Published September 17, 2008

Market will reveal gems when dust settles

By VEN SREENIVASAN
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WHEN I asked a broker how he's doing, he exclaimed: 'There is so much blood on the street, I'm slipping and sliding everywhere.'

Colourful though the phrase may be, his description of the impact of the unprecedented events shaking global financial markets during the past 48 hours was no exaggeration.

The collapse of one of the world's oldest investment banks, the takeover of another, and troubles at the world's biggest insurance firm are tectonic events which will reshape the US - and global - financial landscape for decades to come.

No single event has shaken the market as much since the 1929 Great Depression.

Year of malaise

Here in Singapore, a year of malaise has led to near capitulation with the Straits Times Index breaching the key 2,500 points mark for the first time in over two years. By the close of trading yesterday, the index had fallen some 8 per cent over the last one week.

These are echoes of the 1997 crisis, when the collapse of highly geared major Asian corporates brought many Asian banks to their knees. The result was a region-wide economic slowdown which lasted through the end of 1998.

Yet, investors who rode on fundamentals not only came through intact from that crisis, but saw their investments double, triple and even quadruple over the subsequent two or three years.

While no one can predict what the next days or weeks will bring, the events currently unfolding on Wall Street may be cathartic if they help end the malaise afflicting markets for over a year and enable the global financial system to claw back to firmer ground.

Some market experts are even beginning to sound optimistic this week. Mark Mobius, executive chairman of global fund manager Templeton Asset Management, told Bloomberg: 'We're probably now at the bottom and it'll be a build-up of confidence from here on in, if these decisions are made.'

If Dr Mobius is right, value investors should position themselves to capitalise on opportunities that could emerge in the months to come.

Interestingly, the 'Black Monday' plunge on the Singapore market came on relatively low liquidity. This has been especially so for some second-liners which until recently were market darlings.

Take for example C&O Pharma. The stock dropped 28 per cent from 28 cents to 20 cents on a mere volume of 101,000 shares on Monday. Another market darling Oceanus fell from a month high of 26 cents to 20 cents on Monday, a 23 per cent tumble on a volume of only 11 million shares worth less than $2.5 million.

Ferrochina fell a massive 26 per cent on Monday, totalling a 37.5 per cent plunge over three market days on the back of margin calls on modest volumes.

Just three weeks ago, this company reported a scintillating set of first-half results of 419 million yuan (S$88 million) in net profits.

Analysts project full-year FY08 profits to be anywhere between 900 and 960 million yuan (about S$190-200 million). This suggests a forward P/E multiple of around three times.

Others like heavily owned China Hongxing and Li Heng have similarly been bashed down.

The selldown was not restricted to S-chips.

Heavily traded commodity play Straits Asia Resources has crashed from a July high of $4.20 to under $1.70 now.

Bellwethers

Meanwhile, bellwethers such as Singapore Press Holdings, Neptune Orient Lines, CapitaLand, Keppel Corp, SingTel and the banks have sunk to two-year lows. Ditto for mid-caps like crane operator Tat Hong or refinery & tank farm specialist Rotary Engineering.

The question one has to ponder is this: Are these companies in danger of collapse? Are their businesses shrinking? Are their balance sheets and order books damaged? Are they facing a liquidity crisis?

Make no mistake: The near-term market outlook remains uncertain. No one can be sure how long it will take for this storm to blow over. No one really knows the extent of damage inflicted on corporate and personal balance sheets. And jangled nerves and margin calls could rule the day.

But as the saying goes, it is darkest before the dawn.

And when this frenzied forced selling subsides, and the dust ultimately settles, the market will reveal the gems.