BT: Which are the best performing bourses? (03 Jan 2006)

Business Times - 03 Jun 2006

Which are the best performing bourses?

By TEH HOOI LING SENIOR CORRESPONDENT


I WAS looking at the various regional indices earlier yesterday and it occurred to me that Japan's Nikkei 225 and Hong Kong's Hang Seng are now around the same level - just under 16,000. Then I wondered what levels the two indices were trading at back in 1985. So I checked. In early 1985, the Hang Seng was trading around 1,300 points and the Nikkei 12,000. In just over 20 years, the Hang Seng has seen its value rise more than 10 times - some 1,100 per cent - while the Nikkei has crept up only 30 per cent.

And it's not like Japanese companies have completely lost their competitiveness in the world stage. In the last 20 years, many have continued to sell their products globally. For example, Toyota is now the biggest car maker in the world, having overtaken the US's General Motors.

Not that many world-beating brands have emerged from Hong Kong. What it does have is its leverage as China's conduit to the world, and vice versa. It started as a manufacturer for the world, but the role has since been taken over by China. And with the opening of China, many of the Chinese state-owned enterprises have sought listings on the Hong Kong exchange. The tremendous growth of China, and thus its companies, are fuelling investors' demand for these stocks. That's what been propelling the Hong Kong market upwards.

Meanwhile, the lack of progress in terms of price in the Japanese market has a lot to do with its valuation back in the 1980s. There was a huge bubble then, plus the accompanying excesses. The day of reckoning came in the early 1990s, and Japan has spent the last 15 years mending things. The job is finally completed, and it is now ready to move forward from here.

The examples of the two markets illustrate the importance of two points: the ability to identify the macro trend and ride with it, and to watch out for valuation.

And since I was at it, I decided to look at a few other markets. Among the following stock markets - Germany, the US, Japan, Hong Kong, Korea, Taiwan, India, Malaysia and Singapore - which has been the best performer in the last 21 years?

Well, in their own currencies, Bombay's Sensex has had the best run between 1985 and now. It has skyrocketed from below 300 points to about 10,000. Much of the climb took place in the last three years. In early 2003, the index was still trading at below 3,000. The Hang Seng came in second, then Korea's Kospi, the Taiwan Stock Exchange and the US's S&P 500, followed by Germany's Dax.

However, if we were to convert everything back to Singapore dollars, according to data from Bloomberg, Germany's Dax is the leader. It chalked up a Singdollar return of 906 per cent, the strength of euro contributing about a third of the return. The Hang Seng came in next, with a return of 733 per cent. Then came Taiwan, India, the Kospi and the S&P 500 at 405 per cent.

The Straits Times Index rose 254 per cent, while the SES All shares index came in lower at 151 per cent.

The Nikkei and Malaysia's Kuala Lumpur Composite Index trailed the STI with returns of 109 per cent and 47 per cent respectively. The Nikkei was helped by the appreciating yen while the KLCI was hurt by the depreciating ringgit. On its own, the KLCI rose 200 per cent during that period. But the decline in the ringgit against the Singdollar wiped out three-quarters of that gain.

Seasons and cycles

Stock markets, of course, don't move in straight lines. Domestic economic cycles will be the predominant factor dictating the stock market trend. However, there appear to be seasonality and cycles that affect many stock markets around the world at the same time.

Apparently, during the World Cup season once every four years in June and July, the whole world will be glued to their TVs and thus neglect the markets. So it is said that stock markets tend to enter a lull period with prices drifting lower during these times.

Incidentally, the World Cup also coincides with the mid-term in the four-year US presidential cycle, that is two years after the last election and two years before the next election. Studies have also shown that there's a clear stock market pattern that tracks the four-year US presidential cycle.

According to Formula Research, between 1886 and 2001, the average annual gain in the Dow Jones Industrial Average in pre-election years was 11.1 per cent, and almost 80 per cent of pre-election years were positive years. The average annual return in the third year of a presidency was only 4 per cent, and only 55 per cent of those years were positive.

One of Wall Street's leading strategists, Jeremy Grantham, explains it thus: 'The first two years (after an election) are when you tighten the system. Year three is when you let everything rip if you can, so then you can stimulate, create jobs and get re-elected. So employment and jobs created dropped in year one and two, rise nicely in year three and reach a high in year four. Politicians understand it, they get the help from the Federal Reserve to execute it. With a little bit of tax cuts, but it's mainly a monetary event.'

Be it the World Cup effect, or the US presidential cycle effect, the last four World Cups had seen bad market performance. The STI fell by 18.7 per cent in 1990, 11.1 per cent in 1994, 7.6 per cent in 1998, and 17.4 per cent in 2002. Malaysia was also down in the last four World Cups, whereas those in the US, Japan, Hong Kong, Taiwan and Germany fell in three out of the four World Cup years.

Bucking the trend were South Korea and India. Meanwhile, there's also a yearly seasonal pattern in the stock market movements.

From the chart, you can see that August and September are especially bad months for most markets. May and June are also not so great. After the sell-down in August and September, October is the month one should get ready to buy in. And the best returns are chalked up in December, January and February.

So did June and July in World Cup years see the sharpest fall? No. The worst months in those years remained August and September.

The worst average monthly return of the S&P 500 in the last 21 years was in September during the mid-term of the US presidency - the World Cup years of 1986, 1990, 1994, 1998 and 2002. The average return for those months was -5.1 per cent. It was the same for the Nikkei and Germany's Dax, where the average decline for those five months were 6.9 per cent and 12.4 per cent respectively.

For Korea and Taiwan, the worst month was August, also during mid-term of the US presidency. The average falls in those months between 1985 and now were 6.1 per cent and 10.5 per cent respectively.

Following the sharp falls in the months of August and September in the World Cup or the mid-term of US presidency, there were usually quite strong rebounds in the month of October. The biggest monthly gains chalked up by the Nikkei, the Hang Seng and the STI in the last 21 years were in October, in the World Cup year. The gains averaged 4.6 per cent, 9.1 per cent and 13.8 per cent respectively.

So if history is anything to go by, we have not seen the end of choppiness in the markets just yet. Watch out for August and September, but after that October should provide a good entry point again.

Previous articles of this column can be found in volumes I and II of the book entitled Show Me the Money, available at major bookstores.

The writer is a CFA charterholder. Her e-mail: hooiling@sph.com.sg

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