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One Important Thing To Remember in Falling Markets

The Straits Times Index (SGX: ^STI) closed Thursday’s (20 June 2013) session at 3,133. That represents a 9.6% decline from the index’s 52-week high of 3,465 that it hit almost a month ago on 22 May 2013.

The US Federal Reserve’s Quantitative Easing programme, essentially the incessant running of the money-printing press, has been pinned as one of the main reasons for the rise in stock markets across the globe. So, markets around the world became jittery, or even downright fearful, when the Fed’s Chairman Ben Bernanke recently commented that QE might be slowed down “later this year”.

For individuals with money invested in the stock market, it’s certainly not a nice feeling to see almost a tenth of your stocks’ worth wiped out in less than 30 days. But, investors also have to remember – with falling markets, comes rising opportunities.

Using the STI-tracker SPDR STI ETF’s (SGX: ES3) data as a close proxy for the index, we see the STI having a Price-Earnings Ratio of 12.7 as of 20 June 2013. That would translate into a PE ratio of 14 for the STI at its 52-week peak. What this means is, investors are currently paying up to 9% lesser for each dollar of earnings that the 30 STI-components are making compared to a month ago. All things being equal, the price decline represents a much better deal for investors.

Besides being given the opportunity to pay lesser for historical and prospective earnings, we’ve also seen dividend yields become more attractive for investors. We can take telecommunications operators Starhub (SGX: CC3) and SingTel (SGX: Z74) as examples – the former’s yield has increased from 4.5% a month ago to 5% currently, while the latter’s yield has grown to 4.7% from 4.1% in the same time.

Sure, prices might just continue falling for awhile more before finding a bottom. But, the crux here is this – as investors, do we believe that the future outlook (in three, five or even ten years) for the companies we are interested in has changed radically because of falling share prices? If not, then we should leave the worrying of share price movements to others and focus on the corporate performance of the businesses we are keen to own.

Some might argue that the this time, we can’t view the fall in share prices as an opportunity for bargain hunting because the slow-down in QE, besides causing a fall in share prices, might actually negatively affect business results for certain companies.

It’s true that businesses or entities such as REITs that carry heavy debt loads will feel the crunch on their corporate performance should interest rates rise as one of the likely consequences of the Fed’s quenching of its QE programme. But, not every business shares that same burden. In fact, businesses with strong balance sheets might even be in a position of strength to consolidate its competitive positions as weaker rivals struggle.

Foolish Bottom Line

Temporary price declines, due to many different reasons, are inevitable in the stock market and the fear of the end of QE is just a new one on the long list of ‘reasons’. But, for savvy investors, they would have aimed their focus on businesses with demonstrable earnings power and strong balance sheets and use any price declines as opportunities to buy those quality businesses on the cheap – that’s the one important thing they won’t forget in a falling market.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.