Monday, June 09, 2008

Asian stock markets reminisce 1997?

Quite a number of investors who held onto Asian stocks since the spring of 2007 until now could feel the same as those who had lost their life savings during the Asian Financial Crisis in 1997. In case readers do not follow the Asian and global financial news reports on a regular basis, many stocks in emerging and major Asian stock markets (inclusive of Australia) have been badly battered. Just like in 1997, these stock markets have fallen like ten pins; life savings and fortunes have been lost; owners of public quoted companies have their substantial shareholdings forced sold by margin lenders; reports of punters committing suicide because of share trading losses; and investors holding onto huge paper losses in never ending downward spirals.

Then and now, the lax or lack of regulation by Central Bankers on the loose lending practices of commercial banks and other financial institutions put paid to the Bull Runs of 1996 / 1997, and that of 2006 / 2007. The only difference is the twist.

Instead of the financial crisis starting from an emerging economy like Thailand back in 1997, it started on the other side of the world, in the most sophisticated and largest financial market, the US, ten years later. By coincidence, the stock markets started their often wild plunges in August of 1997 and that of 2007. Also by coincidence, my teacher, the Yi had given prior warnings of both decimations of stocks quoted on the Kuala Lumpur Stock Exchange.

If we go by indices, the Vietnamese stock exchange suffered the worst fall among the Asian markets. Its index has experienced a horrendous two thirds fall from its peak of 1170 points reached in March 2007, because of the change in sentiments and rampant inflation in that country. According to Yahoo Finance reports, the stock market upheavals started around October 2007 despite the communist government’s effort to keep it on track and continuing a non-stop decline since early May 2008, dealers said. The VN Index at the Ho Chi Minh Stock Exchange dropped by 5.54 points to close at 395.66 points on Wednesday, June 4, 2008.

Since October 2007 till now, while the Vietnamese stock market led the way, the Shanghai stock exchange index fell by a stomach churning 45%, Hang Seng fell 25%, and Bombay SEI fell 24% with the Singaporean, Japanese, New Zealand and Australian stock indices giving up between 17.5 to 20% of its previous markets capitalization. By comparison, the Malaysian, Taiwanese, Indonesian and South Korean stock indices fall were relatively mild – in between 12.5 % to 14%. (Remember my forewarnings in the related entries on ‘Stand not in the middle of the mountain’ and 'Missing the return' of these falls?)

In 1997, the biggest losers in terms of magnitude were those of low liners and second board counters in the KLSE. Some were hit by several limit downs effectively losing 70 to 95% of their market values within days. The only difference from spring 2007 till now is that these categories of stocks and others which had lost 70 to 95% of their market values at their peaks had almost a year to do so. Others include Centro Properties Group of Australia and Bear Stearns of the US, for example.

A bitter lesson learned from 1997 is that investors may think that stocks are cheap after a fall of 30 to 50% from their year highs. Stock prices would then slide lower after a small rebound – termed bear traps - since sentiments have changed; for the bull had already turned into a bear market. When foreign and/or local fund managers start selling down their substantial holdings for a reason or other, like those witnessed in 1997, small investors better learn not to buy unless they have boatloads of money to lose. (Think of declining stock prices of Centro Properties Group and Bear Stearns in 2007 and the first quarter of 2008.)

Goldman Sachs has recently recommended their clients to underweight or to reduce holdings of shares in several emerging Asian stock markets including that of Malaysia, for one reason or another. Looking at my Yi Chart for 2008, Goldman Sachs’ timing of the call is about right. Since their clients could move much slower than small fry.

Obviously the few readers, if any, who sold some of their stocks in the KLSE after my May 13, 2008 entry on ‘Raising cash levels’ could consider themselves lucky as the prices of quite a number of low liner stocks have fallen by 10 to 20%, if not more, since then. And we have exited the market before Goldman Sachs’ call.

How bad the KLSE will fare after Malaysia’s surprised and shocking 40% hike in fuel (gas) prices on June 5th remains to be seen. But no matter how badly local market stocks will fall this June because of surging inflation, soaring oil prices, or anything else, you ain’t seen nothing yet!

Some investors in the KLSE have recently resorted to seeking advice from Daoist deities and heavenly immortals (ShenXian). Apparently, the advice and hints given by the divinities is not dissimilar to my entry on May 13 and in this one. While the world’s best stock analysts had been proven wrong time and time again so far this year according to Bloomberg reports, there is no doubt that the Daoist gods and heavenly immortals already know what is going to happen in the second half of 2008 to the KLSE and perhaps to the global stock markets.

Therefore, I suggest regular readers cum investors in the KLSE to exercise extreme caution in the coming months. Of course there is nothing wrong with a bit of trading since stocks will rebound after sharp plunges, just try not to lose your shirt, the house you live in, your entire fortune, your life or whatever, okay?

Take care.

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