Could property and stock markets lose top billing?

EARLIER this year, the asset markets, namely those related to property and stocks, were among the star performers of the Singapore economy. But the outlook for these markets is less clear in the coming months as risk aversion among investors lingers amid the global financial market turmoil.

Despite the uncertainty, the Monetary Authority of Singapore (MAS) is still keeping to previously announced forecasts for broad economic growth. It expects the gross domestic product (GDP) to expand at the upper end of the 7 to 8 per cent range this year, before moderating to 4 to 6 per cent this year. The MAS assumed higher oil prices and the possibility of more volatility in the global financial markets in its forecast.

The economic projections were contained in the MAS’ Macroeconomic Review, released yesterday. The report, issued twice a year, provided the economic backdrop to the recent decision by the MAS to allow the Singapore dollar to appreciate faster.

The MAS said that while many of Singapore’s economic sectors are “poised for healthy growth in 2008″, the overall economic outlook for next year “is more uncertain, as it hinges on the severity of the weakness in the United States’ housing sector”.

The de facto central bank said the wealth advisory, capital and property-related markets accounted for close to 30 per cent of GDP growth in the first half this year because of the buoyant investment climate. However, the third quarter saw growth slowing as a result of the US sub-prime loan crisis, which spooked financial markets around the world in August.

“Stock market volumes have recovered somewhat since mid-September,” the MAS said. “There has been renewed interest in Asia equities and particularly in Chinese stocks, some of which are listed on the local bourse.”

But it said that 2008 trading volumes are unlikely to match this year’s high stock market activity. Among other uncertainties, “latest data suggests that a full recovery in equity fund flows to Asia has yet to materialise”, although investors could rebalance their portfolios towards Asia to mitigate potential downturns elsewhere, it said.

The MAS offered a more optimistic outlook for property-related industries, given that most of the large infrastructure and housing projects were entering the stage where the largest payments occur. “Projects in the pipeline should be sufficient to support fairly robust growth for the construction sector next year, even if new launches are held back by the recent financial market turmoil,” the MAS said.

In other areas of the economy, the IT-related sector has seen nascent signs of recovery in the second half of this year, and is expected to pick up further next year. The expected rise will serve as an important boost to the overall economy, given the sector’s share and extensive linkages with the broader economy.

Indeed, the slump in this sector shrank its contribution to GDP to just 4 per cent in the first half of this year, from about the annual average of 31 per cent between 2000 and 2006.

Except for electronics production, which shrank 5.7 per cent during the second quarter, there was broad-based growth across various sectors of the economy.

Standard Chartered economist Alvin Liew agrees with the MAS’ assessment of the financial sector. “If we are factoring a slowdown in external markets next year, we would probably see some easing of growth in the sector, for example, asset management.”

Looking further ahead, Mr Liew added that “the sector is poised for long-term growth because of various factors that allow it to thrive,” including a good tax and legal infrastructure, and a relatively stable currency.

He isn’t too concerned about the economy’s shift in reliance from the IT sector. “There is a conscious effort by the Government to reduce reliance on any single industry, which is a prudent approach for economic development,” Mr Liew said.

Source : Today – 31 Oct 2007

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