Singapore Election Fever! & Its Economic Implications

 

The Month of April has been a quiet month after the tremulous events of March. The market had a tremendous run since the Japanese Tsunami and we are back to the point when we started in Jan 2011. Taking a closer look at the STI index, the index has not moved from the 3200 point since last year October. It has been a quiet 7 months for many parts of Asia with the exception of Korea. The immediate concern is on the impact of the Singapore election on the financial markets. I will give a breakdown of the scenario. Here are the list of important events :

-     US Debt rating was downgraded by S&P from AAA Stable to AAA Negative. The reason for the downgrade is due to the huge budget and trade deficit and no long term policies formulated by the government to effectively narrow the deficit. Global stock market corrected on the news while gold prices shoot pass a record of $1,500.

-          Gold prices hit a new high beyond $1,500 as investors rushed to the safe havens of gold fearing for the fate of USD. SGD appreciated against the USD by 2.4% from $1.26 to $1.23. This resulted in a diminished returns in our USD funds and assets, mainly invested in the gold and resource fund. The profits from the commodity rally has dropped due to unfavorable exchange rates.

-          China government increased bank reserved again as inflation is still strong but seems to be weakening as the tight money policies in China is starting to take effect. China stock market corrected on the news.

-          The Japanese economy continues to recover and the nuclear disaster in Japan seems to be stable for now. The Japanese stock market nevertheless is still one of the worst performers for the month.

The Market Does Nothing 80% of the Time…

The last 7 months has been a patient wait for the Asian market to push pass its previous high and so far, it has not materialized yet. The market has been hovering at the previous high for half a year. This is typical characteristic of Mr Market. Mr Market does nothing 80% of the time and big moves occur only 20% of the time. The scenario has been the same for 2010 when most of the 15% gain occurred from Jun to Sep last year, a short period of 3 months.

Figure 1: STI has been Stagnant since Oct 2010 at 3200 points

If by the virtue that history will repeat itself, we should see the market having a good run from now to the 3^rd quarter of the year. Growth around the world has been rebounding with the exceptions of a few European states and Asia boom is expected to continue as the US rises out from the ashes of their deep recession. I mentioned in the last few letters that the US stock market has been a runaway and Asian markets underperformed by more than 15%. I also mentioned that the US market and Asia market should converge because fundamentally, there is no way for US economy to outperform the Asian economy by such a large margin. Last month, the Asian markets caught up quite a bit as compared to the US stock market. My decision to stick to Asia and not to react with greed and fear and switch to the outperforming US market has been a right call. The American fund has fallen to the back of the pack again for the month of April in my selected funds list.

Figure 2: The Asian Market (Blue Line) has nearly caught up with the US Market (Red Line)

I also made the call to take profits of the gold and resource fund as I am worried at the strengthening SGD dollar and a potential correction of the commodities market if the US Federal bank decides to reverse their market stimulation. The call seems to be paying off as the Asian funds are outperforming the resource funds despite prices of gold and oil hit record high. There are some investors who are invested in a pure china fund and I have also made the call to take profit and to switch the fund to a diversified Asian fund. One of the reason for the move is my preference for the Aberdeen fund managers, which have been doing a better job than the DWS so far and I believe that this switch will benefit the client. I have also take this timing to do the switch due to the exceptional outperformance and profits of China funds, so as to lock in profits from the fund before any further tightening measures from the China government knock it back down. Refer to the fund performance chart at the bottom for a better picture.

Election Fever & Its Implications

With the election around the corner, there is certainly a need to analysis the cause & effect of various possible scenarios. Given that the opposition parties have field strong candidates and the sentiment on the ground has been shimmering against the incumbent party for some of the policies, it may be possible that PAP may lose a GRC. Let us examine possible scenarios based on the stock market performance on past elections and similar situation:

PAP wins all GRC and majority seats: The Singapore stock market will probably rally due to the continued stability of the country. Investors do not like political instability. When the PAP had their worst performance in 1991 garnering a record low of 61% of the votes and losing 3 seats to the opposition party, the stock market fell by 6% in the next 2 months. If PAP do loses a GRC, expect the stock market to take a tumble. The election will have a direct impact on you if you are invested into Singapore stocks. However, there should be no impact if you are a long term investor.

For those who think PAP will win with an overwhelming majority, it is a good time to pick up some stocks. For those who think that opposition might stand a chance to win a GRC, sell your stocks now and wait for the tumble. Pick up the stocks at a cheaper price and wait for the profits to roll in!

As usual, here is the performance of the frequently used funds with the top performing and worst performing funds in the Singapore unit trust market.