Published August 21, 2009

Is the bellwether stock obsolete?

By WONG WEI KONG
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FOLLOW the Leader is a game children sometimes play. First a leader is chosen, then the other children all line up behind. The leader then moves around and all the children have to mimic the leader's actions. Any player who messes up or doesn't do what the leader does has to leave the game.

Moving on: Diversified groups have restructured to focus on core or new businesses over the years

But in the local stock market it seems, it's the leader who's out of the game.

Consider this. Not too long ago, traders, analysts and journalists often talked or wrote in terms of bellwether stocks. But in more recent years, this hasn't been the case. The concept of the bellwether stock, in the local context at least, appears to have faded into obscurity.

The term bellwether comes from 'bellewether', which refers to a sheep which leads the rest of the flock, using a bell to attract the attention of the other sheep. Traditionally, the leader sheep was a wether, or castrated ram. Over time, people began to use the term more generally to refer to any sort of leader or indicator.

So a bellwether stock is one that is seen to be an indicator of the trend in the stock market or a sector. If the bellwether stock is moving up or down, the whole sector or even market is expected to follow suit. It is the leader stock, leading the rest higher or lower.

A classic example of a bellwether stock is General Motors or GM in the US. The stock acts as a reference point for the automobile industry, but also influences other sectors too. GM buys from a wide number of suppliers, so its performance has a ripple effect. It sells to consumers, so its sales figures are an indicator of consumer confidence.

Conversely, it employs thousands of people, so whether it's hiring or firing also determines consumer sentiment. And because it makes things that run on gasoline, its performance reflects the impact of oil price movements. Hence the popular saying: 'What's good for GM is good for America', which, looking at the current circumstances facing GM, spells a period of painful restructuring for the US economy.

The Singapore market had its own bellwether stocks. The classic example was Keppel Corp. In the 1990s, the group had major interests in ship and rig building, property, banking, energy, telecommunications and engineering. With such a diversified portfolio, it was considered a proxy to the Singapore economy and the most important bellwether stock. Keppel's performance was closely tracked, and the group's earnings were often the key opening event of the reporting season.

Indeed, when Keppel's shares fell to record lows during the Asian financial crisis, it reflected accurately what was happening to the Singapore economy and corporate earnings then.

But today, there is no bellwether stock of this stature in the Singapore market. It's down to two broad reasons: the shifts within the economy and corporate action. While banking and property remain key sectors in the economy, newer industries, such as pharmaceuticals and knowledge-driven sectors, have become more important. But the representation of these newer sectors in the stock market remains low, with most of the major players being foreign companies. That rules for the listing of bio-tech firms have just been recently unveiled highlights the yawing gap.

And over the last decade, corporate groups have restructured to focus on core or new businesses, prompted by internal strategy changes or by regulatory requirements. Keppel, for one, shed its banking exposure (Keppel Bank), and pared its interests in other non-core areas to focus on marine, property and engineering activities. The banks cut their exposure to property, while other corporates also restructured to refocus on selected operations.

While manufacturing is still an important economic sector, the consolidation among major listed manufacturing groups also means that the key electronics manufacturing segment, for instance, is represented by just two major stocks, Venture Manufacturing and Creative Tech.

So the wide-ranging conglomerates of the 1990s gave way to more focused groups, and the idea of the bellwether stock became increasingly diluted.

Keppel may still lead sentiment within the marine sector, but it's no longer the bellwether stock for the broader market or economy. The closest investors have to a bellwether stock these days are probably the three listed banks, with their lending exposure to consumers and different sectors of the economy - but this isn't pure, direct exposure.

But then, perhaps the idea of a bellwether stock is obsolete anyway. The concept of bellwether stocks affecting other stocks because investors read bullish or bearish signals from their performance is premised on the fact that the market trades on fundamental factors. This is often (maybe mostly) not the case these days.

The growth of proprietary trading here, in which house traders move huge amounts of stocks for no reason other than to earn a margin, has more or less thrown the idea of fundamentals leading the market out of the window. The banks or big stocks like Keppel may rise or fall, but the market can be going the other way. Even if there's a leader, there may not be followers.

It's as if all the sheep are now wearing bells, and it just means that reading the market has become that much more difficult for the average investor.