First, let’s take a look at how some of the key indices have performed in the past few years.
In the past three years, the US indices like the S&P 500 and the DJIA were repeatedly achieving new highs and giving investors high teen annualised returns. And in recent months, the bulls went over to China. The SSE broke out from a 5 year doldrum in the middle of last year. In June 2014, the SSE was hovering at around 2,000. Fast forward a year later, the SSE actually breached 4,900. That’s a 150% return within a year! A ferocious bull indeed.
However, if you were an investor in the local scene, you could have struggled to achieve a cumulative 15% return. The STI has hovered between 3,000 to 3,500 for the past 3 years. One could be tempted to conclude that the bulls never visited this tiny island, even on its 50th Birthday. Arrgh….
To make matters worse, even though the STI is currently at the 3,300 level, many are speculating for it to trade nearer to 3,000 by the end of the year. Not surprising, with the China bubble bursting and the Grexit on the horizon.
So what’s next for the STI? Instead of just wildly predicting, perhaps we can gain greater insights by taking a closer look in the past.
I have never appreciated technical analysis. Let’s just say that it’s simply beyond my rational capacity.
However, I do believe in human psychology and since humans make up the market, to find out what could possibly happen in the foreseeable future, we might be able to glean some insights if we look far behind into the past.
And the below is what I did to with some simple manipulation/editing using Yahoo Finance, Paint and Powerpoint to capture the major peak and troughs of the STI.
For this post’s sake, let’s assume that we expect the STI to appreciate by 5% each year. Before you accuse me of being overly conservative, I will reiterate that this 5% does not include the dividends which could easily add 2.5% to the returns. And for those who feel that I am overly optimistic, this return is lower than what’s reported for the MSCI Singapore that stretches even further back than 1987.
And to both sides, I really have to assume something. And 5% seems fair enough to me.
Is the STI overvalued at this point?
In Jan 1988, the STI stood at 900 points. If the STI appreciated by 5% a year, it would have increased to 3,400. Interestingly, that’s not very far off from where the STI closed today. The STI certainly doesn’t appear to be overvalued at this point in time and this is also backed by other typically-used indicators like historical P/E levels of STI.
So looking through historical lenses, despite what the papers say, if you invest today, this is unlikely to be the worst time to invest in shares. Did this piece of information bring comfort to you?
What’s the potential downside at this point?
Howard Marks remarked that “if you can avoid losers (and losing years), the winners will take care of themselves. “
For the past 2 decades, 3 horrible bears have wrecked havoc to the local index. In Aug 98 during the Asian Financial Crisis, STI plummeted to 850. In Mar 03, after the Dot Com Bust and Sept 11, the index shrivelled close to 19% P.A. for 3.5 years to end at 1,270. For the most recent bear in Feb 09, the index dived more than 50% within 1.5 years. From a high of 3,800 in Oct 07, it closed at 1,600 in Feb 09.
With hindsight, many market experts will argue that these were the safest points to make a huge investment into the market. If we apply our assumption of 5% growth each year, we should realistically not be expecting the index to shrink to 1,600 in an upcoming bear. A range between 2,000 to 2,400 seems much more likely especially with our experience that the market almost always “make new highs and higher lows inadvertently”
Are you prepared for a 33% downside?
When it would have looked silly to invest
We often hear tales and anecdotes of relatives or friends who had burnt their fingers in the stock market. The stock market is akin to the big casino they say, just that it has even better odds than the house.
Something like the above happens when you invest at the absolute peak of the cycle. For example, if one had invested a big amount of money in Dec 93 when the STI stood at 2,425, and assuming he receives our assumed returns for 22 years, the STI should breach 7,000 at this point.
Yes, we are 100% away from that mark today. Irrational exuberance at its best.
It really pays to be VERY VERY PATIENT
From Jan 88 to Aug 98, the market hardly moved. In fact, the index even dropped by 50 points from 900 to 850. Even after including dividends, one might have been better off putting his money in the bank (considering much higher interest rates then). Can you imagine the snigger the investor has to put up in 1998?
However, fast forward another 17 years and he’s getting an annualised return of close to 8% a year.
If I can have it now, I would definitely take 8% P.A. for the next 3 decades.