The History: 3 Local Stock Market Crashes-Part 4


                       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.

It is to be admitted that the economy of both countries were expected to do well in 1987/88 compared with the previous two years but the growth rate which has been achieved rs low if compared with
Table 2.14
Current Price GNP Growth Rate For Malaysia & Singapore 1985 -1988

Current Price GNP Growth Rate % p.a

1985            1986            1987            1988

Malaysia                                                          -3.2               -8.3            +6.3            +8.0

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.

                                                                  Table 2.15
                                         Movement of Local Indices 1986 -1987

March 1986     Sept 1986     Mar 1937     Aug

SES All Shares                                      216                   252                  312               411
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

There is little doubt that the {our years up to 1986 saw one of the best periods for stock markets worldwide. It is interesting to compare the performance of the various stock markets of the world between 1932 and 1985 to that ol’ the local market. Table 2.18 below shows the major index of live markets thought as having the greatest influence on the local investors’ psyche as at year end of 1981 and 1985.
                                                              Table 2.18

                        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.

Local commentators also attributed foreign buying to giving the market further impetus. There is no doubt that there was some foreign buying although the exact quantity is not known. A figure of US$24 billion has been cited by various commentators. This figure is quite small relative to the overall capitalisation of the market (about US$30 billion at the peak). However, given the poor liquidity of the local market, foreign buying could give quite a boost to the local prices.

Low heal Interest Rate

Due to a combination of factors, interest rate sank to a historically low level by early 1987. In Singapore, interest rate reached a peak in 1980, declined quite sharply in 1981 and held steady from 1982 to 1984. In 1985, interest rate in Singapore started to decline again, by early 1986 the three-month fixed deposit rate was down to 4.5 per cent and by early 1987, it was down to 2.85 per cent. In Malaysia, the decline in interest rate was even more precipitous. The interest rate hit a peak in 1984 with the three-month fixed deposit rate reaching 10.5 per cent. This rate declined to 7.25 per cent in 1985 and 6.25 per cent by the end of 1986 before diving down to 2.5 per cent by mid-1987. In the face of interest rate being less than the average dividend yield of the stocks at the time, it is not surprising that large amounts of money flowed into the stock market, thus driving up the prices.

Economic Recovery

For both countries, 1987 was an incredible turnaround year. Both countries achieved the highest growth in five years. The improving economy meant higher income for the people. Even more than that, the mythological impact of a good year after two dismal ones must have been very great. Everyone must have felt as if a great weight had been lifted off their shoulders and the general cheerfulness and good feeling may have contributed to a great deal of optimism about the market.

Lack Of Other Investment Avenue

As we shall see in Chapter 3 of this book, the lack of other avenues of investment is an important factor for a stock market boom to reach speculative proportion. In 1986/87, this condition was fully met. The only other investment alternative apart from stocks and deposits, for laymen was in houses. By 1986, the housing market in both countries was in a severe slump. What is worse, the slump did not look as if it was going to end soon. There was therefore totally no incentive for investing in houses.

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.


These three adventures to Manialand have shown all too clearly that be] investors are still far from rational in their approach to investment. Their behavior in 1987 was not much improved from that of 1973.
If anything, what can be noted is a very disturbing development, the local market seems to have become more speculative not less. The first truly speculative boom of modern time took place in 1971/ 72 and there was a gap of over eight years before the next speculative boom (that of 1980/81) took place. But after the boom of 1980/81, there were am more episodes of speculation within a space of seven years.
An even more disturbing fact is that the local market has not effectively progressed since 1980/81. Between 1970 and 1980, the local stock market gained about 400 per cent. But from 1980/81 to 1987/88, the market hardly moved at all. What this means is that had an investor bought near the top of the market in 1973, he would have marred his capital and more a few years later. But for those who bought in at the top of the market in 1981, many would still be out of money today. We shall be looking at this in greater detail in Next Chapter.

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