How Low Will Pound Go?

On 10 June 2016, I made a prediction on the outcome of the UK referendum which turned out to be quite accurate, with the projected “remain” percentage to be quite close to the actual number. Refer to my post:  https://kenutau.wordpress.com/2016/06/10/brexit-is-very-real/

Post-referendum, we saw a significant decline in Pound / GBP against the USD (current rate at 1.33):

Pound_1.png

Latest news: http://www.cnbc.com/2016/06/27/major-banks-cut-sterling-forecasts-after-brexit-vote.html

The currency hit its lowest in nearly 31 years in the early hours of Friday after the referendum results were announced that sent shockwaves across all asset classes globally. However, on Monday sterling further fell below the 31-year low to $1.3221 on speculation that the Bank of England may proceed with a rate cut. Sterling is also at its lowest against the euro since March 2014 at 83.41 pence.

“The move in sterling against the dollar after the U.K. referendum is unprecedented,” John Bilton, global head of multi-asset strategy at JP Morgan Asset Management told CNBC via email

A number of banks have cut their sterling forecast since the vote to leave the EU was announced on Friday. HSBC was the first to announce a change to its sterling outlook. The bank said it expects the currency to fall to $1.25 against the dollar in the third quarter and to $1.20 by year-end.

 

So how low can GBP go?

Since UK is well-connected with the EU region, let’s explore the historical relationship between USD/GBP and EUR/USD to determine the potential trading range of USD/GBP. We did a quick regression analysis between the two currencies for data points (since 1 Jan 1999) and the summary of the results is shown as follows:

Pound_4.png

As shown below, the actual USDGBP rate is trading relatively lower than of the forecasted rate of USDGBP based on the results of the regression analysis.

Pound_2.png

As summarised below, the current rate of 1.33 is below the forecasted rate of 1.5881 and it is very close to the lower bound of the 95% confidence interval of 1.3187 – 1.8576.

Pound_3.png

If you believe that the market has overreacted to BREXIT, the Pound / GBP is poised to rebound. Further, based on a 95% confidence interval, the downside risk is fairly limited. Nevertheless, since BREXIT is an unprecedented event, the ordinary statistical analysis may not be able to capture the full extent of market events resulting from BREXIT.

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE. 

Is There A Link?

This piece of news just came out last Friday:

KWAP emerges as substantial shareholder in Red Sena

By Kamarul Anwar / theedgemarkets.com | June 24, 2016

KUALA LUMPUR (June 24): Pension fund Kumpulan Wang Persaraan (Diperbadankan) (KWAP) has emerged as a substantial shareholder in Red Sena Bhd, a newly listed special purpose acquisition company (SPAC) targeting food and beverage-related businesses.

In a filing with Bursa Malaysia today, the shell company said KWAP’s fund manager bought 4.02 million Red Sena shares in the open market on June 9, bringing the total number of shares that KWAP indirectly owned to 51.52 million.

KWAP’s fund manager bought another 750,000 Red Sena shares the next day (June 10), according to another stock exchange filing. As at June 23, KWAP owns 52.27 million or 5.23% of Red Sena’s share capital. Red Sena, which was listed on Dec 10, 2015, has been hovering in the range of 40 sen to 41 sen this quarter. It was traded flat at 40.5 sen as at noon break, with a volume 2.76 million shares.

Few months ago, this article appeared in the news:


Is it a coincidence? Red Sena has been very quiet with its first qualifying asset. The million dollar question is whether KWAP acquiring Can One’s dairy unit indirectly via Red Sena? We shall wait for the first qualifying asset acquisition to be announced by Red Sena…


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Stock Market Crash

Things are looking quite bearish for global stock markets at this juncture. Predicting the timing of the next great stock market crash is crucial in protecting one’s capital or even maximising one’s trading profits. A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles.

