by Terence Lin
Fear gripped the Singapore bourse as the FTSE Straits Times Index (STI) lost 15.2% in the week between 3 October and 10 October 2008. Concerns over an escalating financial crisis led investors to sell riskier assets in a flurry of panic, and the STI lost 7.4% on Friday (10 October) alone. As at 10 October 2008, the STI had lost 44.1% year-to-date, closing 49.7% below the all-time high made almost exactly one year ago. We are certainly in the most turbulent of times, and fear is the overriding sentiment of the hour. At this juncture, we feel that it is appropriate to take a step back and look at the recent decline in a more historical perspective.
Chart 1 : Straits Times Index (STI)
No Stranger To Bear Markets
A bear market is commonly defined as a market which has experienced a fall of 20% or more from its peak. The Singapore market is clearly in bear market territory, but is this really such an unfamiliar place? The strong bull-run from 2003 to 2007 saw the STI gain 219%, and this long period of prosperity has left investors with clouded memories of troubled times in the past. From 1985 to 2007, the STI has entered bear market territory six times, with the current bear market marking the 7th time in the past 23 years (See Chart 1). Market downturns are part and parcel of the market cycle, and taking a simple average, we would expect to see a period of downturn for the Singapore market once every 3.3 years, more frequent than many investors would expect!
The past 23 years has taken us through bear markets of varying lengths and severity. Some of us have felt the impact of these incidents first-hand, while others have heard stories related to these events. Mention events like SARS (Severe Acute Respiratory Syndrome), the bursting of the technology bubble and even the Asian financial crisis, and you will likely evoke strong emotions from older investors. Table 1 shows the falls of the STI in the past 6 bear markets.
Table 1 : Historical Straits Times Index bear markets
Source: Bloomberg, iFAST Compilations
The STI Is Nearer A Bottom Than A Top!
On an average in the previous 6 bear markets, the STI lost 44.8% from peak to trough, over a period of approximately 360 days. Also, 4 out of the previous 6 bear markets coincided with Singapore recessions. With this in mind, let us examine how the STI has performed in the current bear market of 2008.
At the intraday low of 1902.28 on 16 October 2008, the STI has lost 50.9% since peaking in October 2007. This is more than the average 44.8% decline, and is on par with losses seen in the period around the Black Monday market crash of 1987 (-54%) and the technology slump in 2001 (-52%). Also, the Singapore economy has also fallen into a technical recession, with consecutive quarter-on-quarter economic contractions in the second and third quarters of 2008. (See Table 2)
Once again, this is nothing unusual as 4 out of the previous 6 bear markets occurred near or during periods where the Singapore economy entered a recession.
Table 2 : Current Singapore bear market in 2008
Source: Bloomberg, iFAST Compilations
Things certainly look gloomy at the moment, with credit markets in disarray and the global economy slowing. However, this is not the time to panic and sell out. The current market decline is in-line with prior falls of the past 23 years, and only the Asian financial crisis in 1997/1998 saw a much steeper fall of 62%. As of 16 October 2008, the Singapore equity market is 371 days into the current bear market, slightly longer than the 360 day average. The duration-to-date of the current crisis suggests that the STI is possibly near the end of the bear-phase.
As we stand, the stock market has already fallen significantly and investors who sell now are likely selling out nearer the bottom than at the top. With this in mind, let us take a look at the periods of market recovery.
Time to focus on rebound upside
Data on the market slumps since 1985 may be interesting, but we believe investors should be more focused on opportunities in a rebound. We examined the recovery periods from each market bottom, and looked at how long it took for markets to regain previous market peaks, as well as the returns generated in the process.
For the 9/11 attacks and technology slump in 2001, we chose a partial period of recovery up to the peak made on 19 March 2002. The recovery from the 2001 trough was marred by the impact of SARS which led to the STI making a new low in 2003. Instead of looking at the 2001-2003 period as a single bear market in entirety, we chose to look at them separately as there was a significant rebound of 46% from the 2001 market bottom.
(The full recovery from the 2003 bottom to the peak made in January 2000 took 1302 days and the index gained 114% in the process. Inclusion of this data skews the average recovery period to 1.9 years and the average return to 101%)
Table 3 shows the results of our study of the 6 market recoveries. On average, it took 444 days (approximately 1.2 years) for the STI to regain its previous peak before the trough (except for 2002, which was a partial recovery). During these recovery periods, the STI returned an average gain of 81%. This already represents significant upside potential, and provides us with a good reason to be buying in a crisis.
Table 3 : Market Recoveries
Source: Bloomberg, iFAST Compilations
Aside from just a retracement of previous losses, investors may forget that bull markets begin where market bottoms end. Table 4 shows the returns of previous bull markets which returned 178% on average. The average length of these bull markets was an incredible 956 days, which works out to about 2.6 years!
Certainly, investors who invest near a market bottom gain an incredible amount of upside potential, and get to experience a lengthy period of market gains. Investing during a crisis begets great rewards, and investors would do well to buy low and sell high. Of course, no investment decision should be made without consideration of a market's valuations.
Table 4 : Bull Markets start from market bottoms
Source: Bloomberg, iFAST Compilations
Seeking Value
Value investors are finding no lack of promising ideas in the current market downturn, and valuations of the Singapore market are extremely compelling. As at 16 October, the STI trades at just 6.3X of 2007 earnings, and at just 1.16X price-to-book (PB). Both the historical P/E (price earnings ratio) and PB are at the lower end of the historical scale, suggesting that the Singapore equity market is highly undervalued at present.
Slowing global growth may weigh down on future earnings, affecting the historical P/E valuation measure. Our estimated 2008 and 2009 P/Es for the Singapore market are 9.5X and 8.7X respectively. However at a PB ratio of just 1.16X (as at 16 October 2008), the Singapore equity market is being valued at little more than its book value, a measure of its assets net of all liabilities. On a price-to-book basis in the past 15 years, the STI has only been cheaper during the Asian financial crisis in 1998 (See Chart 2).
Chart 2 : Valuations
Market Bottom In Sight?
In the past, we have survived recessions, terrorism fears and even an outbreak of a fearsome disease. Each time some new problem arises, it sends investors scrambling for the exit. "This time it's different!" they exclaim, but every time the market bounced back. Our market has even survived the Asian financial crisis, which saw Singapore's economy contract for 4 consecutive quarters. Given the problems we are facing in 2008, we do not see why it will be any different.
It is unfortunately impossible to call a bottom on the Singapore equity market. We are not proponents of market timing, which is an art best reserved for lucky people. However, placing the recent market declines in a historical perspective, we believe that we are much closer to the bottom than we are to the top. After 371 days, we are likely in the later stages of the current bear market which means the risk-reward trade-off now favours risk-taking.
Valuations for the Singapore equity market are already at historical lows, suggesting that markets have priced in a huge amount of bad news. An often cited but very apt quote from legendary investor Warren Buffett springs to mind at this point: "Be fearful when others are greedy and greedy when others are fearful". While market volatility is expected to continue, we believe upside potential outweighs downside risks at this point and it is probably time for investors to start being greedy again.
Source: fundsupermart.com
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