Wednesday, July 06, 2005

Bear market in 2002-03 1 comments

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It is a natural human phenomenon that pride comes before a fall, and so it was after the dot-com bubble burst in 2000; the way down was long and arduous, and it would not be another 2-3 years later before the bear market was decisively ended.

The sustained bear market for the first years of the new millenium was due to several factors: over-optimism in previous years, a downturn in business worldwide, and what we may call a series of unfortunate events.

The first was clear to veteran investors who had seen and experienced several stock market cycles. Rising investor optimism leads to irrational exuberance with speculators taking over, and when this climaxes the downturn will start. Market observers had been predicting this for the last few years, and so indeed investor psychology reached an inflexion point in mid-2000.

The stock market downturn portended a sharp decline in the business cycle which started to be evident in 2001 onwards. It soon became clear that rising "productivity", credited by Alan Greenspan for the stock market rise in the late 1990s, was due to excessive investment in IT rather than brought about by IT. Thus a downturn in the technology sector struck especially hard, as orders for many EMS firms suddenly evaporated. Consumer demand declined as confidence was low and expectations of a recession became self-fulfilling. Retail businesses stagnated. Firms were reluctant to invest in new capital given the poor outlook, leading to losses by many capital equipment manufacturers. Trade flows dwindled, leading to poor business for shippers such as NOL.

Add to this climate of sudden pessimism a further series of confidence-shaking world events. The Sep 11 terrorist attacks in 2001 brought the STI down to 1200; a rally that brought it back to 1700 then fizzled out in 2002 due to the revelation of the Enron and Worldcom corporate scandals and the impending threat of war in Iraq. Then SARS struck Singapore in 2003. And so, in mid-2003, the STI was back to the post-Sep 11 index of about 1200.

To give a share price perspective of key STI stocks: by the low point in 2003, DBS was trading at about $8, Singtel at about $1.30, Capitaland at $1, Keppel at <$4, NOL at as low as 70 cents! The market was probably trading at 12-13 times overall trailing PE, compared to its historical 17-18 times. Quality small and mid-caps were trading at single-digit PEs (6-8 times!), such as Jaya, Meiban, Sincere, HTL, People's Food etc.

Viewed in this context, one need not be overly alarmed at the drastic recovery the STI has made since mid-2003. Stocks had simply risen too high in 2000 and fallen too steeply by 2003. This recent stock market cycle only again reinforces the cliche that the more things change, the more they remain the same.