When Will Our Stock Market Recovers? By Ooi Kok Hwa
THE world’s stock markets, including Malaysia’s, have recovered lately.
Some analysts have viewed this recovery as window dressing activities while others have called it bear market rallies.
TEH : Whatever they call it, it is a rebound and we should ride the short-term tide.
And there are those who wonder whether we have seen the worst.
TEH : Obviously, NO. Worst is yet to come. Wait for 2Q2009 reports.
They are eager to know whether the current stock market level has reflected all the negative news, like the sharp drop in consumer spending, higher unemployment rates or lower sales and lower profits for most of the listed companies in the coming corporate result announcements.
Every investor wants to know when will the market recovers.
Some investors may be excited about the current stock market level as a lot of good quality stocks have been hammered down to attractive levels, and are keen to start accumulating them.
However, if the stock market continues to dip for long periods, certain investors may run out of “bullets” to average down their purchasing prices.
TEH : Don't average down. CUT loss is the game in BEAR market, if your buyings are against you. Accept small defeats, keep the bullets for greater war.
Then, they will start losing interest in the stock market as they do not have cash to purchase further and their earlier purchases also start to show losses.
TEH : Then, they need to LEARN first. EDUCATE yourself.
We need to prepare ourselves for the market turnaround.
TEH : Yes, fully agreed.
However, we need to be patient and wait for the right time to invest.
TEH : Hmm ... difficult to know the RIGHT time. Use strategies and plan out your buyings.
In this article, we will look into the past two major downcycles: the 1998 crash and 2000 crash versus the current 2008 crash.
From the table, it can be seen that the Kuala Lumpur Composite Index (KLCI) tumbled by almost 80% in a period of 18 months during the 1998 crash versus a drop of 45% in a period of 13 months during the 2000 crash.
The percentage drop and duration of the 2000 crash were much less severe and shorter compared to the 1998 crash.
For the current 2008 crash, our KLCI has plunged by 47% to its lowest level of 801 points on Oct 28.
If investors believe that the current crash is quite similar to the 2000 crash, then we may have seen the worst as the current percentage drop of 47% is near the 2000 crash of 45%.
However, if the 2008 crash mirrors the 1998 crash, then we may have to wait until the KLCI touches about the 300-point level (assuming the same 79.4% drop in the 1998 crash) before we can see any real recovery.
TEH : I think KLCI will not see 300-points. I m looking at 650, even that I m being very conservative.
Hence, we may have to wait for another nine months or until September 2009 (assuming the same duration of 18 months).
TEH : That is what most analysts predicting the location of 2008 crash bottom.
We do not think the 2008 crash is similar to the 1998 crash.
TEH : Yes, agreed too. It is DEFINITELY not the same. In 1998 crash, it was ASIAN financial crisis, it was regional and DIRECT into our financial systems. As we all know, 2008 crash is due to the sub-prime crisis started in US housing last year. Of course the domino-effects from there were tremendous. We are LESS affected by it(compared to Europe, Singapore and Hong Kong, for examples) as we are so-called DUMB enough not to know about their 'products'. Ignorance is a BLISS here. So, we are less exposed. BNM ... betul ka?
Our current economic situation, like central bank reserves, the health of the banking sector as well as economic fundamentals, are much better compared to 1998. However, as mentioned earlier, we need to prepare ourselves for the worst.
TEH : YUP. Double-yup!!
What to expect from here on?
Our market will try to absorb all the negative news.
As long as the market continues to drop as a result of negative news, we know we have not seen the bottom yet.
TEH : Yes, that is an important indicator too when we try to look for its bottom.
We have to wait for the day when the stock market refuses to come down even when it is loaded with massive negative news; that should be the right time to buy.
Unfortunately, based on our past observations, by then most investors may not have any more cash to purchase or they will still worry about the economic situation.
TEH : I might be VERY NEW and NEVER have any experiences in any bull-runs, but currently I m dealing with a BEAR market. I think we all SHOULD listen to those know-how. So, I will listen to him. Yes, I agreed.
Investors need to understand that stock market cycles are always ahead of economic cycles.
Normally, when the stock market hits the bottom, the economic situation is uncertain or is still getting worse.
TEH : Yes, about 6 months ahead. So, by the time economy recovers, markets have bottom-out.
Ooi Kok Hwa is an investment adviser licensed by the Securities Commission and managing partner of MRR Consulting