BT: Global equity markets lose US$11.4 trillion (07 Jul 2008)

Global equity markets lose US$11.4 trillion

Equities are at their lowest levels since 1980s as value declines sharply: Citi study

By TEH HOOI LING

(SINGAPORE) A whopping US$11.4 trillion has been wiped out from global equity markets so far this year - the weakest start to the year since 1970, figures from Bloomberg show.

Just how large a sum is US$11.4 trillion? It is three and a half times China's gross domestic product (GDP) in 2007, and 70 times that of Singapore. The United States' GDP last year was US$13.8 trillion.

Almost all the world's major stock markets shrank. The notable exception was resource-rich Canada, which expanded by 6.6 per cent. Two of the hottest markets last year, India and China, saw the biggest falls in the size of their equities markets.

India's plunged by 46 per cent, and now accounts for just 2 per cent of global market capitalisation, while the overall value of China's stock markets was down by nearly 43 per cent so far this year.

China's share of the world's market capitalisation now stands at 5 per cent. The US is still home to the biggest equity market in the world, accounting for over 30 per cent of world market cap.

As for Singapore, the stock market is puny. It makes up only 0.9 per cent of the world's total equity market. But the consolation is that the overall value of the market did not fall as much as the others so far this year.

Latest available figures show that so far, the equity market is relatively better off than in the two previous down markets in 1997-1998 and 2001-2003. This is due primarily to the strong gains in prices between 2003 and 2007.

Based on last Friday's prices, stocks traded on the Singapore Exchange were on average 47 per cent off their one-year highs, which were mostly reached in the second half of 2007.

On average, they are still 19 per cent off their one-year lows, registered in March this year. In comparison, on Sept 4, 1998, prices on average were 66 per cent off the top and 13 per cent off the bottom.

On a one-year perspective, relative to 1998 and now, March 3, 2003's trough looked mild. Prices then were 40 per cent off the top and 34 per cent off the bottom.

But on a 3-5-year perspective, current Singapore stock prices are on average still 99 per cent higher than their three-year lows, and 135 per cent above their five-year lows. These are significantly higher than the numbers for 1998 and 2003.

In other words, investors who bought three or five years ago still have profits to fall back on. But, of course, how bad the current downturn will be is still an open question as arguably we have yet to see the trough. The two points picked in 1998 and 2003 were the troughs of the market.

Citigroup Global Market's equity research shows that while worry over rising inflation, interest rates and falling earnings will continue to weigh the markets down, the sharp decline in value in the last eight to nine months has sent equities to their lowest levels since the 1980s, and the cheapest relative to other assets since 1970s.

In terms of trailing price-earnings ratio, the global equities' current 14.3 times is the lowest in the last two decades, said Citi.

In terms of price-to-book ratio, at 2.1 times, current levels are lower than the average in the 1990s and 2000s, and just 15 per cent above the 1980s average.

Global dividend yield, at 2.8 per cent now, is within 20 basis points of the long-term average, and 60 basis points below the 1980s average.

'All our valuations metrics suggest global equities are cheap when compared to averages in the 2000s and 1990s. These cheap valuations keep us from becoming wholesale sellers of global equities,' said Citi in its report titled Valuation: A Reason to be Cheerful.

Across various assets, equities are now seen as the only class that is reasonably valued relative to the 1990s and 2000s.

Henderson Global Investors, however, cautioned that equity markets are likely to remain volatile in the short term and could fall on bad news from the financial sector, more inflation worries or signs that economic growth will disappoint. 'By the middle of next year, assuming the outlook for 2009 is brighter, equities might be staging a more sustained recovery,' it said.

Teng Ngiek Lian, founder of Target Asset Management, recently gave this advice to his investors: 'The world is now paying the price for past years' indulgence of cheap liquidity. The economic pain which started a few months ago will not end so quickly.'

However, he added that the world is not likely to go into recession as he believes politicians will again choose the soft option of tolerating a higher inflation.

'For the next 12 months, we believe developed economies will suffer stagflation. Affected by slower export and higher inflation, emerging Asia's economy will slow down but will still grow at a creditable rate ranging from 6 per cent to 8 per cent for India/China and 3-5 per cent for other countries.

'Due to its strong economic fundamentals and undervalued currencies, emerging Asia has the option to counter slower export by pump priming its economy and stimulating domestic consumption. Imported inflation can be mitigated by further currency appreciation.

'After the recent fall, buying opportunity in Asian equities is now emerging. Investors who can take a 2-3 years view about Asia will be well rewarded.'


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