THE Straits Times Index (STI) recovered momentarily to 3,047 before resuming its downtrend. Indeed, inflation has been a central theme in the market's volatility, and central bankers are likely to face significant hurdles in carrying out their monetary policies to tackle inflation amid a slowing global economy.
In a rising rate environment, bonds, equities and even commodities will be negatively impacted. The inflation fighting process is going to be a painful one for the markets and is unavoidable.
From a valuation perspective, STI is now trading on a forward PE of 14 times, which would translate into a market earnings yield of 7.1 per cent. The Business Times journalist Teh Hooi Ling published a column on June 21 highlighting that STI had traded in the PE range of 12.4 to 12.9 times in 1980 and 1981 when inflation was 8 per cent. With Singapore's inflation expected to hit 6 per cent this year, the theoretical level for the STI is 2,639 if we use 12.5 times PE as a benchmark.
We are maintaining our view that the STI will fall further, and are holding on to our target objective of 2,890 as an intermediate target. Fortunately, a temporary respite may be on the horizon as Stochastic and RSI are forming bullish divergences. It is likely that end-of-the-quarter window dressing at end-June could buoy markets somewhat in the very short term.
By KEN TAI CHEE MING, technical analyst, Kelive Research
June 24, 2008
ReplyDeleteCHART POINT
Intermediate target for STI remains 2,890
THE Straits Times Index (STI) recovered momentarily to 3,047 before resuming its downtrend. Indeed, inflation has been a central theme in the market's volatility, and central bankers are likely to face significant hurdles in carrying out their monetary policies to tackle inflation amid a slowing global economy.
In a rising rate environment, bonds, equities and even commodities will be negatively impacted. The inflation fighting process is going to be a painful one for the markets and is unavoidable.
From a valuation perspective, STI is now trading on a forward PE of 14 times, which would translate into a market earnings yield of 7.1 per cent. The Business Times journalist Teh Hooi Ling published a column on June 21 highlighting that STI had traded in the PE range of 12.4 to 12.9 times in 1980 and 1981 when inflation was 8 per cent. With Singapore's inflation expected to hit 6 per cent this year, the theoretical level for the STI is 2,639 if we use 12.5 times PE as a benchmark.
We are maintaining our view that the STI will fall further, and are holding on to our target objective of 2,890 as an intermediate target. Fortunately, a temporary respite may be on the horizon as Stochastic and RSI are forming bullish divergences. It is likely that end-of-the-quarter window dressing at end-June could buoy markets somewhat in the very short term.
By KEN TAI CHEE MING,
technical analyst,
Kelive Research