Crash of 1987

The Crash of 1987.

At the time of writing (June 1988), it may be premature to write the history of 1987Crash as the full story of this crash has not yet been revealed. (Aisehhhh... what la.... !!.. I told you this little book is OLD what!). However, the global stock market crash of Oct 1987 has become part of the folklore of the investment world and it would be negligent if this story is left out.

In some ways, it is more difficult to get a 'handle' of this Crash than the two Crashes previously described. There were no obvious villains as in the earlier crashes. The bull market was intense and broad based, to be followed by a crash of unprecedented severity. The amazing thing to most casual observers of the market is that the crash took place just as both Msia's and Spore's economy were getting into full steam after two years of unprecedented low growth.

It is to be admitted that the economy of both countries were expected to do well in 1987/88 compared with the previous two years but the growth rate which has been achieved is low if compared with the heydays of say 1975 or 1981 when the economy grew at twice this rate or more. In spite of the mediocre economic rate, the stock market put up one of the best performances ever.

... It matched the growth rate of the bull market of 72/73 all the way.

From the start of bull market up to its peak, the SES All Shares nearly doubled while the KLSE increased by 167%. This is to be contrasted with an expected total growth in GNP of about 15% for 1987 and 1988. An examination of the earnings trend of the listed shares on both exchanges is even more telling. Apart from commodity companies and certain turnaround situations (eg Cycle & Carriage), the improvement in EPS between 1986 and 1987 is not particularly remarkable.

The increase in the EPS between 1986 and 1987 is only 18.7% for the Sporean stocks and 34.6% for the Msian stocks. Their March 1986 PER (based on 1987 EPS to allow for the expected increase in EPS) at the start of the bull run were not particularly low by usual financial standards (respectively 13.8 and 21.9). At the peak of the bull run, their PER can be said to be very high indeed and probably not sustainable.

The experience of the non-blue chips more or less mirrored that of the blue chips except the former were more extreme in their movements. In spite of the none-too-low PER level of the majority of the stocks in March 1986, the market took off in the classical manner with an ever increasing rate of increase that is so typical of a speculative stock market boom. Readers may like to compare it with the rate of increase experienced in the previous two booms described earlier.

Thus by Sept 1987, many local stocks were selling at prices which were completely out of line with the fundamentals. [ same symptoms lo - prices went totally out of whack!! ] The earlier two tables in message 33 and 34 shows the PER of a selection of stocks at the top of the market compared with the highest PER during the previous bull markets. It is safe assumption that the shares do indeed look expensive compared with previous stock market tops.

Why should the market height it did, if there are no strong fundamental reasons to account for? (LOL!! No strong fundamental reasons? Kaki-kia?)

Influence of the Foreign markets

There is little doubt that the four years up to 1986 saw one of the best periods for stock markets worldwide. It is interesting to compare the performance of the various stock markets of the world between 1982 and 1983 to that of the local market.

.. the local market was the only one which had done badly in the four years preceding 1986. Furthermore, by Jan 1986, local bear market was 26 months old, a very advanced age for a bear market. Given the very powerful psychological stimulus provided by the continuing strong advances in most major markets, it is not surprising that local investors took heart and got the bull market underway.

Local commentators also attributed foreign buying ti giving the market further impetus. There is no doubt that there was some foreign buying although the exact quantity is unknown. A figure of US$2-3 billion has been cited by various commentators. This figure us quite small relative to the overall capitalisation if the market (US$50 billion, at the peak). However, given the poor liquidity of the local market, foreign buying could give quite a boost to the local prices.

Low Local Interest Rate

Due to a combination of factors, interest rate sank to a historically low level by early 1987. In Singapore, interest rate reached a peak in 1980, declined quite sharply in 1981 and held steady from 1982 to 1984. In 1985, interest rate in Singapore started to decline again, by early 1986 the three month fixed deposit rate was down to 4.5% and by early 1987 it was down to 2.85%.

In Msia, the decline in interest rates was even more precipitous. The interest rate hit a peak in 1984 with the three month fixed deposit rate reaching 10.5%. The rate declined to 7.25% in 1985 and 6.25% by end of 1986 before diving down to 2.5% by mid 1987. ( WOW!!! that's a sure DEEP falling rates!!!... and with such low interest rates... where to put ze moola??)

In the face of interest rate being less than the average dividend yield of the stocks at the time, is not surprising that large amounts of money flowed into the stock market, thus driving up the prices.

Economic Recovery

For both countries, 1987 was an incredible turnaround year. Both countries achieved the highest growth in five years. The improving economy meant higher income for the people. Even more than that, the psychological impact of a good year after two dismal ones must have been very great. Everyone must have felt as if a great weight had been lifted off their shoulders and the general cheerfulness and good feeling may have contributed to a great deal of optimism about the market.

Lack of Other Investment Avenues.

The lack of other avenues of investment is an important factor for a stock market to boom to reach speculative proportion. In 1986/87, this condition was fully met. The only other investment alternative apart from stocks and deposits, for laymen was in houses. By 1986, the housing market in both countries was in a severe slump. What is worse, the slump did not look as if it was going to end soon. There was therefore totally no incentive for investing in homes.

Granted that there were good reasons for going into the share market, it is understandable that the market should have gone up. But what is not comprehensive is that why should the market go up so much especially for the Malaysian stocks.

I feel that once again, the local stock market players had let their emotions take over from their senses. A more charitable interpretation would be that the typical investor still did not have an understanding of investment fundamentals such as PER and DY. In this sense, they were no better than the players of the previous speculative booms. Once the market went up strongly, they would enter the market, attracted not by the value represented by the shares but by the mere fact that they have gone up so much. The market went into a self-sustaining upward spiral. (LOL!!!... kaki-kia dude!!!)

...(As we can see from the tables in the book) the PER (most of them 3 digits PER some had PER over 230!! and most had NM (not meaningful) PER cos they were companies which were losing money!) were typically so high that prices could not be sustained once the reasons for the rise in the first place disappeared.

Thus, once the collapse hit the other markets, the interest in local market largely vapourised as well and the market took a plunge of unprecedented short term severity.

The tables (in the book) shows the magnitude of the fall amongst a selection of speculative and investment grade shares. Once again, the volatility of the local market was clearly demonstrated. Even though our market started moving up much, much later than the major markets, our decline was more severe than any of these except hong Kong. Latecomers to the speculative scene once again must have suffered enormous losses. (err... buy high, sell ... ???)

Conclusion.

These three adventures to Manialand have shown all too clearly that local investors are still far from rational in their approach to investment. Their behaviour in 1987 was not much improved from that of 1973.

If anything, what can be noted is a very disturbing development, the local market seems to have become more speculative not less. (Ahemmm... now? any changes? ...how? ) The first truly speculative boom of modern time took place in 71/72 and there was a gap of over 8 years before the next speculative boom (that of 80/81) took place. But after the boom of 80/81, there were 2 more episodes of speculation within a space of seven years.

An even more disturbing fact is that the local market has not effectively progressed since 80/81. Between 70 and 80, the local market gained about 400%. But from 80/81 to 87/88, the market hardly moved at all. What this means is that had an investor bought near the top of the market in 1973, he would have bought in at the top of the market in 1981, many would still be out of money today.

~~~~~~~~~~~~~~

the ENd.

Stock Market Investment - Neoh Soon Kean
Berita Publishing Sdn Bhd. 1989 (ISBN 967-969-066-0)


Hope you enjoyed it! I did!

Cheers!