Dear readers, it was reported yesterday that Singapore is in a technical recession after the economy contracted 41.2% in the second quarter from the first quarter. Obviously, the decline was attributed by Covid-19.
With Singapore in a technical recession, what is next for Singapore stocks?
First, let me just highlight that in the last recession Singapore had in 1985, the Straits Times Industrial Index (the former equivalent of the Straits Times Index) reached 620.04 at the lowest. Given that some commentators have said that the 2020 recession for Singapore could be even worse than the 1985 recession, would it be a case that the Straits Times Index could reach lower than 620.04? That is, for Singapore stocks to drop more than 75% from their current level (as reference to the current STI level of around 2,600)?
Second, the lowest price to earnings ratio of the Straits Times Index (STI) was about 6 during the global financial crisis in 2008. The current price to earnings ratio of the STI ETF (ES3.SI) is about 9.18 and we could take this price-to-earnings ratio as that for the STI too. So does it mean that if the Singapore Straits Times Index (STI) were to reach a price-to-earnings ratio of 6 again in the upcoming recession, then STI would reach 2,600 multiplied by 6 divided by 9.18 = 1,699 level? This translates to an approximately 35% drop from the current STI level.
Hence, if the past performance of the STI during stock markets corrections and meltdown were any benchmark, there could be a possibility that Singapore stocks correct by 35% to 75% next.
But first, I would still maintain my view that the STI should correct to the near-term support of 2,500 first. Thereafter in a mass markets correction, the STI should retreat to the 2,000 level which is about 25% down from the current STI level. Against the current volatile markets backdrop, investors would be wise to hold on liquidity to ride out the stock markets corrections next and invest in the markets when many investors have fled.