There has to be a more accurate way for investors to measure the strength of the economy than by the GDP figures - the percentage increase in the value of goods and services sold last quarter. It's not that the numbers are wrong. Quite the contrary - a lot of effort goes into researching and publishing them. But most investors have no idea what to do with the GDP numbers, to the extent that they generally have very little impact on the stock market.

The Ministry of Trade & Industry published a 13-page release announcing the downgrade of the economic outlook to 4%-6% growth, from 4.5%-6.5% earlier. The document used phrases like:

If the US slips into a more severe recession … the effects on Singapore will … be stronger, particularly in the sentiment-sensitive and external oriented sectors like electronics, wholesale trade and financial services.

In theory, the worrying outlook should have sparked a fall in the Straits Times Index. Instead, the market climbed 86 points, with the value of shares traded exceeding yesterday's. Perhaps it was because investors read the rest of the document which showed strong growth in some areas like construction.

But I doubt it. First, because the only really interesting part is the forward-looking statement, not the review of what happened. That's in the past. We invest for the future. Second, because of the peculiar way the numbers are dissected. Not only do we get to see how the economy fared in Q4 2007 compared to Q4 2006. We're also presented with a baffling annualised quarter-on-quarter number, whose usefulness is perhaps the most questionable: Considering how volatile quarterly growth is, what sense is there in extrapolate a full-year number by saying "assuming every quarter in the past year was like this quarter…". Because, invariably, it never is.

But back to the stockmarket. What are you to do with these GDP figures?

In short, nothing. Your time is better spent looking at individual companies:

Cashflow. Is the companies you're investing in generating cash? Simple question, simply answered. In a sense, the GDP numbers already measure this, but not on an investible company level.

Dividends. How much of the cashflow is finding its way into your pocket? Again, simple question, simply answered.

Until the SGX launches a futures contract with GDP growth as the underlying, this micro view of the world serves you far better than macro econo-babble.


Mark Laudi, forever indebted to my good friend Bernard Lo for inventing that word, and to all the economists who make it so entertaining.

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Labels: gdp, Singapore Economy