This is MoneyClub

Stocks for the Long Run
Part 2: Valuation, Style Investing, and Global Markets. (the preceding 6 chapters were called “Part 1: The Verdict of History”)
Chapter 7. (more…)

Inspired by Buying into Weakness:

Kent Thune hypothesises that in a booming stock market, stocks go up by sectors, in the following order:

1. Transportation, Finance
2. Technology
3. Capital Goods
4. Basic Industry
5. Energy, Precious Metals
6. Health Care, Consumer non-cyclicals

My intent is to see if Singapore stocks also go up like that. If Thune is correct, finance stocks should rise faster than the rest, then capital goods stocks should rise faster, followed by industry stocks, etc.

What I did:

1. Choose shares that mirror the sectors mentioned by Thune. Thankfully, Singapore stocks are split into smaller indices by sector, and Yahoo! has been keeping track of them, so we can use these indices instead.
Problem: these indices do not correspond perfectly. I have tried to match them like this (Thune’s sectors -> sub index (Yahoo!’s abbreviation) ):

• Transportation -> the Transport, Storage and Communications index. (TSC)
• Finance -> the Finance Index (FIAN)
• Technology -> NA. Creative Tech is the closest I can think of so I’ll omit it.
• Capital Goods, Basic Industry -> Multi Industry Index (MLTI)
• Consumer non-cyclicals -> Manufacturing Index (MAFT)
• Thune does not mention property stocks, but Singapore does have an active property sector, so I’ve thrown it in as well. (PROP)

You can see the components of each index here.
2. Figure out what is meant by ‘bull’ and ‘bear’ market. This is harder than it sounds! No one walks into the stock exchange and announces ‘this is the start of the bear market’. I’ve picked the STI, for obvious reasons, and Singapore GDP figures. Yahoo! is able to plot out the STI from 1988 onwards, but 5 years should be enough for now, since in 2003 (4 years ago) there was a downturn in the Singapore economy brought about by SARS…
How I worked out the GDP:

a. Collect GDP growth figures, from MTI and SingStat.
b. MTI and SingStat figures have actual GDP growth figures, at 2000 market prices. This is to say, we are ignoring general price increases from 2000 onwards.
c. I could have looked for the actual GDP figures, but it’s a bit too much work. So from the 2006 figures provided by SingStat, I worked backwards using the growth figures. I was able to compare my calculations with the 2005 actual figures; they were accurate to about 0.5-1%.
d. Since my 5 year Yahoo! chart sets the closing indices as of Aug 5, 2002 as the baseline, I set Q3 2002 GDP as the baseline as well.

3. Superimpose GDP figures with Yahoo! indices, producing this (click for bigger size):

(blurry serif numbers on top and below each GDP bar are actually the growth rates of each quarter compared to the corresponding period a year ago.)

Observations:

1. Interestingly, on this scale, the STI actually mirrors the GDP pretty well.
2. There seems to be 5 phases in this bull run.

1. July 2002 – Dec 2003
   We should actually ignore this because we just reset all our indices. But you can note that at the end of it PROP is lagging the index, whereas the TSC, MLTI and MAFT are ahead, but not by much.
2. Jan 2004 – Mar 2005
   TSC and MLTI are clearly ahead.
3. Apr 2005 – Sep 2005
   PROP picks up pace, while TSC starts to slow down. MLTI carries on.
4. Oct 2005 – Jun 2006
   PROP catches up with MTLI. MAFT and FIAN lag.
5. Jul 2006 – time of writing
   PROP rises and rises. MLTI is also clearly ahead, while TSC tries to catch up. MAFT and FIAN still lag.

It does seem that Thune’s arguments are generally valid, but there are also certain exogenous factors to consider:

- The revival of the Singapore property market as a result of the casino projects (hey call a spade a spade), and a recovery from the 1997 property bubble.
- MLTI shares do well, but many of them are oil-related and have benefited from the spike in oil prices.
- TSC has not done that well, but TSC is a diverse mix of shares from M1 to SIA… SIA has oil-price related cost problems, but M1 does not. It is difficult to say whether TSC validates Thune’s view about transport stocks.