Friday, April 25, 2008

Reasons why stock is better

Despite billions of write downs by big banks and financial institutions in US due to sub prime issues and bad mortgage loans, I still believe that equities or stocks are still preferred to bonds, savings bank, fixed income, etc. I don’t see any irrational selling or dumping of stocks that can plunge the worldwide stock market indices further. In my opinion the market has seemed to bottom from the charts that I posted recently. We are now entering a new phase of bull cycle.

There are a few good reasons why investors or traders still prefer stocks even though you heard a local news of worst recession coming from our very own GIC.

High inflation
Inflation in Singapore and just like in any other country is hitting all time high levels. The most recent data from Department on Statistics said Singapore’s annual inflation was 6.7% last month. That is the highest inflation rate in 26 years. What that means is the money that you hold in cash will devalue by 6.7% after one year if you choose to continue holding it. Obviously aggressive traders and investors would choose to put their cash in Singapore stocks.

Low interest rate
Take a look at interest rates from banks, yields from Singapore treasury bills and SGS bonds. They have one thing in common and that is the rates and yields are all going south. In order to fight inflation, the yields or returns are not even close in neutralising it.

Singapore Interbank Offered Rate (SIBOR) serves as a benchmark for borrowers and lenders of banks to make transactions between each other in the Asian regions. Therefore if SIBOR is low, whichever fixed income instruments or money market funds you put your cash into, they will yield low returns as well. The table below shows the latest SIBOR data:

SIBOR (S$) April 21, 2008

1 month1.00000
2 months1.12500
3 months1.25000
6 months1.37500
9 months1.43753
12 months1.50000

T-Bill historial chart
Treasury bill historical chart
Chart courtesy of elwinlee from SGFUNDS

High excess yields
From the latest iFAST report for month of March, most of the markets have reached attractive levels of price to earnings (PE) ratio. Take Singapore market for example, our 2008 PE ratio stands at 13.3. If you were to inverse this number, you get earnings to price ratio of 7.52%. Compare this yield to the latest 5 year bond yield (at 2.6%); you get an excess yield of 4.92%. That is why I see attractiveness in Singapore stocks as a whole. You can do similar analysis for the other markets as well.

The above are three of the primary reasons why stocks are preferred in my opinion. One of the other reasons why many say 2008 is a year of the bull is because of the upcoming US presidential election. If you read about the presidential market cycle theory, you will understand why there is always a strong bull run nearer to US election.

1 comment:

Finding Mr Lazy said...

i think Diversification still the key. while stock do look attractive, risk remains high especially especially with the upcoming recession (hmm ... i sure hope it doesn't though)

i felt dividends stocks is a good move, at least there are still good dividend income when times are bad. well, only when one have enough capital to buy a few every month lolz

wait for few month or go in now hmmm ... such a difficult decision now. :(