To understand the future, one must understand the past. Our brief analysis will dwell into past major stock market crashes in Malaysia and in specific, we will be looking at past movements in the index trend of KLCI / KLSE. The historical trend for KLCI / KLSE (since 1978) is shown as follows:

FC_1.png

1st Crash: 1981

The first major crash for KLCI occurred in 1981. Prior to the crash, the KLCI / KLSE had ascended from 141.20 points (1978) to 546.7 points (Jul 1981), with an increase of approximately 287% over 956 calendar days. Subsequently, the index fell more than 60% to 217.86 points (1982) over a period of 405 calendar days.

FC_2_1981

2nd Crash: 1984

FC_1984.jpeg

The second major crash for KLCI occurred in 1984. Prior to the crash, the KLCI / KLSE had ascended from 212.8 points (1982) to 421.9 points (1983), with an increase of approximately 94% over 336 calendar days. A double top was also formed in 1984. Subsequently, the index fell more than 60% to 169 points (1986) over a period of 818 calendar days.

3rd Crash: 1987

FC_1987.jpeg

The third major crash for KLCI occurred in 1987. Prior to the crash, the KLCI / KLSE had ascended from 305 points (May 1986) to 472 points (Aug 1987), with an increase of approximately 181% over 448 calendar days. Subsequently, the index fell more than 53% to 223 points (end 1987) over a period of 118 calendar days.

4th Crash: 1997-1998

FC_1997.jpeg

The fourth major crash for KLCI occurred between 1997 and 1998. Prior to the crash, the KLCI / KLSE had ascended from 848 points (1991) to 1,336 points (1994), with an increase of approximately 173% over 875 calendar days. Subsequently, the index fell more than 79% to 268 points (1998) over a period of 552 calendar days.

5th Crash: 2000

FC_2000

The fifth major crash for KLCI occurred in 2000. Prior to the crash, the KLCI / KLSE had ascended from 767 points (1998) to 1,027 points (2000), with an increase of approximately 294% over 578 calendar days. Subsequently, the index fell more than 46% to 549 points (1998) over a period of 427 calendar days.

6th Crash: 2008

FC_2008.jpeg

The sixth major crash for KLCI occurred in 2008. Prior to the crash, the KLCI / KLSE had ascended from 606 points (2003) to 1,529 points (2008), with an increase of approximately 152% over 1772 calendar days. Subsequently, the index fell more than 43% to 803 points (2008) over a period of 284 calendar days.

When Is The Next Crash?

Kindly note that the above analysis is a simple desktop analysis in order to gain a broad understanding about past stock market crashes in KLCI.

FC_Summary.pngKey observations are as follows:

  • Each stock market crash is distinct in its own;
  • Intervals for stock market crash appear to be 3, 8 and 10 years;
  • Uptrends generally last longer than downtrends;
  • Higher average prior up % per day will potentially lead to a higher decline average fall % per day;
  • The quantum of decline in a stock market crash averages at 56.8% (with a range of between 43% – 79%); and
  • One possible way of predicting an upcoming stock market crash is when an index has gone up significantly (~ 94% – 294%)

So, what is happening to FBMKLCI?

FC_2016.jpeg

The FBMKLCI has since increased 1,063 points or 126.9% over 1,940 calendar days from 2009 to 1,900 (2014). This translates to an increase of 0.07% per day, which is relatively lower than the prior uptrend rate in past stock market crashes of KLCI. Although it does not appear to be a drastic increase, this may warrant a potential future downward reversal due to the following two key reasons: (1) the total increase percentage is within the range of percentage increase in past stock market crashes; and (2) further refinement of timeframe is required for the analysis of the past crashes so that a more appropriate comparison can be made.

What is important to note is that the recent correction in 2015 (from 1,900 to 1,501) only represents a percentage decline of slightly above 20% from FBMKLCI’s peak. This is relatively lower than (i) the average percentage decline of 56% of past crashes ; and (ii) the lowest percentage decline of past crashes of 43%. In other words, to qualify for a stock market crash, we need to observe an additional  percentage decline of at least 23-36% from FBMKLCI’s peak (i.e, 1,900) to 836 – 1,089 points before we can conclude that the market has bottomed out. Assuming a 3, 8 or 10 year interval period for the next stock market crash, we may potentially see a major correction / crash happening between 2016 and 2019 (since the last stock market crash happened in 2008-2009).

