THE CRASH OF 1987
At the time of writing (June 1988), it may be premature to write the history of the 1987 Crash as the full story of this crash has not yet been revealed. However, the global stock market crash of October 1987 has become part of the folklore of the investment world and it would be negligent if this story is left out.
In some ways, it is more difficult to get a ‘handle’ on this Crash than the two Crashes previously described in this Chapter. There were no obvious villains as in the earlier crashes. The bull market was intense and broad based, to be followed by a crash of unprecedented severity. The amazing thing to most casual observers of the market is that the crash took place just as both Malaysia’s and Singapore’s economy were
getting into full steam after two years of unprecedented low growth. Table Below on the next page shows the respective nominal economic growth rate of these two countries between 1985-1988.
Current Price GNP Growth Rate % p.a
Singapore +1.3 +1.4 +8.7 +10.0
the heydays of say 1975 or 1981 when the economy grew at twice this rate or more. in spite of the mediocre economic growth rate, the stock market put up one of the best performances ever. It matched the growth rate of the bull market of 1972/73 almost all the way. Table 2.15 below almost shows the growth rate per six months from the start of the bull run in March 1986 to end shortly after September 1987 though It peaked in August.
March 1986 Sept 1986 Mar 1937 Aug
Increase per six months – 36 60 99
KLSE Industrial 341 421 588 913
Increase per six months – 80 167 325
Note: It is generally accepted that the KLSEII is not a representative index and it exaggerates the amount of movements.
From the start of the bull market up to its peak, the SES All Shares nearly doubled while the KLSE Industrial increased by 167%. This is to be contrasted with an expected total growth in GNP of about 15% for 1987 and 1988. An examination of the earnings trend of the listed shares on both exchanges is even more telling. Apart from commodity companies and certain turnaround situations (e.g. Cycle & Carriage), the improvement in EPS between 1986 and 1987 is not particularly remarkable. Table 2.16 shows the earnings trend of a selection of Malaysian and Singaporean blue chips as well as their price and PER at the start and peak of the bull market. As can be seen, the increase in EPS between 1986 and 1987 is only 18.7 per cent for the Singaporean stocks and 34.6 per cent for the Malaysian stocks. Their March 1986 their PER can be said to be very high indeed and probably not sustainable.
The experience olf the non-blue chips more or less mirrored that of the blue chips except the former were more extreme in their movements. In spite of the none-too-low PER level of the majority of the stocks in March 1986, the market took oil in the classical manner with an ever increasing rate of increase that is so typical of a speculative stock market boom (refer Table 2.15). Readers may like to compare it with the rate of increase experienced in the previous two booms described in this chapter.Thus by September 1987, many local stocks were selling at prices which were completely out of line with the fundamentals. The PER and DY of a selection of shares at the top of the market compared with the highest PER and lowest DY which were recorded during previous hull markets. It is a safe assumption that the shares do indeed look expensive even compared with previous stock market tops.
Why should the market reach the height it did, if there are no strong fundamental reasons to account for it? This writer believes that the main causes were largely psychological and his analysis of the causes is given below.
Influence of the Foreign Markets
Comparison of Stock Market Performance 1982 -1985
31.12.81 31.12.85 % Change
New York – Dow Jones 964 1547 60.5
London – Financial Times 473 1131 139.1
Tokyo – Nilkei – DJ 7681 13083 70.3
Hong Kong – Hang Seng 1474 1752 18.9
Sydney – All Ord 1017 1004 -1.2
Singapore – SES All Shares 346 234 -32.7
Kuala Lumpur – NST 572 409 -28.5
As can be seen from the table, the local market was the only one which had done badly in the four years preceding 1986. Furthermore, by January 1986, the local bear market was 26 months old, a very advanced age for a bear market. Given the very powerful psychological stimulus provided by the continual strong advances in most major markets, it is not surprising that local investors took heart and reentered the market in early 1986 and got the bull market underway.
Low heal Interest Rate
Lack Of Other Investment Avenue
Granted that there were good reasons for going into the share market it is understandable that the market should have gone up. But what is not comprehensible is that why should the market go up so much, especially for the Malaysian stocks.
I feel that once again, the local stock market players had let their emotions take over from their senses. A more charitable interpretation would be that the typical investor still did not have an understanding of investment fundamentals such as PER or DY. In this sense, they were no better than the players of the previous speculative booms. Once the market went up strongly, they would enter the market, attracted not by the value represented by the shares but by the mere fact that they have gone up so much. The market therefore went into a self sustaining upward spiral. As we can see from Table 2.17, the PER and DY were typically so high that the prices could not be sustained once the reasons for the rise in the first place disappeared.
Thus, once the collapse hit the other markets, the interest in local market largely vaporized as well and the market took a plunge of unprecedented short term severity. Table 2.19 shows the magnitude of the fall among a selection of speculative and investment grade shares. Once again, the volatility of the local market was clearly demonstrated. Even though our market started moving up much, much later than the major markets, our decline was more severe than any of these except Hong Kong. Latecomers to the speculative scene once again must have suffered enormous losses.