Equities - Here I Come?

Based on my study, on average global investors’ returned only 6 months after stock markets bottomed, as seen in the 1997/98 Asian financial crisis, and in the sell-off in the US between 2001 and 2003. In the Asian financial crisis period, I noted that global investors waited until the equity prices recovered almost 50% before turning net buyers and that essentially gave further momentum to market.

So far, the short-term uncertainties have translated that any rally may prove hard to sustain and with little appetite for risk, we have seen greater capital allocation to cash at a faster pace and levels are now approaching highs not seen for a number of years. Some have made estimates the rising possibility that global earnings could plunge by as much as 40-50% before the cycle turns and global earnings are only 30% way through its earnings decline and there is more way to go from here and this fear is reflected across the globe including Bursa Malaysia.

Corporate earnings are likely to be bashed again by the time the 4Q results reporting season arrives – in February 2009 and that will put a cap on share prices. Corporate earnings results then will be showing impact of ballooning receivables and a strangled cash flow and followed by further earnings slash by analysts. Forward PER will be higher than what they are now, so logically for one to expect share prices will have to drop to justify those rates since earnings have fallen.

On the flip of coin, we know that markets will turn before we know the economic recovery is going on. Housing bubble in Sweden in early 1990s and in the 12 months that followed, its stock market soared 42%, even while the economy continued to recede. During the recessions of 1982 and 1991, the S&P began to climb four months and five months before the economy started to recover. The 45% loss in the DOW between 1973 and 1974, it rallied a whopping 53% from its 1974 low, as bad economic news poured for the next 18 months. The DOW bottomed in 1932 but bad economic news continued to stream out for another three years.

Based on my simplistic calculations, the earliest period for a possible rally will be in January or February 2009 given the speed of its tumble from last year’s peak and the time it took stocks to gain before recessions ended in 1975, 1982 and 1991. This seemingly will coincide with the Inauguration Day of President-elect Barack Obama.

However, if the recession is to be far serious than that of my optimistic case, then the rally could perhaps be delayed by another 6 months, somewhere around June or July 2009.