Business Times - 27 Mar 2012
Hock Lock Siew
STI hitting 3,000 or not: It's no big deal, really
By R SIVANITHY
OVER the past month, the 3,000 mark has emerged as a sort of holy grail for the Straits Times Index, a level that when surmounted is greeted with a curious mixture of awe and relief but when pierced on the downside, brings dismay and disappointment.
Also, when 3,000 is crossed on the upside, pundits inevitably speak of 'more upside' since 'a key resistance' has been cracked; conversely, when the index falls below 3,000, worry envelopes sentiment, apparently because a 'key support' has failed to hold.
While it is fine to keep in mind a round and easily remembered number like 3,000 for accounting, recognition and maybe even valuation purposes, there is a danger that observers - including journalists and headline writers - place too much faith in such figures.
At the risk of over-simplifying, it is much more important from an investor viewpoint to focus on the economic and earnings outlook, conditions in Europe and Wall Street and most important, rising risk levels (or not) and liquidity rather than a number that conveys little about future expectations.
It is equally important to recognise that even if the STI does shoot past 3,000, there is really nothing to suggest that there could be more (or less) upside or downside thereafter.
Observers should first of all note that the STI initially crossed the 3,000 mark in early 2007, so any similar move today would simply see the index returning to where it was around five years ago - certainly not something to justify the celebratory headlines that have accompanied recent rises above the 3,000 mark.
Moreover, if one was to extrapolate further back, it emerges that it was 14 years earlier in 1993 when the STI first attained 2,000. Since the Dow Jones Industrial Average stood at 3,000 in 1993 versus 12,800 in early 2007, this means it took the STI almost 14 years to gain 50 per cent compared to 320 per cent for US stocks over the same period.
So it is that if and when the STI does cross 3,000 again in the coming weeks - as it might at the end of this week when quarter-ending 'window-dressing' should materialise - and if and when this brings with it the oft-heard urgings to buy because Asian growth will outstrip all others, investors should know to accept such reasoning with a bucket of salt.
The truth is that every so often, the stock market encounters a 'new normal' (China and India were pillars of the 2005-2007 normal) and if one is to preserve and grow capital, one has to adjust quickly to the dictates of that normal.
Often, the prevailing normal is a function of interest rates, commodity prices, whether or not monetary authorities have promised fresh and unlimited bailout money and what the big money funds are inclined to do, depending on their performance to date.
Currently, adjusting to existing conditions is difficult because it involves adapting to choppy trading in the Straits Times Index because of a realisation that prices may have overshot the fundamentals, heavy punting of low-priced counters and thin volume in the overall market.
Also part of this paradigm - or if you prefer, part of doing business as usual - is learning to survive in a two-tier market, a feature that appears ever so often in local circles (and, according to anecdotal testimony, in other markets such as Hong Kong as well).
The two tiers are the 'expensive' blue chips on the one hand and the 'cheap' penny stocks on the other while mid-caps and mid-priced stocks are largely neglected.
The adjectives 'expensive' and 'cheap', of course, refer to absolute dollar value and not underlying earnings or some other economic yardstick.
It is thinning liquidity, however, that is the main concern for those who track the long-term health of the local equity market. When volume is low as it is now, large price movements are possible, including repeated crossings in either direction of the much-vaunted 3,000 level by the STI.
Unless turnover improves significantly and until it becomes clear that Europe is really out of its debt mess and that the US economy is really turning around, investors shouldn't read too much into the STI and the 3,000 mark.