The Market Back On Track?

The market seems to be on an uptrend for the past few days, now the STI is starting to approach back to the 3000 level, but then is this growth sustainable? There seem to be many ideas floating around that a recession is possible, which may be so since a recession has come about every 7-10 years and we're already reaching the lower band of the time frame.

(Image source: pixabay.com)

If we look at the P/E ratio of the STI, it is around 11-12, which is not all too bad and is still sustainable. But a different picture is painted when looking at other aspects. Singapore's housing market isn't doing all too well, which affect REITs. The REITs will face a challenging operating environment, possibly in the near future, as prices and rents seem likely to decline.

The increasing SIBOR and SOR rates would also affect homeowners, increasing the cost of borrowing, which will lead to lower home prices. Banks will also be affected as the increasing rates would increase their costs of borrowing, while putting a larger strain on mortgage holders, increasing their risk of default. If this chain effect does start, no matter how low the P/E ratio the market currently is, the market is still likely to take a very big hit as the banks, a big constituent of the STI would be affected, which would hurt investor sentiment and may have repercussions in other industries.

If we start looking overseas, the S&P 500 currently has a P/E ratio around 20, much higher than Singapore, but still a reasonably sustainable number, just not too much room for sound growth. China on the other hand is starting to face a slowing economy and a debt problem, which it had hoped to solve with a buoyant stock market, which as we now know, has failed quite miserably. I think most of the worries are in China, as they consume a lot of resources and it's slowdown may have a larger impact on the rest of the world through commodity prices. The US seems to be doing well, but the impact of China may weigh more in Singapore.

I don't think that the market will be able to go back to its previous levels of around 3,500. But it still has room to grow in the P/E ratio if the global economy (especially China) is able to hold out for a longer period of time and eventually recover.

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