20th anniversary of October plunge is timely reminder not to get carried away
EVEN 20 years on, memories of the 'Black Monday' Oct 19, 1987 stock market crash on Wall Street can still send shudders down the spines of older investors.
The scale of the plunge back then was so breathtaking, and traumatising, that mini crashes that rocked markets earlier this year simply pale by comparison.
And many looking back to that fateful day on the 20th anniversary today may feel a sense of foreboding.
The anniversary offers a timely warning to investors not to get carried away by the bull run that has resumed on regional bourses, now that they have shrugged off the August blues that followed the US mortgage crisis. It is also time to realise that the next big global crash may well be set off in Asia, not Wall Street.
Back on Oct 19, 1987, following what has been widely regarded as an era of greed and irrational exuberance, Wall Street plunged 23 per cent in a single day amid a spate of big corporate bankruptcies.
It was the biggest single-day plunge ever on the New York market. The only warning signs had been several relatively modest falls the previous week.
As the crash reverberated around the globe, Singapore's Straits Times Index (STI) plunged 25 per cent in a day.
Hong Kong shut its stock market for four days in the hope that global markets would have regained their footing by the time it reopened for trading.
Alas, this turned out to be a fool's dream. The Hang Seng Index dived 33.3 per cent when trading finally restarted - triggering a collapse of the then-Hong Kong Futures Exchange.
In the 20 years since, it has been more common to see a series of mini-crashes, such as those in August, when the STI fell by over 100 points on four occasions.
And with all the safeguards that have been put in place since 1987, many are confident that a crash equal in magnitude to that sell-off is no longer probable.
It is, for instance, unlikely that a stock market plunge would trigger a global depression like the one experienced after the 1929 crash. Central bankers have learnt to flood the market with funds to lift investor sentiment.
In 1987, then newly installed Federal Reserve chairman Alan Greenspan made his mark by restoring confidence, saying the Fed 'stands ready to provide all necessary liquidity' in the wake of the crash.
Last month, current Fed chief Ben Bernanke did the same thing, surprising investors with a 0.5-percentage point cut in interest rates, after stocks around the world plunged by more than 10 per cent in a matter of weeks.
But while Wall Street is still regarded as the key global market to watch, the centre of gravity in the global financial system is gradually shifting to Asia.
To give some examples: The Industrial & Commercial Bank of China has overtaken United States-based Citigroup to become the world's most valuable bank. And the world's second- largest listed firm by market value is another China group, PetroChina, just after another oil giant ExxonMobil.
Many fear that a serious knock to global markets on the scale of that seen in October 1987 could well come from China.
A 9 per cent rout in Shanghai on Feb 27 ignited tailspins across Europe. Then came a 416-point plunge on Wall Street - its worst drop since falling 684 points on its first day of trading after the Sept 11, 2001 attacks.
The rocket-like ascent of Hong Kong's Hang Seng Index over the past two months almost defies credulity.
Since Aug 17, the Hang Seng has climbed almost 50 per cent from its intra-day low - touching the 30,000 level yesterday for the first time. China stocks in Hong Kong have risen even more - by an eye-popping 80 per cent.
Sure, there has been a steady stream of initiatives by the mainland to allow its citizens to invest in Hong Kong shares.
This has attracted billions into Hong Kong, as every fund manager and his dog salivated to get a piece of the action first.
But the gains may simply be unsustainable, even if China grows at the projected levels.
So the spectre of October 1987 hangs over investors 20 years on - not in New York but here in Asia, where a fresh wave of irrational exuberance may be looming over Hong Kong and Shanghai.
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