By TEH HOOI LING SENIOR CORRESPONDENT THE current financial crisis, which germinated in the West, started to unnerve the global stock markets - albeit not that severely - in October last year. It\'s been one year since. And we\'ve seen how bad things have developed and in particular, the floor seemed to have fallen off the stock markets around the world late last week and early this week. Ten years ago, we had the Asian financial crisis which started in July when Thailand devalued the baht and unleashed unprecedented selling pressure on all regional markets. The crisis lasted just over a year. Its end was marked by the 800 points hit by the Straits Times Index in September 1998. I thought it\'d be interesting to compare how the STI reacted to both crises from the day people started getting uneasy about it up till 13 months later. So I plotted the price movement of STI between early July 1997 till end July 1998, and beginning October 2007 till end October 2008. For the Asian crisis, the price on July 1, 1997 was taken as a base. Hence the index started at 100 on that day. For the current crisis, Oct 1, 2007 was taken as the base at 100 points. From Chart 1, you can see that the paths taken by the STI in those two separate time frames were remarkably similar. By the end of the 13th month since the beginning of the Asian financial crisis, the STI had lost 47 per cent of its value. As of yesterday, the STI has shed 51 per cent compared with early October last year. As mentioned, the STI sank for another month back in 1998. After that, it just powered ahead and recouped all the previous 15 months\' losses by early May 1999 - in merely eight months\' time. (See Chart 2) By end of 1999, the index was up some 30 per cent from the start of the crisis. This week, the STI has rebounded sharply off its intra-day low of below 1,500 on Tuesday. As of yesterday, it was about 22 per cent off that low. Now let\'s take a look at Chart 3. In between 1998 and 2007, we of course had a few other crises. We went through the dotcom bust, the shock of the Sept 11, 2001 terrorist attacks, and the SARS episode. The decline in the first year of the dotcom bust was not as severe as the Asian crisis and the current crisis that we are seeing. But because it was one shock after another, prices continued to sink lower and lower and it hit a bottom only in March 2003, at a level 55 per cent lower than those in early 2000. And even at the end of 2003, a full four years later, the STI was still 34 per cent lower than it was at the beginning of 2000. So will we see a sharp recovery as that of 1998 or will we face a protracted bear market similar to the one in 2000-2003? Now take a look at Chart 4. The reason why we got out of the Asian crisis so swiftly was the strength of the US markets. While the STI halved in value in 1997-1998, the Dow Jones Industrial Index gained as much as 20 per cent before pulling back when the Russian crisis erupted in 1998. But even then, it barely fell below its July 1997 levels. However, during 2000-2003, the US market muddled along, and hence so did we. As for the current crisis, from Chart 4, you can see how sharply the US markets have contracted in the last 13 months. And a swift recovery in the US market is not expected. Hence chances of a strong and swift rebound similar to that of 1997/8 is not that great. However, we may have seen the bottom this week. Tremendous volatility typically marks the turning points of the market. Even if we have not, we are quite near the bottom. Compared with 1998, Singapore\'s GDP has expanded by some 76 per cent. If we crudely take that to represent the wealth created by STI companies in the last nine to 10 years, and use 800 points as the fair value of STI companies back in 1998, then the fair value today should be just over 1,400. Of course, GDP and companies\' earnings can shrink in the next couple of years. But it is unlikely to be as severe as the 1929 Great Depression as feared by some. For one, the concerted efforts by the global central banks have averted a systemic meltdown of the world\'s financial sector. In his newsletter to investors on Oct 20, 2008, fund management firm Ferrell\'s managing director and chief investment officer David Lee explained why he disagreed with the view that a great depression is coming. \'Unlike 1929, there is almost no cost in printing money - not politically, and certainly not in monetary terms. There is simply no resistance in printing money unless we run out of ink and paper! So, this is unlike 1929 where there are political pressures as well as the need for asset backing for anyone to hold on to a country\'s currency.\' All this printing of money will lead to prices of widely-held assets such as real estate and shares being reflated, he said. \'The amount of money that were printed the previous week is close to US$5 trillion - at least that is what the public is aware of and I am sure there is more printing to come. \'Unlike 1929, Central Banks are not the lenders of last resort but the lender of all resorts. Almost all global big banks are now majority or partially owned by governments, and when they are not, their deposits are guaranteed. \'If the commercial banks are now guaranteed by the government, why is everyone in the US, for example, buying Treasuries and not government guaranteed corporate bonds that pay higher interest? Are they not the same? No, of course not. Both are guaranteed but one pays higher interest! \'The market is irrational as everyone is too scared of the unknown! Markets should be shorting Treasuries and buying guaranteed corporate bonds!\' he wrote. \'Unlike 1929, when Benjamin Graham had yet to popularise his quantitative stock picking concepts, we now have a better understanding of valuation. It is not true that analysts have no ideas of valuation and earnings visibility, they are just too scared to stick their necks out at this moment! \'I run companies and understand how they work, and I am now sticking my neck out to say that valuation of good stocks are too low! It is so low now that if we have a 50 per cent drop in earnings in some of these stocks they are still trading at single digit earnings multiple with 5 to 10 per cent dividend yield. \'If there is a depression, will we see all the companies lowering their earnings in a big way? The answer is YES. But the probability of depression is very low when there is so much money being printed. Once banks start lending again, participants will all start to chase stocks.\' Dr Lee also talked about time compression, where with technology, everyone can react faster. Recessions will be shorter but sharper. \'If you want to be brave, this is the time to buy on dips whenever there are redemptions. If there is any \'great depression\', it will be for those who sell good companies at this level. When they wake up in a few months or few years\' time, and see the prices way above the current levels, they will feel really sick and truly depressed!\' He ended with the following quote: \'High IQ and logical arguments may be detrimental to your investment returns, especially when everyone believes in those arguments and act on them collectively. So I would rather be lucky than be smart. \'Sometimes you may be smart enough to spot the opportunities but you have to be lucky to have someone desperate enough to sell to you. \'At this point in time, who knows? It may be the rare opportunity that you can be both smart and lucky!\' As for me, here\'s how I would look at it. From current levels, we may take four years to reclaim the peak reached in October last year. Those who have been holding on to their portfolios since October are looking at four years just to recoup their capital. However, if one were to put in some money now into the market, by the time the previous peak is reached in four years\' time, one would have made a return of 100 per cent or more - or more than 20 per cent a year! But the key is to pick companies that have little chances of going bust, and to make sure that one will not need the money committed now for at least the next five years. The writer is a CFA charterholder
