Yield Differential (Update: August 2017)

In this brief posting, I am going to take a quick look at the yield differential between Earnings Yield of FBMKLCI (i.e the inverse of FBMKLCI’s price-to-earnings ratio) and yield to maturity (YTM) of 5 Year AAA-rated private debt securities (PDS). The lower amount of yield differential (earnings yield minus PDS yield) may potentially indicate a higher risk of equity overvaluation.

The following graph shows the historical trend between earnings yield (FBMKLCI) and yield to maturity (5Y-AAA), whereby the earnings yield of FBMKLCI is usually at a premium to the YTM of 5YAAA:

KLCI vs 5YAAA.png

The following graph shows historical trend of yield differential. FBMKLCI is currently trading at yield differential of 1.66% (premium) which is relatively lower than historical median yield differential of 1.92% (premium):

YieldDiff.png

The following graph shows the historical distribution of yield differential with a mean of close to 2.0% premium:

Distribution.png

Distribution2.png

In a nutshell, based on the above hypothesised relationship (between earnings yield of FBMKLCI and YTM of 5YAAA), the FBMKLCI may not appear to be ‘overvalued’ as the current yield differential is not overstretched from its historical mean / median. Nevertheless, there are certainly other factors to be considered in determining whether an equity market index is overvalued or not. This positing is strictly for educational & illustrative purposes only.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY 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 MENTIONED IN THE ARTICLES.

Author: Ken Utau

Markets Observer + Food Lover

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