When will our stock market recover?

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.

And there are those who wonder whether we have seen the worst.

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 recover.

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.

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.

We need to prepare ourselves for the market turnaround.

However, we need to be patient and wait for the right time to invest.

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.

Hence, we may have to wait for another nine months or until September 2009 (assuming the same duration of 18 months).

We do not think the 2008 crash is similar to the 1998 crash.

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.

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.

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.

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.

l Ooi Kok Hwa is an investment adviser licensed by the Securities Commission and managing partner of MRR Consulting.