Is S&P 500 About To Reverse?

The S&P 500 index has recently reached its all time high level, buoyed by US economic optimism (?). http://www.usatoday.com/story/money/markets/2016/08/11/stocks-dow–sp500-thursday-wall-street/88557406/

Overbought signals are clearly present in the MACD indicator.

S&P500.jpeg

Fundamentally, we have seen the current 30 day average trading P/E of 20.17x exceeded the long term historical P/E (since 1998) of 19.43x.

PER.png

In terms of price to book ratio, the current 30 day average trading P/B of 2.83x approximates the long term historical P/B (since 1998) of 2.94x.

PBR.png

The current dividend yield of 2.10% is below that of its long term historical average dividend yield (since 1970) of 2.93% (signifying potential overvaluation).

Div Yield.png

Final Words

Investors should monitor the S&P 500 index closely and trade with caution, as the index appears “overvalued”.

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, 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 INSTRUMENTS MENTIONED ABOVE.

Where Is The Dividend?

Malaysia-based utilities player, Ranhill Holdings Berhad (Ranhill) has recently announced its latest Q2FY16 result on 5 August 2016. As per the announcement, there was no mention of any interim dividend to be declared. Ranhill has been trading sideways / range bound as there is no major positive catalyst coming out from this company. As the Company is in the utilities sector, dividend yield is an important investment merit for the investors. It is not unusual that investors are anxiously waiting for this Company to declare its maiden dividend since its successful listing on Bursa early this year.

Untitled.png

As per the notes to the latest quarterly result, the Company is in the midst of sorting out its guarantee arrangement with its Guarantors with respect to its existing Sukuk programme. We believe that once this matter has been sorted out, this may potentially facilitate future dividend payments by the Company.

notetoacc.png

Assuming the Company is able to declare dividends for FY16, the following is a high-level desktop estimate of projected dividend for the Company:

Est Div FY16.png

Our key assumptions:

  1. Assuming a dividend payout ratio of between 50% – 70%
  2. Q3 and Q4 FY16 are based on Q2 FY16 PATMI (excluding the effects of negative goodwill)

Whilst investors are waiting for the maiden dividend to be declared by the Company, the comforting point is that Ranhill has the backing from institutional investor such as Lembaga Tabung Haji (LTH). As shown below, LTH has been gradually accumulating its position in the Company:

change in shareholders.png

LTH currently holds 6.592% of total shareholding in Ranhill.

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, 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 INSTRUMENTS MENTIONED ABOVE.

 

Buying Insurance Against Fallout In The O&G Sector

We have recently seen continuous flow of bad news from the Oil & Gas sector in Singapore:

Further, crude oil may be falling again. http://www.usatoday.com/story/money/markets/2016/08/03/crude-oil-prices-may-back-skids/87454152/

It is time to maintain cautious stance toward the O&G sector and to consider hedging (i.e “buying insurance”) against further possible fallout in the Malaysian O&G sector. One such instrument that may be considered for the purpose of hedging is SKPETRO-HD (5218HD), a structured put warrant on Sapurakencana Petroleum (a Malaysian listed O&G company). Extracted from Malaysia Warrants the following are key features of this structured warrant:

 

MQ Terms.png

Since mid 2015, SKPetro’s share price has been on a downtrend:

SKpetroGP.png

Target analysts’ price for SKPetro ranges from as low as RM1.20 to RM1.90.

SKpetro target.png

A higher volatility of the underlying as well as a lower share price of underlying will increase the share price of the structured put warrant, SKPetro-HD. In a nutshell, one should not consider buying a warrant when volatility is high (i.e should buy before volatility rises).

As shown below, the YTD historical volatility (10D,30D,50D and 100D) have recently trended lower, below that of average historical volatility of approximately 46%.

YTD HisVol.png

From a different angle, the following graph shows the proportion change (YTD) for the historical volatility of SKPetro has fallen below 1.0 (since 1 Jan 2016), thereby showing a lower recent volatility.

YTD HisVol Prop.png

As for the implied volatility of SKPetro-HD, the current implied volatility of 70% approximates the average implied volatility (since the first issuance date of SKPetro-HD) which is approximately 70%.

