Singapore Entrepreneur - Is the World Economy Recovering?

The International Monetary Fund (IMF) has forecast the global economic growth at 3.1% for the year 2010, compared to a dismal -1.1% in the year 2009.

Asia, led by its growth engines China and India, is slated to outpace its US and Europe counterparts. This year, China alone is expected to emerge at 8.5% growth amidst a global recession. This feat is mainly attributed to its government stimulus package and continual strong domestic demand. Developing economies like ASEAN stands to benefit from these powerhouses.

On the other side of the globe in US where the epicentre of the financial tsunami is, growth has been laggard for this year. No clear signs of recovery has emerged. Same is felt in most European economies. High unemployment rate is still being faced in these countries. It will certainly take at least another year of two for the US and Europe climb back its their pre-crisis levels.

Although the decoupling effect theory has been in the talks for some years, the impact of the US economy on the rest of the world will, nevertheless, still be great.

In this year alone, we have witnessed the equity markets rising to as much as 80% from their lowest points. Asian markets have seen the most spectacular gains in anticipation of their quick recovery.

But are all these rises sustainable? Could we see another bubble or start of a W-shape recovery, as depicted by some analysts?

One argument point about the unprecedented recovery of the global market is that most governments' stimulus packages have taken effect. So whatever improvements we have witnessed are all artificial and may not be sustainable. How much more can governments continue to "feed" their economies until they can be back on their feet again?

Nonetheless, Asia is still slated to emerge strongly from this deepest recession in 70 years. Economists and analysts have unanimously agreed that any next bet would be on Asia. The spectacular rise over the last few months in Asia markets is mainly attributed to new investment monies entering from US and Europe.

In Singapore, many counters have risen from undervalue to fair or overvalue. In the short term, analysts are divided over which direction the Straits Times Index (STI) will head.

My analysis on the current trend is that most counters have been fully valued. All earnings have already been factored into the current price. Today's STI Price over Earnings (P/E) ratio stands at about 21x. It is no longer cheap as compared to the above chart (courtesy of Bloomberg), showing the historical STI P/E. The direction of the index will really depend on the earnings announcement for the last quarter and also any development in the US economy. A small correction may be eminent in the near future. It should be healthy for the market to cool off speculation. For long term investors, the current price is still reasonable for future growth. As for short term investors, be on your toes when looking into the suitable price to enter. Don't get caught up by a sudden correction.