STI and the Economy

The Straits Times Index (STI), comprising 30 blue-chip stocks, is influenced by the actual economic performance of Singapore and expectations of where the economy is heading. With improved economic growth, one can expect that the STI to trend upward. The same can be said about decline in economic growth putting downward pressure on the index.

Looking back at some of the recent economic crises, the STI declined significantly during a crisis.

End of Month Crises STI
August 1998 Asian Financial Crisis 856
December 1999 Recovery from crisis 2479
May 2000 Dot-com Bubble 1795
September 2001 Sept 11 attack on twin towers 1319
March 2003 SARS 1267
October 2007 Economic growth (2003-07) 3807
December 2007 Start of Global Financial Crisis 3482

During the Asian Financial Crisis, the STI was at 856 points in August 1998. The recovery did not take long. By December 1999, the STI climbed to 2479. Subsequently, three more events caused the STI to go below 2000 points level. These were the Dot-com bubble (May 2000, STI at 1795); September 11 attack on twin towers of WTC in US (September 2001, STI at 1319); SARS (March 2003, STI at 1267).

After SARS, economic growth gathered pace for a good four years from 2003 to 2007. STI reached its highest level in October 2007 at 3807. When the global financial crisis started in December 2007, the STI was at 3482. It went through a major dip touching 1456 on 9 March 2009.

Since then and coupled with phenomenal economic growth for this year, STI was currently at 3252 on 12 November 2010. Will STI catch up to the pre-global financial crisis level of December 2007 (at 3482 points)? To hazard a guess, one needs to ask a rather simplistic question: Is the current global economy better than the global economy just before the global financial crisis of 2008/09.

For four years to end 2007, US and European countries went through a bubble economy where asset prices, including the equity markets, reached the roof. This is not sustainable and one should temper one’s expectations of future level for the STI. US, Japan and some European countries have still to fully recover from the crisis and this will take a while. The projected global economic growth for 2011 will not be spectacular compared to this year. It will be moderated. On that note, it is not easy to be overly bullish on the level for the STI.

Copyright © 2010, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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