ImpVol.png

With the implied volatility of SKPetro-HD approximating its historical average and historical volatility of the underlying is relatively lower than its average, this may present potential opportunity to consider this instrument.

Assuming the following parameters:

  1. Implied volatility of 70% (based on average implied volatility)
  2. Underlying share price of RM1.20 (as per the lowest target price by analysts)
  3. Assuming underlying touches RM1.20 as of 30 September 2016

The possible theoretical price range of SKPetro-HD is computed based on the warrant calculator from Malaysia Warrants

Calc.png

At current ask price of SKPetro-HD of RM0.10 per warrant, we may be able to achieve a 15% return on investment (should the warrant price increase to RM0.115).

Final Words: It is important to note that this is a simple desktop analysis. Further bad news in the O&G sector will drive the volatility of the underlying, which may translate into higher implied volatility for the SKPetro-HD. Nevertheless, based on past trading volume of SKPetro-HD, it has a very low trading volume, thereby questioning the appropriate fair value to be accorded for this instrument.

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. 

Alarming Household Debt

Background

Household debt is defined as the amount of money that all adults in the household owe financial institutions. It includes consumer debt and mortgage loans. A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and subsequent European economic crises of 2007–2012. Several economists have argued that lowering this debt is essential to economic recovery in the U.S. and selected Eurozone countries.

Household debt rose as living standards rose, and consumers demanded an array of durable goods. These included major durables like high-end electronics, vehicles, and appliances, that were purchased with credit. Easy credit encouraged a shift from saving to spending.

Households in developed countries significantly increased their household debt relative to their disposable income and GDP from 1980 to 2007 — one of the many factors behind the U.S. and European crises of 2007–2012. Research indicates that U.S. household debt increased from 43% to 62% of GDP from 1982 to 2000.[5]

U.S. households made significant progress in deleveraging (reducing debt) post-crisis, much of it due to foreclosures and financial institution debt write-downs. By some measures, consumers began to add certain types of debt again in 2012, a sign that the economy may be improving as this borrowing supports consumption.

https://en.wikipedia.org/wiki/Household_debt

Reference Materials – Household Debt

A rise in the household debt to GDP ratio predicts lower output growth and a higher unemployment rate over the medium-run.

http://faculty.chicagobooth.edu/workshops/macro/pdf/MianSufiVerner_worlddebt.pdf

The Great Recession was particularly severe in economies that experienced a larger run-up in household debt prior to the crisis. A further negative effect on economic activity of high household debt in the presence of a shock, postulated by numerous models, comes from the forced sale of durable goods. For example, a rise in unemployment reduces households’ ability to service their debt, implying arise in household defaults, foreclosures, and creditors selling foreclosed properties at distressed, or fire-sale, prices. Estimates suggest that a single foreclosure lowers the price of a neighboring property by about 1 percent, but that the effects can be much larger when there is a wave of foreclosures, with estimates of price declines reaching almost 30 percent (Campbell, Giglio, and Pathak, 2011). The associated negative price effects in turn reduce economic activity through a number of self-reinforcing contractionary spirals. These include negative wealth effects, a reduction in collateral value, a negative impact on bank balance sheets, and a credit crunch. As Shleifer and Vishny (2010) explain, fire sales undermine the ability of financial institutions and firms to lend and borrow by reducing their net worth, and this reduction in credit supply can reduce productivity enhancing investment. Such externalities—banksand households ignoring the social cost of defaults and fire sales—may justify policy intervention aimedat stopping household defaults, foreclosures, and fire sales. The case of the United States today illustrates the risk of house prices “undershooting” their equilibrium values during a housing bust on the back of fire sales. The IMF staff notes that “distress sales are the main driving force behind the recent declines in house prices—in fact, excluding distress sales, house prices had stopped falling” and that “there is a risk of house price undershooting”.

https://www.imf.org/external/pubs/ft/weo/2012/01/pdf/c3.pdf

United States

US_HSD.png

US’s household debt-to-GDP hits as high as more than 95% before the global financial crisis hit in 2007-2008. Since recession, there has been significant deleveraging within the US financial sector.

