the outlook for singapore stocks 1119412015

The epicentre of the earthquake that shook global stock markets on Monday was undoubtedly located in the Asia-Pacific region, and specifically, China.

Unfortunately, it appears that the pain from Monday’s bloodletting in stocks is likely to hurt regional investors some more as stocks are not likely to rebound much from current levels.

Over the next three months, the MSCI Asia Pacific Ex-Japan Index is likely to achieve a level of only 405 compared to an earlier estimate of 495, according to analysts at Goldman Sachs. The index fell 5 per cent to 387.19 in Hong Kong yesterday.

Over the next 12 months Goldman has reduced its forecast for the index from 520 to 455, as reported by the Business Times.

"A shock to growth expectations and faltering confidence in policy are at the centre of a self-reinforcing downward price dynamic in regional equities," Goldman Sachs analysts wrote in the report. "Past valuation troughs suggest there could be another 15 per cent downside. The catalyst for a rebound is likely to be stable-to-better macro data, notably from China, which is at least six weeks away."

Past valuation troughs? Where would those be for Singapore stocks?

Here’s some interesting data on how much Singapore blue chips could decline if stocks fell to a price-to-earnings ratio from the current 12 to 6 – the PE ratio of the STI in 2009 at the time of the global financial crisis:

(Data courtesy of S&P Capital IQ, via Fool.com)

Singapore Telecommunications Limited (SGX:Z74) -63 per cent

StarHub Ltd. (SGX:CC3) -64 per cent

Jardine Cycle & Carriage Ltd (SGX:C07) -39 per cent

SIA Engineering Company Ltd (SGX:S59) -72 per cent

Oversea-Chinese Banking Corp. Limited (SGX:O39) -30 per cent

But of course remember that extremely low PE ratios at the time of a market crisis are the result of investors over-reacting, and it may be worthwhile to keep in mind that old stock market adage: in the short run, the market is like a voting machine – but in the long run, the market is like a weighing machine and assigns a stock its substantial worth.

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