Published March 6, 2009

Bad news can be good news for investors

By ARTHUR SIM

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THE revelation that the economy could shrink a shocking 10 per cent this year could be just the news that some investors have been waiting for.

Buying into the stock market one month after the worst GDP contraction produces a return of 21% in three months, 38% in six months and 53% in 12 months. - Citigroup

Citing poor economic data - manufacturing and non-oil domestic exports have fallen by around 30 per cent and 35 per cent from their peaks respectively - Citigroup said that it believes that Q109 could possibly see gross domestic product (GDP) shrink by 10 per cent, followed by 8 per cent in Q209.

However, Citigroup believed that this could be an indication that the time to start buying into the stock market is nigh.

Timing, however, will be critical. While buying into the stock market during recessions can produce exceptional returns, it can be counter-productive if the investment horizon is short (eg three months), said Citigroup.

But looking at the four past recessions, it noted that buying one or two months after the quarter of the worst GDP contraction in past recessions produces positive and more consistent returns.

By back-testing the strategy, it found that buying one month after the worst GDP contraction would produce a return of 21 per cent in three months, 38 per cent in six months and 53 per cent in 12 months (with the exception of one period - the 1985/1986 recession - in which there was a negative three-month return of 3 per cent).

Of course, it is not known if Q109 will register the steepest GDP contraction during this current downturn.

But it seems that recent data has been so bad that it can only get better.

In its report, Citigroup said: 'We see no sure signs that manufacturing or exports will rebound in a definite fashion as yet, judging from recent leading indicators, although we see some signs of stabilisation.'

Looking at various economic indicators around the world, Citigroup head of Singapore research Chua Hak Bin added: 'Key indicators are showing some uptick.'

He also reckoned that the scenario where exports fall to a level that would suggest an 8 per cent or even a 10 per cent GDP contraction is not likely. 'The level of contraction is already fairly steep,' he added.

Citigroup said that the sectors that will outperform in the recovery phase of this current recession will very much depend on the nature of this recovery - whether led by China, or infrastructure spending, or new areas of technological innovation.

In the past recessions, different sectors led the recovery. In the 1998 Asian crisis, banks, developers and transport led the recovery.

In the 2001 tech recession, transport, financials and media led the recovery while in the 2003 Sars recession, developers and conglomerates led the recovery on the commodity boom and growth in the high-end market.