Monday, 26 January 2009

For the Lion City, the Ox is no bull

According to the Chinese zodiac, today marks the first day of the Year of the Ox. Many investors must no doubt be hoping that the Ox brings bullish prospects for markets in the new year.

Last year, the Year of the Rat, certainly did not prove bullish for markets. Almost all asset prices declined substantially, government securities, especially United States Treasuries, being among the few exceptions. Major economies experienced slumps, including notably the US, the euro area and Japan.

Today, the Rat makes way for the Ox. With the Rat gone, is it time for investors to nibble on stocks?

According to feng shui master Raymond Lo, 2009 will be a year in which the stock market stabilises. He says that this Year of the Ox is symbolized by two elements: earth sitting on top of earth. This suggests to him harmony and peace. Therefore, he expects to see signs of more stability and calmness in the stock market. However, in the absence of a fire element, usually seen by feng shui experts as the driving force behind stock market movements, investors will remain cautious.

Historically, Ox years have seen some pretty turbulent times, especially in recent decades, but they have not generally been bad for stock markets.

In 1973, we saw the first oil crisis and stock markets tumbling around the world. In the US, the Standard & Poor's 500 fell 17.4 percent while the Nikkei 225 fell 17.3 percent.

1985, however, turned out much better. The S&P 500 rose 26.3 percent that year while the Nikkei 225 was up 13.6 percent.

In 1997, the last Ox year, we had financial crises in Asia and other emerging economies. The Nikkei 225 did not escape the fallout, declining 21.2 percent. The US market, however, was unscathed, the S&P 500 actually surging 31.0 percent that year.

While the Ox has not generally been unfriendly for the larger markets, there is one stock market which has invariably been gored by it: Singapore's.

In 1973, the Morgan Stanley Capital International (MSCI) Singapore Index fell 42.7 percent. In 1985, it fell 26.9 percent as the economy experienced its first recession since the country gained independence. In 1997, it fell 29.2 percent.

Last year, the MSCI Singapore fell 49.5 percent, the biggest decline on record. Will it fall again this year?

Since the beginning of 2009, the MSCI Singapore has fallen five percent. It is early in the year, though, and historically, two consecutive years of declines in the index have not been common.

Having said that, the plunge in 1973 was followed by a 51.3-percent fall in 1974, the decline in 1985 had been preceded by a 26.6-percent fall in 1984 and the tumble in 1997 had been preceded by a 1.8-percent fall in 1996 and was followed by a 7.3-percent fall in 1998.

In other words, years around the Ox year have always seen a multi-year bear market for Singapore stocks.

Will this time be different? If the latest economic figures from the Singapore government are any indication, probably not.

The Singapore economy fell into recession in 2008 after the economy contracted 5.5 percent in the second quarter and 5.1 percent in the third quarter on a seasonally-adjusted, annualised quarter-on-quarter basis.

A report from the Ministry of Trade and Industry on 21 January said that gross domestic product fell again in the fourth quarter, this time by 3.7 from the previous year or 16.9 percent on an annualised quarter-on-quarter basis. Furthermore, the report said that the economic downturn is expected to continue in 2009, with the ministry's growth forecast for the year being revised down to a range of -5.0 to -2.0 percent from -2.0 to +1.0 percent announced on 2 January 2009.

"The Singapore economy is going through its sharpest, deepest and most protracted recession," the ministry's second permanent secretary Ravi Menon said at a media briefing on 21 January.

That view on the economy was echoed the next day by Finance Minister Tharman Shanmugaratnam when he proposed a government budget for 2009 that included a S$20.5 billion package of measures to mitigate the impact of the downturn. "We are likely to experience the deepest recession in the Singapore economy since our independence, arising from the worst global economic decline in 60 years," he told Parliament.

With that kind of forecast from the government, investors in the Singapore stock market will be fortunate if the market avoids another sharp plunge this year. More realistically, investors should probably expect more turmoil for the stock market.

The Ox may have arrived today. The bull is likely to be much tardier.

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