Master Rider Blog

A Tale of Two Markets

October 16th, 2007 NW Teong

If we take a quick glance at the two charts below, we will see that they are very similar in shape. They both enjoyed a good run since the 3Q of 2005. However, the similarity stops there. Yes, one is the Dow Jones Industrial Index and the other one is the sizzling hot Shanghai Stock Exchange (“SSE”) Composite Index. While Dow has surged about 37% since the 3Q of 2005 to reach about 14,000 now, SSE has surged a whopping 500% to breach 6000 during the same period of time! This is achieved in a space of two years!

While US market is grappling with the sub-prime loans problem and its inevitable slow down in its economy, China economy continues to enjoy its double-digit growth and the super-charged stock market is a reflection of this strong growth. Obviously, a prolonged investors’ optimism in the market is a pre-requisite for any long and sustainable super bull market like SSE now is experiencing. However, any correction (don’t know when but could be near for SSE, especially in 2008) to a prolonged super bull would be painful. Let’s make this clear, there is no such thing as “painless” correction. Any correction is painful and it is a matter of degree for different investors. While I hope the market would consolidate in a more gradual manner, however I am very sure the suicidal rate would surely go up If there is a market melt down in China, This applies to any prolonged bull markets such as the Sensex index in India.

For momentum or trend investors, I suppose they would know how to react when the markets started to turn. This group of investors/traders would normally be among the first to leave the market before it falls off the cliff. What I would like to caution are those so-called value investors. That is those investors invest based on fundamental analysis. From fundamental analysis, we can still buy stocks with high valuation (e.g. high PER) if the potential for both top and bottom line growth is huge. However, how does one consider the PER as high? Is 20 times high or 50 times high? For those who have read my e-publications, you know that we can use another ratio to gauge this, yes this is the PEG ratio. In short, this ratio measures the valuation versus the potential growth in bottom line.

However, we have to be cautious whenever we have high PER reading despite a low PEG ratio. High PER can be read as high growth potential or high disaster potential. The reason is simple, since it is a potential and not a sure thing and anything could still happen along the way. In short, the risk associated to this should logically be higher. From this argument, I would advise those investors in China and India markets to lock in their profits and this should preferably be done in the 4Q of 2007. Put it simply, we may not be able to  predict the top but we can surely sleep soundly with money safely in our pockets. So what if we sold the market 10-20% too early? It is alright to let other investors to make that additional return for taking much higher risk! Bear in mind that a correction of a super bull can be anything from 20% to as much as 70%.

Yes, after close to five years of un-interrupted bull run, we have to be prepared for a slower global growth looking forward. In short, the easy money to be made in stock markets worldwide is almost over for now and we need to be more selective come 2008. While I am not optimistic for 2008, I am still bullish for the remaining months for 2007. Regional indices have continued to scale greater heights as I have expected (refer to my earlier blogs in Aug and Sept 2007). By the way, the Baltic Exchange Dry Index continues to breach historical record on a daily basis. Enjoy the party while you can and be sure to watch out for some triggering events (e.g. record crude oil price, US bad loan problem, China anti-inflation measures etc) and not to forget the countdown of the Black Monday anniversary! Cheers!

Master “The Essence of Stock Investment” and ride towards the journey of your financial freedom to be the “Master of Your Own Destiny”!

Disclaimer: Investors are investing at your own risk. Please read full disclaimer at the end of the blog or from the main page of the website.

Entry Filed under: Macro, Stocks, Singapore