http://www.tradingeconomics.com/united-states/households-debt-to-gdp

Greece

Greece experienced its highest household debt-to-GDP ratio of close to 65%. On June 30, 2015, it became the first developed country to fail to make an IMF loan repayment.

greece-households-debt-t.png

Malaysia

Malaysia’s and Thailand’s household debt to GDP ratios have almost doubled between 2008 and 2015. Thailand’s ratio stands at about 80%.

household-debt-to-income_620_403_100.jpg

Bank Negara recently announced that Malaysia’s household debt-to-gross domestic product (GDP) ratio increased to 89.1% as of 2015 from 86.8%.

http://www.thestar.com.my/business/business-news/2016/04/02/household-debt-on-the-rise/

With recent massive retrenchment exercises in Malaysia (especially with the O&G sector), we are seeing an increasing rise in unemployment rate:

IUnemployment Rate_MY.png

Furthermore, Malaysia is experiencing a slowing GDP growth rate in tandem with domestic and global uncertainties.

MY_GDP.png

Final Words: It Is A Matter Of Time

Fitch downgraded Malaysia’s long-term local bonds’ credit rating to “A-” from “A” last week. The key factors now absent in Malaysia are strong public finance fundamentals against external finance fundamentals, and the erstwhile preferential treatment of local-currency creditors against the foreign-currency ones.

http://www.theedgemarkets.com/my/article/fitch-downgrades-petronas-long-term-credit-ratings-after-msias-downgrade

It is a matter of time when Malaysia’s high households debt to GDP will lead to significant problems in the domestic economy, including a likelihood of a recession in the medium term.

So when is the breaking point for Malaysia?

  1. When interest rate rises (unlikely the case at this juncture) : harder for Borrowers to meet debt service obligations
  2. Falling property prices : will affect collateral value pledged to property loans
  3. Falling GDP leads to increasing unemployment rate
  4. Rising NPLs, potentially resulting in the shutoff of credit environment
  5. Budget deficits and fiscal issues
  6. Global externalities

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. 

China’s Currency War

When China moves to lower the value of the yuan, others in the developing world follow suit. China’s currency moves also come at a critical time for the yuan: it was recently placed into the IMF’s group of elite global currencies. Chinese officials may not be starting a currency war, some experts argue. After all, they’re allowing market forces to have greater influence over the yuan now. By devaluing its currency, China gains an advantage in global trade. Its exports become cheaper, and more attractive, to foreign buyers. To stay competitive against China, its trade partners — mostly in Asia — devalue as well to maintain a cheaper currency.

http://money.cnn.com/2016/01/07/news/economy/global-currency-war-sparked-by-china/

Further devaluation may be possible as it is envisaged that China will experience slower growth in line with its historic shift of its economy to a more consumption- and service-driven.

What has happened to the Renminbi (RMB)?

We have seen significant depreciation in the RMB, since early 2014.

RMB_Trend.png

What is the outlook for RMB?

Slowing economic fundamentals, coupled with global uncertainties will create downward pressure on RMB to further devaluate.

http://www.chinabusinessnews.com/2835-heres-why-yuan-tumbled-to-its-5year-low/

What will be the impact on Ringgit Malaysia (MYR)?

Since China is a key trading partner to Malaysia, we may see a parallel devaluation in the Malaysian Ringgit in line with China’s move. In validating this point, a simple regression analysis is performed between MYR-USD (dependent) and RMB-USD (independent variable), whereby we saw MYR’s trading pattern is in tandem with the movement of RMB.

MYRCorr.png

Given the current exchange rate of RMB (6.68 against USD @ 25 July 2016), the MYR is currently trading at a fair value of RM4.0828 vs its forecasted value of RM4.0679, with a 95% confidence interval of between RM3.3817 and RM4.7541.

Forecast vs actual.png

The statistical relationship is summarised as follows:

Summary.png

Assuming RMB continues its devaluation path towards 7.10 (http://www.macrobusiness.com.au/2016/07/how-low-will-the-yuan-go-and-what-harm-will-it-do/), we may see further potential devaluation in the Ringgit Malaysia to MYR4.75 against the USD:

Target forecast MYRUSD  = -6.7812 + 7.10 (1.62472) = 4.75

 

 

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. 

