Capital Market - Will the past dictate the future?


  • Business
  • Saturday, 29 Mar 2003

BY P.W. THONG

“HISTORY often repeats itself” and that's precisely what market pundits are hoping for this time around.  

In the absence of certainty, most market pundits are looking towards the behaviour of the stock markets back in the 1991 Gulf War to make their assumptions today. 

It's been about a week since the war erupted in Iraq on March 20. As different as the scenario is today from the early 90s, there are some similarities in the behaviour of the equity and commodities markets a week before and after the war in both instances. 

Major markets in both periods – 1991 and presently – were held captive by the uncertainties of war and locked in a tight trading range over the past few months. 

In 1991, the Kuala Lumpur Composite Index (CI) was hovering between 470 and 500 levels for months before the US-led coalition forces launched its first strike on Jan 17. This time around, the CI has also been locked in a tight range of between 620 and 660 levels over the past few months. 

Then, just a week before the military strike in the 1991 Gulf War and now, most bourses reversed their losses, and posted significant gains. 

The Dow Jones reported a 5 per cent gain a week before the 1991 Gulf War and surged 5.9 per cent a week before the recent war. 

Similar run ups were also noted in tech-laden Nasdaq as well as other major regional bourses. 

On the home front, the CI rose 1.1 per cent over the same period in 1991 and more recently for the current war, rose 0.8 per cent a week after the US invaded Iraq.  

Apart from equities, commodities such as crude oil and gold also exhibited similar patterns over the two periods. 

Another similarity between the 1991 Gulf War and the ongoing war is that most major markets gave up their gains chalked up a week before the war on the day the war began due to uncertainties and concerns over the degree of success in the military campaign before investors swooped back in causing the uptrend in some markets to last for months after. 

Going by the trend, market pundits are now hoping that the rallies in the markets today are perhaps three weeks' away. Of course, that remains to be seen and provided the war is short. 

But just how short is a short war? It's interesting to note that the definition changes according to whom one speaks to. Some international military analysts expect a short war to end in a matter of weeks. Then, there are others who consider a war that last three months as short.  

And fuzzier than the definition of what constitutes a short war, is just how long this current war will persist. 

Some analysts and economists say the “relief rally'' during the previous Gulf War had much to do with the fact that it lasted for a month and a half. Such optimism is not present now, given the vast complexity in macroeconomics and geopolitical forces in play. 

With that, expectations of a strong relief rally this time around have also somewhat mellowed while investors continue to remain cautious. 

No one is also precluding the fact that the war on Iraq might spell disaster for the United States and global stock markets should the military campaign exceed the intended timeframe.  

One research head thinks otherwise. He says a relief rally on the Kuala Lumpur Stock Exchange (KLSE) is not likely to take place anytime soon. “Stocks in Wall Street rose a day before the strike but the KLSE did not. Now, we may see a longer military engagement. And even if there is a rally, the KLSE will probably be sidelined compared with other major markets such as Hong Kong or Japan.'' 

Not all share the pessimism. 

A director of another research house says there is a good chance that stock markets including the KLSE will stage a rebound, if not a rally, in the short to medium term. He says investors, like what they did in 1991, are likely to review the situation a week later and judge the outcome against their previous assumptions. 

He also says: “As long as the war in Iraq does not spread beyond its borders, and global oil supply is contained, the world economy will not be seriously affected. And when economic fundamentals are not very much hurt, demand for stocks should pick up.''  

In addition, OCBC Research points out that although the US' Bush administration had hinted that the war on Iraq could last longer than anticipated, past statistics showed that any price dip proved to be an opportunity to accumulate.  

It says: In the 1991 Gulf War, the CI rose 22 per cent between the time war started and ended. High beta stocks, oversold bank and airline/transport stocks are prime beneficiaries in this rally. While the prospect of a US economic recovery is still weak, nevertheless, we believe investors should trade this tradable rally.'' 

KLCity Research, in its war assessment, argues that oil prices have slipped while the US dollar has strengthened to some extent from its previous lows.  

“Assuming that the economic variables remain steady, we do not think that the war will cause significant damage to the US economy. Some shavings in US growth in this quarter and perhaps more substantially next quarter will, however, be inevitable.  

“This is a result of the temporary disruption in production and economic activity. US growth in the second half of the year will, however, be stronger once the conflict ends (by the end of second quarter),'' it continues. 

The high degree of liquidity in the domestic economy is expected to enhance the prospects of the KLSE, which is currently trading at low price earnings (PE) ratio of 12 times, against a 1990-2003 historical average of 21 times. “Even relative to the post 1997 financial crisis years’ average of 18 times, the CI at current level is inexpensive,'' KLCity says. 

During the break out of the 1991 Gulf War, major stock markets had bottomed out and posted strong rebound by the time the war was over. Stocks on Wall Street, which were plunging, had rallied as soon as the US began its military campaign on Iraq in Kuwait to push the Dow Jones to post a 12 per cent gain a month after the strike. By the time the 1991 Gulf War ended a month and a half later, the Dow Jones had gained 26 per cent. 

Closer to home, the CI had tracked Wall Street's bull. The CI rose 12 per cent a month after the Gulf War erupted on January 17 and a month and a half later posted a gain of 20 per cent. 

A similar pattern was also witnessed post Sept 11 terrorist attacks as well as after the US war against terrorism in Afghanistan. 

Still, it remains to be seen if the current war in Iraq, which is merely a week's old, could send stocks cheering in the coming weeks.  

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