Chart 1: Distribution of bull market corrections

Chart 2: Leading indicators rebounding strongly

Chart 3: market decline presents attractive valuations

Key Points

• We looked back at 4 historical bull markets (1987-1990, 1990-1996, 1998-2000, 2001-2007) for a gauge of how often markets corrected, and by how much they fell
• There were 36 observations where the STI corrected by 4% or more in a bull market
• The median correction was 8.6% while the mean was 10.6%
• Corrections lasted for a median period of 24 days, while the average (adjusted for 2003’s bear market) correction was 37 days
• On average, a correction occurs once every 155 days in a bull market
• In terms of the extent of decline and duration, the recent correction remains largely in line with the historical median
• On the basis of low valuations and a positive economic outlook, we maintain our 3,600 target on the STI by 2011 and reiterate a “very attractive” rating on the Singapore market

From a recent closing high of 2933.53 points on 11 January 2010, the Straits Times Index (STI) fell to a three-month low of 2683.56 on 5 February 2010, an 8.5% correction. Investors fretted over a basket of concerns: China’s moves to tighten lending, Obama’s plans to reform the US financial sector and Greece’s deficit crisis. While the declines in stock prices has reignited fears that the global economy could be double-dipping, we are still of the opinion that recent market weakness is simply a long-awaited correction amidst a longer-term uptrend in the stock market. This is not without basis: economic data remains constructive, consistent with past economic recoveries, while major leading indicators continue to trend upwards.

Historical STI bull markets

While the recent 8.5% correction (as at 5 February 2010) may appear rather shocking in absolute terms, it is important to consider this figure on a historical basis. We did a study on historical bull markets for the STI, looking at four historical bull market periods (see Table 1). In each period, we looked at instances where the market fell by 4% or more from a recent peak, our definition of a correction. The results were as follows:

Recent correction is aligned with historical observations

As shown in Table 2, the median correction was -8.6% over the past four STI bull markets (excluding the period beginning March 2009). The average correction over the prior four bull markets was -10.6%, higher than the median but skewed by a single observation of a 32.7% decline in the 2001-2007 period, when SARS and the Gulf War suppressed a full recovery from the 2001 technology-led recession.

Our recent experience of an 8.5% correction is comparable to the historical median, and is thus placed almost exactly in the middle of past observations, which suggests that the declines we have seen for the STI in January and early February 2010 are very much in line with historical corrections.

How long and how often?

The four bull market periods encompassed a combined 5,592 days, which translates to 15.3 years. Dividing this figure by the number of observed corrections, our data suggests that a correction from a recent peak of 4% or more takes place once every 155 days, or a little more than twice a year.

The average correction lasted 46.5 days, while the median correction lasted 24 days. As in the case of the average percentage correction, there was a single observation which spanned 371 days (a second bear market following the half-recovery from the technology slump). Excluding this single data point, the average correction was 37 days, slightly more than a month. The STI’s recent downturn lasted 25 days (as of 5 February 2010), shorter than average but in line with the median.

The Bull Market that began March 2009

The STI bottomed at 1456.95 on 9 March 2009, along with global equity markets. Since then, the upward ride has been largely smooth-sailing barring a few notable corrections along the way (see Table 3). After more than doubling from March lows, the STI is currently experiencing some resistance and there appears to be an air of uncertainty among investors.

We embrace uncertainty, as it discounts stock markets and allows investors with a longer term view to invest on the cheap. Taking into account that US leading indicators are highly constructive (see Chart 2) and local economic data points to a strong recovery in the Singapore economy (see “Singapore: No worries over 4Q 09 contraction”), we look at market valuations as a confirmation of our investment thesis.

As at 5 February 2010, the Singapore market trades at an estimated 11.7X 2011 estimated earnings, indicating that the Singapore market remains an attractive investment proposition. Index bellwethers like SIA and SingTel have recently reported better-than-expected earnings, which suggest that earnings expectations may still have further room to be revised upwards. If so, forward valuations for the market will fall further (assuming that the index remains unchanged).

Having earlier revised up our own earnings forecasts (see Ignore the Consensus, STI to breach 3,600 points by 2011) in the belief that consensus earnings expectations were far too low, we see no need to make upward revisions to our earnings estimates at this juncture, even as positive surprises continue to flow. We are sticking to our 3,600 point target for the STI by 2011, and reiterate our 4.0 star “very attractive” rating on the Singapore market.

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