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.

Finding Yield

Quick update on Ranhill Holdings Berhad (a Malaysian conglomerate with interests in power and environment sectors). It has since dropped to RM0.965 from its initial IPO price of RM1.20 per share.

At current price of RM0.965, Ranhill may be trading at implied forward dividend yield of approximately 6.5%, which is a decent yield supported by a stable cashflow profile from its long term concessions. Our desktop analysis is summarised as follows:

Ranhilll

Note on projections & assumptions:

  1. Normalised PAT for FY15 to exclude non-recurring costs relating to initial public offering / RTO exercises;
  2. Assume a lower revenue y-o-y growth rate and PAT margin rate for FY16

*Update*: investors should take note of the on-going negotiation between the Company and its Corporate Guarantors relating to its existing Sukuk programme (shown below). Once the proposed debt-to-equity ratio / covenant has been approved, hopefully we will see more light in terms of future dividend payments by the Company.

Ranhill_Indulgence.png

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.

BREXIT is very real

UK’s referendum on 23 June on whether to stay in the UK or leave the EU.

Based on initial survey, the breakdown of voting based on age groups is shown below:

 

Brexit2.png

The above survey clearly show that the higher-age groups are in favour of BREXIT.

Source: http://www.theguardian.com/politics/2016/apr/02/eu-referendum-young-voters-brexit-leave

Based on the outcome of the survey, a simple analysis was made as follows:

Brexit1.png

Final Prediction – there is 48.1% probability that UK will remain with EU. Too close to call. If BREXIT does materialise – volatility will definitely spike coupled with flock of funds into safe haven assets  such as USD and gold.

 

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.

How far can Crude go?

It is observed that in current environment, the movement in crude oil is negatively correlated with the movement in the US Dollar. The following graph shows this relationship based on the historical trends of both ICE Brent Crude Oil and US Dollar Index (measures the value of US Dollar against some of the foreign currencies):

USD Dollar Index 1.png

The ICE Brent Crude Oil is currently at USD51.19 whilst the US Dollar Index is trading at 93.858 (as of 9 June 2016). Using a simple regression analysis, the statistical results are presented as follows:

USD Dollar Index 2.png

Based on the above relationship, we are able to derive a statistical forecast range for the ICE Brent Crude oil based on the movement in US Dollar Index:

USD Dollar Index 3.png

As shown above, the current brent crude price of USD51.19 is slightly lower than the forecasted value of USD57.04, with a 95% confidence interval of between USD23.16 and USD90.91.

Final Say

Movement of USD will depend largely on two contributing factors, namely: (1) timing of Fed’s rate hike; (2) “safe haven” status of USD if there is a global turmoil (e.g http://www.wsj.com/articles/a-bearish-george-soros-is-trading-again-1465429163)

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.

Is the selling finally over?

Malaysia’s Employees Provident Fund (“EPF”) has been offloading its position in Kian Joo Can Factory Berhad (“Kian Joo”) ever since the recent termination of the proposed take-over exercise of Kian Joo, as summarised below:

KJCF_Insiders2.png

As shown in the graph below, recent price and volume trends appear to suggest that the overselling has moderated, with a lower trading volume being recorded in the month of June 2016.

KianJoo_6 June 2016.pngIt is also observed that the current closing price has touched above the 10D moving average price of Kian Joo, indicating a potential upward movement. There is a possibility that the 10D MA may cross above the 20D MA. Further, a gradual increasing RSI trend also supports a more stabilising price trend for Kian Joo.

Further positive catalysts (e.g earnings growth) are required to support a strong upward movement for Kian Joo.

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.