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High cash pile precedes a bull market
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Sunday, 19 April 2009 04:41

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Teh Hooi Ling. Photo by Leong Chan Teik

OVER THE course of the current bear market, Singaporeans have been cashing out of stocks and are now sitting on a cash pile that is big.

Just how big it is was revealed in an article yesterday (Saturday, April 18) by Business Times’ well-known columnist Teh Hooi Ling.

She said that according to the latest issue of the Monthly Digest of Statistics Singapore, deposits of non-bank customers with domestic banking units totalled $355 billion as at end February this year.

That amounted to a whopping 97 per cent of the combined market value of all SGX stocks. Add in deposits with finance companies, and the ratio rises to 99 per cent.

The previous peak was in 2002, when total bank deposits to stock market cap ratio stood at 87 per cent. Add in finance companies' share of deposits, and the ratio increases to 91 per cent.

The fascinating implication is that bull markets are born around the time when cash piles are high. Only thing is we don't know exactly when until after the fact.
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Yeo Seng Chong, chief investment officer, Yeoman Capital

As Hooi Ling wrote: “We all know that the market bottomed in 2003, and the bull rampaged for a good five years.”

Of course, when stocks look great to buy, cash levels begin to deplete, as shown by the bank deposit to stock market cap ratio slowly declining to hit a low of 39 per cent in 2007.

Now, that's lower than the 60 per cent registered in 1997. “Again 2007, as we all know now, was the peak of the market,” wrote Hooi Ling.

Amazing insights! What course of action do they suggest in view of the high cash pile on the sidelines today?

She quoted Yeo Seng Chong, chief investment officer of Yeoman Capital: “This amount of cash at a time with very low yield both in terms of Treasuries and bank deposits suggests that the motivation for taking risk-bearing investments, which equity investment is, should be very high. But the only thing that is holding it in check is sentiment.

"But as you know, sentiment is something non-numeric. And sentiment, like fashion, changes at the flick of a switch. So I won't want to be holding large amounts of cash when these people deploy this vast amount of cash back into equities.”


Recent stories: "SINGAPORE has high cash on the sidelines" - Mirae Asset Management


 JIM CHUONG: "I have been funneling money into the market!"

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