The History: 3 Local Stock Market Crashes-Part 3



Whom the God: wish to destroy, they first praise highly ~Ancient Greek saying

The Crash of 1981 occurred eight years after the Crash of 1973. in magnitude, it is almost as severe as the first Crash. It would seem at first glance that Malaysians/Singaporeans learnt nothing from the events of 1973 but this impression is not fully justified. From several aspects, many Malaysians/Singaporeans had learnt enough not to repeat their past errors. It is the new mistakes that led to their downfall this time. It was as if they thought Jaws I had been killed and it was safe to go dipping 1n the water again, Jaws II and Ill reared their ugly heads. Let us first examine what are some of the lessons that appeared to have been learnt .

First, it would appear that there were sound economic reasons behind the rise of share prices this time. Malaysians/ Singaporeans had learnt sufficiently to depend on their own feelings on how the economy was doing rather than rely on foreign indices. At the time of the beginning of the bull run (approximately in January 1979), both Dow jones and Financial Times Indices were in the doldrums. The local economic environment at the beginning of 1979 was vastly better than that of 1970.

This can be seen from the table below:

Selected Economic Statistics

                                            1 976      1977      1978      1979      1980      1981

Per Capital GNP $                        M 2,300    2,480     2,700     3,220     3,675    3,902
                                                         S 5,496     6,011     6,303     6,892     8,343    9,869
% Change Each Year                    M  +23         +11           +9        +19        +14          +6
                                                         S   +8            +9            +5         +9         +21         +18

 Money Supply $Million                 M  5,257    6,127     7,243    8,487     9,761   11,015
                                                         S  4,000    4,412     4,926    5,706     6,135     7,242
 % Change Each Year                  M   +21         +17        +18        +17        +15        +13
                                                        S    +10         +10        +12.       +16        +8          +18
Price of Rubber M$/kg                     1.99        2.03        2.30      2.79       3.07        3.25
Price of Tin M$/ton                      18,736    25,624    28,803   32,122  34,722   35,710
Price of Palm Oil M$/ton                  882     1,225       1,178     1,310    1,260      1,177

N = Malaysian                 S = Singaporean

As can be seen in the last section of the table, commodity prices were approaching or just below their respective all time high. Most of the companies directly or indirectly involved in the commodities business were doing extremely well and were flush with cash.As can be seen from the top half of the table, per capital GNP had been rising most steadily for five years at an average of about 15 per cent. More than that, the private sector was very liquid with cash. In 1979, the money supply of Malaysia was standing at a figure that was five times higher than in 1971.

This is a remarkable achievement by any standard and by 1980 Malaysians/Singaporeans can be said to be economically fairly well-off. Like the Americans of the 1920’s a long period of prosperity has caused them to be optimistic and trusting. Businessmen, both Malaysians and Singaporeans, were increasingly portrayed as folk heroes by Ministers and the press alike. The region’s future was said to be dependent on businessmen and their performance. Above all else, not ks at the beginning of 1978 were reasonable by most standards. Most first class blue chips could be bought for a PER of ‘25 or less. This can be seen from Table below:

                             Price and PER for Several Less Popular Stocks

31.12. 77                           31.12.78
Price           PER              Price           PER

M$                                    M$

Bata                                                      2.43              12                2.41              16

Cycle & Carriage                                2.62               10               5.25              13

F & N                                                    3.66               13               4.98              14

Guinness                                              4.76               13               4.96              16

MTC                                                      3.05               10               4.06              17

National Iron                                        3.08               11                6.00               12

Sime Darby                                         3.36               12                3.06               17

DBS                                                     3.64               22                4.02               20

OCBC                                                  6.10               24                7.85               28

With profit increasing at a rapid rate, a PER of 20 or more seemed fully justified. As the memory of 1973 faded away and the mood of the country totally changed, stocks were once more respectable investments. Thus, more and more Malaysians/Singaporeans invested and saw their investment steadily increased in value.
Secondly, the timing was right this time. In 1978-1980 the economic horizon was bright and it was natural to envisage an extended period of prosperity. Indeed the governments did promise just that. It is natural to bid up the price of stocks at the top of an economic cycle and until midolQBO, the prices of most stocks were very reasonable. Not many people, if any, could have correctly foreseen the recession of 1982, (two years away still).

Thirdly one could detect several signs of market efficiency which was most surprising in View of what happened in 1973. Even at the height of the speculation some shares were being quoted at very reasonable prices. At the maximum level, Batu, C 8: C, Sin Heng Chan and many Others could be bought at 3 PER of less than 20. Given the Malaysian/ Singapore context. the PER reached could he considered rational. Purchases even at those prices would not have been unwise investments if the region’s growth rate of the late 1970’s were to continue into the 1980’s. Furthermore, it is noticeable that many of the plantation and tin mine stocks turned down well in advance of the general market. Many plantation stocks peaked in early 1981 and most tin stocks even earlier on. This can be shown by comparing the KLSE Industrial Index with the prices of popular plantation and tin stocks. Considering that the poor corporate reports were not to be published yet {or another year, this was a very creditable performance. A considerable number of investors must have taken note of the softening price trends of rubber, cocoa and tin at the point of time and started to liquidate or reduce their holdings.

