2009 – A Year to be Remembered

If 2008 is a year to forget, I guess 2009 will be a year to be remembered. 2008, indeed is a roller coaster year, swinging from a peak of 1524.7 points in mid January 2008 to a four year low of 801.3 on October 28, 2008.

To-date, the KLCI has plunged almost 41%, defensive in nature if we compared to our regional peers. China fell 62.3%, Hong Kong of 56.5%, Indonesia of 58.3%, Japan of 49.7%, Korea of 50%, Thailand of 54.3%, Singapore of 53.7% and Taiwan of 51.9% respectively. But on the other side of the coin, Malaysia’s standing as an out-performer during the recent sell-down, it renders Malaysia to be relatively expensive market – the third most expensive market after China and Japan. As at time of writing, Malaysia’s price to earnings (PE) ratio stands at 10.2, versus Hong Kong of 7.42x, Indonesia of 6.83x, Thailand of 6.3x and Singapore of 5.3x respectively.

Economic conditions may not be better, but market will lead the economy by a wide margin. The fiercest bear occurred back in 1937-1942 with the S&P index losing 60% of its value over 62 months, and that would be the most extreme case study for all of us. But on the other hand, if we exclude the extreme case, and traced back the bear markets since 1942 onwards, markets tend to drop by an average 34.1% for an average period of 16 months. As the numbers suggest there could be less pain ahead and it is always a good lesson that we buy when everyone else is fearful.

I am talking about what has happened during the average bull market – a whopping 164% return over 57 months. The historical lesson is clear – bears can be absolutely brutal, but the ensuring bull runs have always paid off handsomely for patient investors.

From another supporting angle, I note that NBER recession announcements tend to coincide with the end of recession, not the beginning nor even the middle. On December 1, the NBER officially announced that a recession started way back in December 2007.

Table 1. NBER Announcement and End of Recession

Recession Start Date	Recession End Date	NBER Official Announcement	Announcement Date Compared to Actual Recession End Date
Dec-2007	-	Dec-2008	-
Mar-2001	Nov-2001	Nov-2001	Same month as recession ended
July-1990	Mar-1991	Apr-1991	1-month after recession ended
July-1981	Nov-1982	Jan-1982	10 months before recession ended
Jan-1980	Jul-1980	Jun-1980	1-month before recession ended

Source: James Stack of InvesTech Research

So, judging by the NBER’s track record and its official recognition that December 2007 marked the beginning of a contraction, the current economic crisis is probably far closer to the end than the beginning.

And that there is going to be tons – literally tons – of money to be made in 2009. Malaysians tend to have short memories. If we look at the previous bear cycles in 1987/88, 1997/98 and 2000/01, the market took an average 18-22 months to recover. In 1987/88, it was 18 months before recovery between October 1987 and March 1989. In 1997/98 episode, it took 22 months and in 2000/01, it lasted for 20 months, and going by that simplistic count, KLCI could lag the global recovery by a quarter or two in this instance.