2006 - A Recap of an Extraordinary Year on the SGX 2 comments

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The headlines scream bull market. The feel-good factor is truly in the air, as the effects of a strong economy start to filter down to the masses even as the segmentation of Singaporeans into two distinct tiers --- the rich becoming richer, the poor becoming somehow caught in a poverty trap that is exacerbated by the entry of competitively-priced foreign labour supply --- forces a re-consideration of the social welfare system, or rather the lack of it. The stock market is what we're concerned with, and is what I describe chronologically, in broad brushes, of an extraordinary year on the SGX.

1Q06
The year started cautiously as 2005 had ended on a weak note. By the end of the quarter, the bull market was in full bloom. And the stars of the bull were clear: China stocks.

It started with fundamentals, and ended on froth. Initially stocks with strong newsflow eg. Celestial, Fung Choi, were bid up, then followed stocks based on the China domestic consumption theme eg. China Hongxing, Beauty China, Hongguo, and then spread rapidly to new IPOs like China Fishery, Luzhou Biochem, China Milk, and at the close of the quarter, inferiors/laggards eg. Zhongguo Jilong, China Infrastructure, China Great Land. 20-30% gain in one day for these stocks in play, culminating in multi-baggers within one month, were common. It was scary for investors and exhilarating for traders. See my Hotstocksnot writeup on China stocks for a full description of the evolution cycle.

2Q06
It continued from where 1Q06 ended, and ended at where 1Q06 started. The great event that will surely leave its marks on some unfortunate market players who burnt their fingers would be the huge correction in May.

There were some noteworthy news events in this quarter. The general election was held on May 6. It is interesting to note that the market peaked and collapsed soon after, giving some credence to the view that there was market support before the election. But probably the greater factor was the coupling effect with the global market corrections, such as the India Sensex which collapsed several thousand points. The STI started the year at ~2300 points; it ended 2Q06 at around the same level. Investors and traders were panicking and selling out as they interpreted it as the end of the multi-year bull market that had commenced in mid-2003.

2Q06 also saw the award of the Marina IR licence to Las Vegas Sands which did not arouse great market interest (the punting will be in the Sentosa IR later on) and the World Cup, which sucked away further market interest.

3Q06
The market crash did not materialise, and the market consolidated and started to rise again. By the end of the quarter, the market was back in the groove.

The focus had moved from the China theme, so dominant in early-2006, to a variety that moved into focus at different times, such as technology, oil and gas, shipbuilding, oil and gas, plastics recovery, property. But caution was in the air, and there was a move towards quality, as reflected in the STI which moved relentlessly upwards with little correction, if you look at a chart of the STI from Jun06 onwards.

4Q06
One theme established itself strongly in this quarter, and that was domestic reflation with the accompanying beneficiaries of the property, construction and banking sectors.

If one follows the economic cycle, consumption typically lags the cycle, but the wealth effect will eventually manifest itself as liquidity and sentiment climb. Talk is now of rising psfs being traded, of rising office rents amid tight supply, of a new paradigm for Singapore properties amid the impending IRs. Genting, the winner of the Sentosa IR licence, was bid up to the skies, along with most property stocks. Banks, provider of all the liquidity for mass consumption, were revalued upwards. Construction-related stocks came into focus as 2006 drew to a close.

We start 2007 probably with the STI above 3000, if the opening is favourable. The STI is up 25-30% for the year, with the SESDAQ up 50% or so. There are people who report having doubled or tripled their portfolio value. Market sentiment is high as long-dormant retail players look to move back in with their bonus money, together with those unfortunate players who cashed out too early in anticipation of a bear that never came, and are now looking to re-position themselves back into equities.

Overall
2006 was probably the first full year where there were no real market scandals. CAO in 2004, then ACCS and Citiraya in 2005, sapped market confidence and made investors/traders cautious. There were the odd earnings shock eg. Biotreat, but no real frauds that shook the market. The bull markets around the world scaled a wall of worry, but found at every point that things were not as bad as they thought, and so they continued climbing. 2006 was originally thought to be a year for the stock-pickers ie. it would not be easy unless you were a really good stock-picker; at the same time high oil prices were thought to be a huge market-braking factor; eventually the markets have survived and the oil companies/prices and the global economy are still relatively strong.

2007 will be considerably more challenging simply because people's expectations of the stock market have been raised, such that 20% annual return will be considered a failure. Under this kind of circumstances, there is great potential for the greater-fool theory to manifest itself as people keep bidding prices higher in anticipation of other people coming in to take over their line of stock; the challenge will be to exit at the high.