Dear readers, I am going to share with you the three possible levels which the Straits Times Index (STI) will correct to in the eventuality of a massive stocks markets correction. Let us be prepared, the possibility of a stocks markets correction is not that remote at all. The International Monetary Fund (IMF) has warned of a global recession. And back at home, Singapore has confirmed a recession for this year. And many have pointed out that a massive stock markets correction has not happened in more then a decade and that a correction is “timely” now.
The Straits Times Index (STI) closed at 2,572 yesterday. In the event of a major correction, how low will the STI reach? I have three scenarios.
First, the Straits Times Industrial Index (the former equivalent of the Straits Times Index) reached 620.04 at the lowest in the last Singapore recession in 1985. In light that some have commented that the 2020 recession for Singapore could be even worse than the 1985 recession, the Straits Times Index could reach lower than 620.04; that means Singapore stocks could drop more than 75% drop from their current level (as reference to the STI index).
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 is about 8.9. If the Singapore Straits Times Index (STI) reach to a price-to-earnings ratio of 6 again in the upcoming recession, then STI would reach 2,572 multiplied by 6 divided by 8.9 = 1734 level. This translates to an approximately 33% drop from the current STI level.
Third, I feel the STI level of 620 in the first instance may be a little extreme while the STI level of 1734 level in the second instance could still be a little bit high. As a middle ground, I take the average of the two to arrive at 1,177 for the Straits Times Index. This translates into a 55% drop of the Singapore STI at its current level. An approximate halving of the Singapore stocks value in the post-Covid-19 times looks feasible to me given the fact that practically all businesses have been affected. And the impact to businesses could be for quite some time.
But for the near horizon, I expect the Singapore stocks to correct by 20% to reach the 2,000 level.