Persistence in the US stock market may not pay
10 March 2003
The US stock market may still be the biggest and most liquid in the world, but figures released by the US Treasury Department recently show that the US stock market has been gradually losing its attraction to Asian investors.
The US stock market peaked in 2000. Not surprisingly, the value of Asian transactions in US stocks also peaked in that year, hitting US$500 billion. In the following two years, as the bear took a firm hold on US stocks, the value of share transactions in the US by Asian traders also fell in tandem, falling below US$300 billion in 2002.
Singaporean investors, though, seem to have been exceptions. They actually increased the value of their transaction in US shares in 2001 compared to 2000, although they did cut back in 2002 together with most other Asian investors.
According to a report in The Straits Times, some dealers think the largest Singapore investor in US stocks was the Government of Singapore Investment Corporation, the Singapore government's investment arm. With the huge reserves being accumulated by the Singapore government, it certainly is logical to expect much of it to flow into US stocks. It would also explain the relatively stoic behaviour of Singaporean investors in the US in the midst of a persistent decline in stock values. After all, government-linked officers do tend to behave in a steady manner, at least relative to private investors. And a steady investment flow might easily have been passed off as conservative behaviour, a hallmark of public servants.
It might not have been sensible behaviour, though. As it is, even after three years of decline, many still doubt that US stocks are good value. The latest issue of Forbes contained not one but two articles suggesting that better values lie outside the US.
In an article entitled "The overpriced American", Andrew Gillies wrote that "it's not all that hard to argue that U.S. stocks have room to fall. Using actual and estimated numbers from Thomson First Call, the S&P 500 sells for 17 times earnings for the past four quarters. In early 1995, as the last bull market began its climb, that ratio stood at 13. Hardcore bears say that even the multiple from 1995 looks too rich, arguing that down markets usually don't grind to a halt until earnings multiples bottom out in the single digits." He suggested that it "may be prudent to stick with non-U.S. companies that look less expensive than their competitors in the States."
In his article, "The long and short of it", David Roche wrote that he is "convinced that the S&P will test new lows before this bear market is over." However, he also wrote: "Non-Japan/Asia equity markets stand out as places set to make profits and achieve growth in the New Deflation world, mainly thanks to the great opportunity of China's emergence as an economic powerhouse. Valuations aren't bad, either. The average P/E for the region is 14 to 18 times historic earnings. I like Taiwan, Malaysia and China best."
Finally, none other than the great American billionaire investor, Warren Buffett, has declared that US stocks are expensive. In his latest annual letter to shareholders of Berkshire Hathaway, he wrote: "Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge."
So even as several Asian stock markets fell to multi-year lows last week – the Nikkei 225 hit its lowest level in two decades while the Straits Times Index hit its lowest level since November 1998 – investors need to keep a perspective on valuations. Asian equities are relatively cheap. If Asian equities do suffer, US equities are hardly likely to do any better.
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