Wednesday, November 17, 2010

GDP Growth and Stock Market Performance: Any Links?

Speaking to reporters after the two-day Asia-Pacific Economic Cooperation meeting held in Japan over the weekend, Prime Minister Lee Hsien Loong said it would be more realistic to expect the Singapore economy to grow three to five per cent in the medium term.

PM Lee added that, “Even if the external conditions are strong, we are not able to expand so quickly, unless you are prepared to take in more foreign workers and take the risk of overheating.”

Singapore is expected to achieve growth of between 13 and 15 per cent for the whole of 2010.

Earlier in July, Singapore gross domestic product (GDP) for the second quarter grew per cent driven by a surge in the output of biomedical manufacturing, as well as a strong expansion in electronics underpinned by healthy worldwide demand. Advanced GDP estimates for the third quarter will be announced early 18 November by the Singapore Department of Statistics.

Does the PM’s Lee guidance for moderate economic growth the coming year spell poor returns? 

A side-by-side comparison (see table below) of Singapore’s GDP growth with the year-to-year performance of the local stock market seems to suggest that investors need not to worry too much.

In the nine of the twenty two years that the local stock market posted negative returns for the full year, only two were when the economy contracted. Of that same nine years, only two were preceded by below average GDP growth. That said, readers should be aware that a technical recession is defined as two consecutive quarters of economic contraction. Breaking down performance into the various quarters will require more work.

It is interesting to note that Singapore equities hardly have a flat year. There were only three years where the stock market moved up or down by less than 5 per cent.
Nonetheless, readers with more time can try to divine more relationships between GDP and stock market performance. But they should be warned that there are not enough data points to make the conclusions statistically significant. Moreover, there have been significant changes to the composition to both Singapore's economy and the Straits Times Index over the past years.

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