Predicting Price Earnings Ratio

By using regional equity indices’ trailing price earnings ratio (PER), can we form a predictive P/E range for a particular equity index? Let’s explore this question by using Malaysia’s FBMKLCI as the base index and comparing the index to its regional equity indices in the ASEAN region, e.g JCI, SET, STI and PCOMP.

Time Series View.png

As shown above, it is visually evident that the rise and decline in PER of the indices generally move in tandem with each other.

In a multiple regression analysis (shown below), the regional indices’ PER bear statistical significance on FBMKLCI’s PER:

Results_MultipleRegression.png

Therefore, based on this statistical relationship, the predicted PER range (with 95% confidence interval)  for FBMKLCI is 15.96x – 18.30x. The current actual PER of 17.31x is within this established confidence interval range and is marginally above than that of the predicted PER of 17.13x.

 Actual vs PredictedForecastRange

 

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Author: Ken Utau

Markets Observer + Food Lover

1 thought on “Predicting Price Earnings Ratio”

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