Come! Take a quick shot at which country’s stock market had the best performance since the start of June last year. Is it the USA, with its S&P 500 Index up 37%? Or is it the 71% jump in Japan’s Nikkei 225 Index? Well, it surely can’t be Singapore’s market, as the Straits Times Index (SGX: ^STI) ‘only’ grew 18% in that time. Well, if you give up… here’s the answer: Greece. Yes. It was the same Greece that ran into an awful debt debacle in May 2010 and had to be bailed out by other Eurozone countries and the…
Come! Take a quick shot at which country’s stock market had the best performance since the start of June last year. Is it the USA, with its S&P 500 Index up 37%? Or is it the 71% jump in Japan’s Nikkei 225 Index? Well, it surely can’t be Singapore’s market, as the Straits Times Index (SGX: ^STI) ‘only’ grew 18% in that time.
Well, if you give up… here’s the answer: Greece.
Yes. It was the same Greece that ran into an awful debt debacle in May 2010 and had to be bailed out by other Eurozone countries and the International Monetary Fund to the tune of 110b euros. It was the same Greece that some predicted would get kicked out of the Eurozone by the start of 2013.
But yet, the Greek stock market, as measured by its ASE Index, has gained 146% since 5 June 2012, “top[ping] all 94 national benchmarks globally in the period, except Venezuela”, according to Bloomberg. That is truly remarkable.
So, what gives?
For me, at least, there are three key takeaways we can learn from the Greek stock market’s stunning comeback (though to be fair, the ASE Index is still down almost 80% from its 2007 peak).
1) GDP growth can’t tell you much about short-term market returns.
My colleague over in the USA, Morgan Housel, recently wrote (emphasis his): “What the economy does today tells you nothing about what stocks might do tomorrow… Most of us want to believe that market returns are driven by a strong economy and corporate profit growth. In the long-run, they are. But the two don’t move in lock step.
Markets are priced based on what people will think will happen in the future. Today’s reality is yesterday’s news. That’s why [American] stocks surged in 2009 even though the economy was a complete wreck.”
I can’t word it any better than Morgan, so I’ll leave it as that.
2) Valuations matter… a lot!
In 2012, from 5 June to 30 Nov, Greece’s ASE Index had gained close to 70% from 476 to 809 points. But even after that massive surge, the index was still valued at a Cyclically-Adjusted Price Earnings Ratio (CAPE) of only 2.5 times.
That’s an extremely low valuation that gave that the index a massive margin of safety, for which it can do well for investors even if things continued going south in Greece (which it did, judging from the country’s shrinking GDP).
Time and again, we see how valuations of shares can greatly affect returns. Low valuations can lead to superb returns for investors, and on the flip side, high valuations can kill.
The ubiquitous software maker, Microsoft, had tripled its earnings per share from 2000 to 2012 but yet, investors in the company in that period saw its shares go nowhere for more than 12 years.
The reason? Microsoft was valued at a sky-high PE of 72 at the start of 2000; the company’s earnings growth simply couldn’t keep up with the market’s massive expectations.
Its modest 20% growth in earnings per share since then till June 2013 couldn’t appease the market, and in those five-and-a-half years, Keppel T&T’s shares dropped by more than 70%. Valuations matter… a lot!
3) “The time of maximum pessimism is the best time to buy” – Sir John Templeton
In times of great distress come the best opportunities. When shares are priced for oblivion – at 2.5 times trailing-10-year earnings, Greece’s shares were essentially priced for doom – any slight perception of a miniscule uptick in fortunes can mean huge rebounds. We saw that happen in the ASE Index.
To be sure, an investment into the Greek market back in June 2012 would likely not be the same kind of investment in a great company that investors can buy-and-hold for a decade or more.
But like I mentioned earlier, the Greek market’s extremely low valuation back then helped set the stage for great returns going forward over the next few years, despite plenty of wrongs that still needs fixing within the country’s economy,
Going back further in time to 10 March 2009 in Singapore during the Great Financial Crisis of 2007-2009, we see the Straits Times Index hit its trough of 1,456 points on that date.
An investment back then into shares of industry-stalwarts like Jardine Matheson Holdings (SGX: J36), DBS Group Holdings (SGX: D05), and United Overseas Bank (SGX: O39) would have garnered total returns of 287%, 199%, and 194% respectively today.
Those are the bargains that can appear when the markets enter into a tailspin of negativity.
Similar to Sir John’s well-known refrain to investors to buy when pessimism is at its maximum, the ever-quote-worthy Warren Buffett once wrote that “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”
Those are wise words to heed.
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