Briefly discussed a comparison between Malaysia’s KLCI and Singapore’s STI in my earlier post: https://thecafeinvestor.wordpress.com/2016/02/12/a-tale-of-two-bourses/
In this part 2, let’s explore historical trend of the market cap to GDP ratio for both Malaysia and Singapore.
As shown below, the Malaysian stock market crash during 97-98 was much anticipated, as the market was trading as high as more than 300% market cap-to-GDP (1993-1996). For period between 1999 and 2007, the ratio has been range bound with an average of 142%. The 2008 financial crisis had pushed the ratio down to 81% (which is the lowest) since 1989. For period between 2009 and 2015, the average ratio was approximately 145%, which was slightly higher than the average ratio for the period 1999-2007. Unless we see significant contraction in future GDP or global recession, the Malaysian stock market will continue to trade range bound in line with GDP growth rate.
MIDF Research has lowered its forecast for Malaysia’s year 2016 gross domestic production (GDP) growth to 4.0%, following a cut in its growth forecast for the second quarter of 2016 to 3.9%.
In a note today, the research house said the leading indicator which provides a forecast of Malaysia’s economy two quarters ahead, fell 2.6% year-on-year, sinking to levels seen in 1997, 2000 and 2008.
However, it said the decline is rather gradual, compared to the sharp decline in prior crises.
“We believe that a prolonged economic slowdown is likely; hence we are revising our GDP forecast for 2Q16 from 4.2% to 3.9%, and for the full year 2016 from 4.4% to 4.0%,” said MIDF.
Singapore’s market cap to GDP ratio exhibits an increasing market cap-to-GDP ratio and relatively more volatile if compared to Malaysia. This could be due to its characteristics (1) openness of the economy (2) more developed stock market and better liquidity (3) developed nation (lower annual GDP growth). Recent corrections in Singapore stock market had led to a lower ratio of 213% (as of 2015). As long as Singapore continues to record annual GDP growth, the ratio is expected to hover between 200-250. In the event of a global crisis, we should see a decline in the stock market far greater than of Malaysia.
According to the 22 respondents in the latest quarterly survey by the Monetary Authority of Singapore, the Gross Domestic Product (GDP) is expected to expand 1.8 percent this year. This estimate is slightly lower than the 1.9 percent forecast which was projected in March.
However, growth is still within the mark of 1 to 3 percent official forecast. The estimate shows that the GDP can potentially grow at 2.1 percent next year.
The manufacturing sector will contribute about one-fifth of the republic’s GDP. The finance, insurance as well as wholesale and retail trade sectors will expand 2.9 percent and 2.0 percent respectively. However, the previous expectation was of an increase up to 3.6 percent and 3.9 percent respectively.
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