BT: Money supply leads and S'pore stocks follow (03 Feb 2007)

Money supply leads and S'pore stocks follow

In the past 15 years, money surges have usually led stock moves by about 2 months

By TEH HOOI LING

(SINGAPORE) Investors wondering what is fuelling the record-breaking run of the Straits Times Index (STI) need look no further. Money supply numbers released by the Monetary Authority of Singapore (MAS) this week showed a 19 per cent surge in funds in the financial system.

In the past 15 years, changes in money supply have usually led the stock market by about two months. A big jump in money supply is followed by a rise in the stock market. So the December surge in money supply could fuel the market up to the end of this month.

On Wednesday, numbers from MAS showed M2 shot up 19.4 per cent in December 2006 to $262 billion from a year earlier. That was the biggest increase since October 1999, when M2 rose 28 per cent.

Between November 1998 and October 1999, M2 - which includes currency in active circulation, demand deposits, fixed deposits, negotiable certificate of deposits, savings and other deposits - grew an average of 29 per cent year-on-year. And between January 1999 and December 1999, the SES All Shares Index gained 82 per cent.

BT has plotted year-on-year changes in money supply and found them to lead the stock market by some two months. Year-on-year change in M1 - namely currency in active circulation and demand deposits - appears to exhibit a stronger co-movement with stock prices.

There is, however, a one-month lag before MAS releases its latest money supply numbers. Still, investors have a one-month heads-up on where the market would seem to be going. So if past patterns persist, February could be a good month for stocks.

Economists point to a number of reasons why there is such a strong flow of funds into Singapore. Says OCBC Bank's Selena Ling: 'There's quite a bit of growth in deposits with non-bank financial institutions. When we see that, we think of hedge funds and the like.'

Citigroup's Chua Hak Bin says funds could also be flowing in from the region, given policy uncertainties in, say, Thailand. 'There's a lot of liquidity out there. People are parking their funds here, getting ready their ammunition to invest, either in Singapore or elsewhere in the region. It's also a sign that the market is confident of the strength of the Singapore dollar.'

According to OCBC's Ms Ling: 'In the past six months, we've been seeing a lot of money flowing into Asia because of the favourable economic outlook. There is also speculation that there will be significant appreciation of yuan and ringgit.'

She thinks the momentum can continue a while more, as people are still bullish about Asia.

But the sharp run-up in Singapore share prices - the Straits Times Index was up some 50 points or 1.6 per cent yesterday - is making some analysts more circumspect.

Says Song Seng Wun, head of research at CIMB-GK: 'The liquidity is supportive of market conditions. We think February will be an OK month as well. But after that, people may take some profits off the table following the Budget and the release of some major corporate results.

'We think the market is fairly valued now, and it has priced in all the good news. The STI has been going up on a straight line since the middle of last year. It's too good to last, and we are looking for some sort of correction.'

Pioneer Investments shares the view of a correction in the short term but thinks Singapore is still undervalued based on prospects for 2007 and 2008.

Says its head of portfolio management for Far East equities, Angelo Corbetta: 'We have an overweight position in Singapore. Markets are starting to be overbought, with prices now being 20 per cent above the 200-day moving average.

'Consequently, a correction is possible. However, on a fundamental basis, and looking at 2007 and 2008 prospects, the market still looks undervalued. In Singapore, we still see upside in banks, airlines and media stocks.'

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