How Low Can Singapore’s Stocks Go?

There are likely to be some investors in Singapore who are jittery and fearful at the moment. After all, we’ve just entered bear market territory – Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI), had closed yesterday at 2,792 points, some 21.3% lower than a 52-week high of 3,550 that was reached only in mid-April this year.

(A bear market is defined as one in which stocks have fallen by 20% from a recent high.)

How much further can stocks fall? Your guess is as good as mine. But, history’s answer is scary: Stocks have the possibility of falling by a lot more from here.

What generally happens in a market down-turn is this: Stocks start falling, investors get scared and sell, causing prices to fall further, which in turn begets even more selling. As you can see, these can even create a vicious cycle.

The last big crisis that Singapore’s stock market had encountered was the Great Financial Crisis of 2007-09. You can see in the table below the lowest price-earnings (PE) ratios that Singapore’s blue chips had carried during the crisis. (I had ignored real estate investment trusts, business trusts, stocks that were not listed back then, and stocks with negative earnings.)

Company Lowest PE ratio during financial crisis
DBS Group Holdings Ltd (SGX: D05) 4.6
United Overseas Bank Ltd (SGX: U11) 6.6
SembCorp Industries Limited b(SGX: U96) 6.2
Keppel Corporation Limited (SGX: BN4) 4.9
Oversea-Chinese Banking Corp Limited (SGX: O39) 7.2
SIA Engineering Company Ltd (SGX: S59) 6.5
Singapore Exchange Limited (SGX: S68) 10.9
Singapore Telecommunications Limited (SGX: Z74) 8.4
Singapore Press Holdings Limited (SGX: T39) 9.3
Wilmar International Limited (SGX: F34) 7.5
SembCorp Marine Ltd (SGX: S51) 7.5
StarHub Ltd (SGX: CC3) 9.3
Singapore Airlines Ltd (SGX: C6L) 6.2
Comfortdelgro Corporation Ltd (SGX: C52) 10.0
Singapore Technologies Engineering Ltd (SGX: S63) 11.6
Golden Agri-Resources Ltd (SGX: E5H) 0.65
Noble Group Limited (SGX: N21) 2.4
CapitaLand Limited (SGX: C31) 3.1
Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) 3.8
Thai Beverage Public Company Limited (SGX: Y92) 9.7
Jardine Cycle & Carriage Ltd (SGX: C07) 4.4

Source: S&P Capital IQ

Here’s how the stocks in the table above would look like if they were actually trading at the valuations they had during the crisis:

Company Stock price change from current levels assuming a crisis-era PE ratio
DBS -52.8%
UOB -31.1%
SembCorp Industries -20.6%
Keppel Corporation -23.5%
OCBC -15.3%
SIA Engineering -73.2%
Singapore Exchange -50.5%
Singapore Telecommunications -41.9%
Singapore Press Holdings -42.1%
Wilmar International -22.8%
SembCorp Marine -17.0%
StarHub -43.9%
Singapore Airlines -78.8%
Comfortdelgro Corporation -50.6%
Singapore Technologies Engineering -32.6%
Golden Agri-Resources -99.2%
Noble Group -93.5%
CapitaLand -64.9%
Yangzijiang -38.3%
Thai Beverage -50.0%
Jardine Cycle & Carriage -54.5%

Source: S&P Capital IQ; author’s calculations

Looks really ominous doesn’t it? Many of the blue chips seem to have huge room to fall if they were to reach their crisis-era PE ratios. But before you freak out, note that I’m not making any forecasts here – I’m just letting history be a guide. There’s a silver lining in all these. Most of the blue chips mentioned above are worth a lot more than the PE ratios they had carried during the crisis.

A Fool’s take

Things can easily get worse from here and while the possibility is very slim, there is also the chance for the situation to become even bleaker than what was experienced during the financial crisis. Yet, it pays to keep to keep the faith that things will eventually get better. “This too shall pass,” as the age-old Persian adage goes.

The swings in sentiment in the market, from extreme exuberance to ridiculous pessimism, are what create opportunities for the intrepid bargain hunter.

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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 writer Chong Ser Jing doesn't own shares in any company mentioned.