It must be stressed, however, that despite these pockets of efficiency by late 1980’s, the usual symptoms of a speculative mania were making their appearance. Trading on the stock market became more and more widespread among the populace. The mania was slowly taking hold in the minds of the people and soon many of them would throw rationality to the wind.By early 1981, the mania had once again reached epic proportion. The prices again showed the accelerating rate of increase that is common to all manias. The table below shows this accelerating trend in respect of the KLSE and ST Industrial Indices.

           Accelerating Rate of Increase of Stock Market Advance 1979-4981

June 79   Dec 79  June 80   Dec 80   June 81

KLSE Industrial Index                 324          376         459         536          823
Change per six months                –                52           83            77         287
ST Industrial Index                       376          435         545         661         973
Change per six months                –                59         110          116        312

Once again, a large number of ignorant and inexperienced people were attracted to the stock market. Remisiers set up operations in every small town and did roaring business. In a typical small town like Teluk Intan, butchers, rubber merchants and small holders from the surrounding areas would crowd into town in the afternoon to take part in the rush to buy and sell shares. Even the universities were not immune to the temptation of the market. Many lecturers from each of the local universities were heavily involved. Housewives of all ages spent their days at the brokers’ offices, no doubt finding it more exciting than a. game of mahjong.
Earlier, it was mentioned that Jaws II and III’ reared their ugly heads. These are names I gave to two new stock market phenomena that first made their appearance in this region during the Crash of 1981 although they first appeared as fully fledged man-eaters as early as the South Sea Bubble era. Jaws II and III are more properly known respectively as ‘The Conglomerate Game’ (also known as ‘The Pyramid Game or the ‘Earnings Per Share Game’) and ‘Property Injection Game’.Jaws ll became notorious in the US and Britain during the late 1960’s and 1970’s when conglomerators such as Jim Slater and Jimmy Ling made their mark in the world of finance. Jaws III is very much a strictly local phenomenon spawned by the regulatory environment of the time. It is my view that the local stock market players, in their unsophistication, failed to grasp the true meaning of these two phenomena. They might have learnt the lesson of the past and would not bid 0080 up to $50 again but the importance of these new phenomena escaped them totally.
However, not having experienced these phenomena before, their enthusiasm for something to believe in and to cherish led them to overprice vastly the stocks of the companies involved. Let us examine Jaws II and III more closely.


As has been said before, the value a speculator places on a stock (or a tulip) does not necessarily depend on anything which is tangible. Rather, it depends on the image or fantasy the investor may have of a particular stock. A company that is continually in the public eye (a result of a continuous stream of announcements of bonus, rights, takeovers and profit forecasts, etc.) is that much more likely to become the object of such a fantasy. In the same way, an actress who is always in the news is far more likely to become the object of a man’s fantasy. {Mocks of such companies are far more ‘attractive’ and are likely to be hidden! up to a far higher level than the dull ‘never-anything-happens’ type of companies. Indeed, the activities of several companies during

1980 and 1931 {it this description. They are the companies that were busily engaging in takeovers and mergers (for example, MUIB, Hong Leong Industries ( HLI and PEGI ). With the announcement of each new takeover, their profit forecast would become greater and their prices attain a higher level. It would indeed be foolish for these companies not to make use of their new found strength in the form of high stock prices to seek new takeovers by an exchange of shares. More takeovers led their prices to go even higher and an upward Spiral took shape. What was not realised by the public at large was that the higher -overall profit did not necessarily mean higher per share earnings. This is because a lot of new shares had to be created to ‘pay’ for the takeovers. Therefore, the per share price should not necessarily go up just because overall corporate profit goes up. This critical distinction between overall and per share earnings was lost in the general madness to pursue the high-flyers. Most of the newly-fledged conglomerates saw their stock price increasing to a level that is ridiculous by any measure. Some examples of these are shown in Table below which compares the Price Earnings Ratio (PER) and Dividend Yield (DY) at the end of 1977 to the highest level reached.

As with the Blue Chips phenomenon of 1973, the prices of these speculated market favorites reached a level which is seldom seen in the more rational mature markets.
                          Price PER And DY of Several Popular Conglomerates

                                           31.12.77                   Highest                        Price
                              Price$   PER    DY %        Price$   PER   DY %       Increase

HL Industries           1.01     NM       5.9           21.80    197       0.3            2058%
MUIB                        1.51      80        6.7           24.30    176      0.4            1509%
Paramount              0.72     NM        0.0             9.60    107      0.4            1233%
Samanda                0.62     NM        0.0             4.52    NM       0.0              629%
MBF HLDG             2.48     NM        0.0           15.50   968      0.0              525%
PEGI                        5.30      18        0.9            16.70   341      0.3             215%

NM = Not Meaningful – Because company was loss-making.

**The term ‘Jaws’ and here does not in any way imply improper or predatory actions on the part of the companies concerned. Jaws II are largely of the speculators’ own making,  

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