Looking from the global economies peak period in 2007 to the melt down of the subprime in 2008 and till recent issue of the Europeans' debts, with fundamental on the economy on a roller coaster ride, the global equity markets also experienced the same behavior. While the fundamental of the economies/equity markets has slowly recovered from the subprime crisis, the concern of inflation, double dip recession and Europe debt issue did not provide a smooth passage way for the recovering as a whole.
From 2007 till now, it can be spotted that there exhibit an equilibrium line for STI throughout these periods and it is at around the 2,754 level. This level was first tested during March 2008 as the subprime issue seemed worried for most that it can't be contained since it was first alerted in Aug 2007. When Lehman Brother was collapsed around the Aug 2008 period, STI broke down this equilibrium and soon followed global economies gone into recession, bottomed out during March 2009 and staged a recovery then as Government worldwide pumped in stimulus to support the economies.
This equilibrium level was finally reclaimed during Feb 2010 but with the recent European debt issue, this level was being tested ( though not physically hit but attempt to test it ). Global economy as a whole is still not back to its peak in 2007 and that is why most part of the STI value since Aug 2008 till now lied below this equilibrium level. If the European debt issue is able to provide an equal or sizable impact as the subprime, STI will break down below the equilibrium once again and might take another lengthy period to reclaim that level.
Further looking at some of the stock prices of the blue chips ( representation of sectors ) and their respective equilibrium price level, some insightful views can be observed.
1. UOB eq price = $16.60
2. DBS eq price = $12.40
3. OCBC eq price = $7.26
4. KepCorp eq price = $9.80
5. SembCorp eq price = $3.67
6. SembMar eq price = $3.30
7. NOL eq price = $2.23
8. CityDev eq price = $10.00
9. Capitaland eq price = $4.13
10. CapitaMall Trust eq price = $1.78
11. Wilmar eq price = $5.50
12. NobleGrp eq price = $2.00 ( before dilution due to bonus share )
13. Olam eq price = $2.20
14. SIA eq price = $13.00
15. ST Engg eq price = $3.20
16. SingTel eq price = $3.40
17. StarHub eq price = $2.50
18. SPH eq price = $3.80
With reference to 7th May 2010 closing price for the above stocks, what can be seen was Banking and Commodity sectors are trading above their equilibrium price level. The remaining sector of Property, Offshore/Marine, Aviation and Telco are still mixed with some trading above their equilibrium price and some still struggling to move above it.
The subprime crisis was caused by financial over-leverage and hence finance sector would be strong on the rebound on the recovering and that is why the banking stocks are all now trading above their equilibrium price. Commodity stocks have pretty much linked to the USD. With US Fed pumping trillion of USD to save the economy, the world is flooded with excessive cash and potentially causing inflation to rise. To curb inflation, commodity is the best choice and that is why commodity stocks also traded above their equilibrium level.
Property stocks in general should still be trading above their equilibrium value as the excessive cash has caused investors to buy physical assets as investment. The case of Capitaland trading below its equilibrium level could be due to its big exposure in China. China is facing property market being overheat and with measures being constantly rolled out by the Government to curb the property market, this could have dented the upside of Capitaland.
Offshore/Marine stocks also showing mixed behavior as even though crude oil price has recovered from the USD50/barrel level but still way off their peak of USD140/barrel. Concern of rig orders demand still hampering the revenue of these companies. If taking into consideration of the demand of rig orders, offshore/Marine or evening shipping sector is considered a laggard in recovery.
Aviation sector being laggard in nature for economy recovery is also showing mixed result with reference to their respective equilibrium level.
Lastly, the defensive & telco sectors are no surprised they still yet to recover fully as due to their laggard and defensive nature.
Economy recovering cannot happen to all sectors at the same time and will be done in batches and hence this is why stock prices behave differently. What the underlying meaning of the equilibrium level is it provides the basis of the stock prices for longer term perspective. For short-term perspective, the equilibrium price level could signal fair valuation for those yet to fully recover fundamentally or support level for those who has gone ahead of the block in recovering. Eventually when the whole economy is back to its peak, stock prices will all move above their equilibrium level. Whatever still struggling to cross that level would signal the recovering is still lagging.
