A Wild Guess

Welcome to my first blog posting for 2017. It is interesting to take a wild guess of predicting what will be the 2017’s year end target for Malaysia’s FBMKLCI index. On the first trading day of 2017, the FBMKLCI index started with a decline of 6.2 points to 1,635.5.

What Analysts Think

Shares on Bursa Malaysia will likely trend higher next year, with some analysts expecting the key benchmark FBM KLCI to end 2017 at around 1,720-1,750 points.The positive trend, said experts, is due in part to the expected rebound in corporate earnings next year from a low base and the prevailing inexpensive valuations of the Malaysian bourse. According to Maybank Investment Bank Bhd (MaybankIB), the FBM KLCI is no longer “the most expensive by a huge valuation premium”. Public Investment Bank Research (PublicIB) said the markets were primed for investors with a longer-term horizon and to position for a turnaround, as the corporate earnings outlook had somewhat stabilised and Malaysia remained fractionally cheaper from a regional standpoint. Read More

Target of 1,720 by DBS:

DBS_target.png

There was no third quarter turnaround in Malaysia’s weak earnings trend, as negative earnings surprises trumped positive surprises four-to-one. The automotive, building materials (cement), consumer, glove, media, oil and gas, shipping, technology, telco and utilities sectors all disappointed, while the gaming sector was the only one which beat estimates. We cut our 2016 and 2017 calendar year earnings forecasts for the FTSE Bursa Malaysia KLCI Index (FBMKLCI) by 0.2% and 0.5% respectively. Earnings for the 2017 calendar year are forecast to rebound 8.8% from a low base. However, the risk of further a earnings cut cannot be ruled out given the prevalent risks in the telco and banking sectors. Read More

“Earnings growth in 2017 may yet be stronger than what’s seen so far in 2016, which increases the probability of the equity benchmark to inch up from its current sideways performance. Therefore, premised on the rooted behaviour whereby earnings and prices are trending broadly hand-in-hand, we reiterate our 2017 FBM KLCI target at 1,830 points,” said MIDF Research. Read More

What I Think

It is certainly not an easy task to predict the year end target for FBMKLCI. Where should I start? Fundamental method? Technical? Luckily, I manage to draw some broad ideas from the book Alchemy of Finance written by George Soros where Soros explained about the theory of reflexivity in stock market. In a nutshell, changes in share prices can influence the fundamentals of stocks. From another perspective, the way we perceive fundamentals and how this affects price can cause fundamentals themselves to change. Reflexivity thus describes an iterative process: Prices set by irrational market participants affect the fundamentals, which affect prices, etc., in a “reflexive” feedback loop.

saupload_Reflexivity.jpg

Soros used stock prices and earnings per share line to illustrate a typical boom / bust sequence. The divergence between the two curves as an indication of the ‘underlying bias’. The earning curve incorporates not only the underlying trend but also the influence of the stock prices on the trend. The above graph shows that the stock prices usually reflect the expectation of future earnings. If earnings are expected to decline in the future, the stock prices will decline.

Modelling the relationship between the FBMKLCI index and earning per share (EPS), we can see the interaction between the two curves is similar to that graph / model described by Soros. What is interesting to note is that there appears to be a rebound in EPS for the FBMKLCI since 2016. Would we see a rebound in the FBMKLCI index, consistent with the views of the analysts for 2017?

KLCI vs EPS.png

A simple regression is performed between FBMKLCI index and EPS:

Regression Results.png

There is a statistical significance between the dependent variable (FBMKLCI) and independent variable (trailing EPS of FBMKLCI), defined by the regression relationship of FBMKLCI = 476.651 + 11.8498 (EPS). Based on this regression relationship, it appears that the current FBMKLCI index value is relatively close to the predicted value of 1,660:

KLCI vs Forecast.png

Scenario Analysis:

Personally, I intend to adopt a “downside” bias if compared to the analysts, premised on the following potential developments:

  1. Higher imported inflation due to weakening of Ringgit – > erodes profitability
  2. Higher non-performing loans, stalling of credit growth
  3. Lack of demand for exports (due to weak global demand, despite a weakening ringgit)
  4. Global macro uncertainties, political risks

In view of the above, I re-adjust my scenario analysis as follows:

  1. Maximum growth rate in EPS to be capped to 4.0% (consistent with Malaysia’s forecast 2017 GDP annual growth rate)
  2. Sensitised downward growth rate in EPS of up to negative 10%

Scenario.png

In a nutshell, based on this high-level desktop analysis, the wild guess range for FBMKLCI 2017 year end target would be between 1,541 – 1,707 points.

If I have to chose just one number, my wild guess would be closer to the zero – 1.0% growth rate (i.e 1,660 or 1,672).


Investing In Knowledge: Book Corner

(click image)

New chapter by Soros on the secrets to his success along with a new Preface and Introduction.
New Foreword by renowned economist Paul Volcker
“An extraordinary . . . inside look into the decision-making process of the most successful money manager of our time. Fantastic.” -The Wall Street Journal
George Soros is unquestionably one of the most powerful and profitable investors in the world today. Dubbed by BusinessWeek as “the Man who Moves Markets,” Soros made a fortune competing with the British pound and remains active today in the global financial community. Now, in this special edition of the classic investment book, The Alchemy of Finance, Soros presents a theoretical and practical account of current financial trends and a new paradigm by which to understand the financial market today. This edition’s expanded and revised Introduction details Soros’s innovative investment practices along with his views of the world and world order. He also describes a new paradigm for the “theory of reflexivity” which underlies his unique investment strategies. Filled with expert advice and valuable business lessons, The Alchemy of Finance reveals the timeless principles of an investing legend.
This special edition will feature a new chapter by Soros on the secrets of his success and a new Foreword by the Honorable Paul Volcker, former Chairman of the Federal Reserve.
George Soros (New York, NY) is President of Soros Fund Management and Chief Investment Advisor to Quantum Fund N.V., a $12 billion international investment fund. Besides his numerous ventures in finance, Soros is also extremely active in the worlds of education, culture, and economic aid and development through his Open Society Fund and the Soros Foundation.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. 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, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR RELATED INSTRUMENTS MENTIONED ABOVE.

Author: Ken Utau

Data Scientist, Markets Analyst and Food Lover

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