Volume Matters

“The bottom is preceded by a period in which the market declines on low volumes and rises on high volumes. The end of a bear market is characterised by a final slump of prices on low trading volumes. Confirmation that the bear trend is over will be rising volumes at the new higher levels after the first rebound in equity prices.” (Napier Russell, Anatomy of the Bear: Lessons from Wall Street’s four great bottoms)

Volume analysis is an important consideration in determining whether the index is at the beginning of a rally or the end of a bear.

Historical trading graph and volume of Malaysia’s FBMKLCI is shown below:

FBMKLCI 23072016.jpeg

The volume of rises and declines of FBMKLCI is discussed as follows:

Rises Volume

RisingVol_FBMKLCI.png

2009 – end 2013: increasing rise volumes coincides with a bull run in the FBMKLCI

2014 – 2015: lower rise volumes coincides with a downward reversal in FBMKLCI

2015-2016: increasing rise volumes potentially mean the end of the bear market? To confirm this, we need to see a much higher volume to be followed by upward price movement

Declines Volume

DeclineVol_FBMKLCI.png

It works quite opposite to the Rise Volume. Nevertheless, we are currently seeing a lower decline volumes, which may potentially mean the end of the bear market with FBMKLCI.

Final Words

Trading volume is only one part of the entire equation. More importantly, the end of bear market should always be accompanied by positive catalysts / strong macroeconomic indicators.

 

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.

Keep Going Up?

The Stock Exchange of Thailand (“SET”) has recorded impressive return since the start of 2016, with its trading pattern backed by an upward trend line and support as per the 200D-MA.

Thai SET Index_Jul 16.jpeg

On a fundamental front, SET may appear overvalued, with its price-to-earnings ratio (PER) exceeding 20 times (which is significantly higher than its historical average of 14.45 times since 1989).

PER_Graph.png

From another angle, the price-to-book ratio (PBR) of the SET is currently at a reasonable valuation point of 1.86 times which is relatively lower than historical average of 2.20 times (since 1989).

PBR_Graph.png

In addition, the current dividend yield of SET of 3.29% is relatively higher than historical average of 3.02% (in another words, the valuation of SET appears reasonable at this point in time).

Div_Yield.png

The reasonable dividend yield of SET is supported by an increasing dividend payout ratio of SET since 2000:

Div_Payout.png

On a separate note, we are seeing a decreasing return on equity, ROE for SET (i.e below 10%). The higher dividend payout trend may have potentially led to lower funds being retained in the companies for business expansion / growth, which in turn will affect future earnings / profitability of the listed companies.

ROE_Graph.png

Furthermore, the market cap-to-GDP for SET appears to be on the higher side at this juncture (signifying potential overvaluation):

Mkt Cap to GDP_Thai.png

Statistical Test 1: P/E vs ROE

PER vs ROE_2.png

PER vs ROE_1.png

PER vs ROE_3.png

In summary – based on the relationship PER vs ROE, it appears that PER of SET of 21.96x is relatively higher than the forecasted PER of 18.64x (signifying potential overvaluation of SET)

Statistical Test 2: P/E vs Dividend Payout

PER vs DivPyt_2.png

PER vs DivPyt_1.png

PER vs DivPyt_3.png

In summary – based on the relationship PER vs Dividend Payout Ratio, it appears that PER of SET of 21.96x is relatively higher than the forecasted PER of 20.64x (signifying potential overvaluation of SET). The statistical relationship based on dividend payout ratio is relatively strong if compared to PER vs ROE.

Statistical Test 3: PBR vs ROE

PBR vs ROE_2.png

PBR vs ROE

PBR vs ROE_3.png

In summary, the statistical relationship of PBR vs ROE appears weak. Based on this statistical relationship, the current PBR of SET of 1.86x is marginally lower than its forecasted value of 1.97x.

Final Words

On a weight of “evidence”, SET appears potentially overvalued. Further, we may see future headwinds affecting the Thailand’s economy:

In the 2016 Thailand Economic Monitor released today by the World Bank, fiscal stimulus and tourism are highlighted as the key drivers of economic growth in Thailand, but the economy still faces headwinds on the path to a broad-based and sustained recovery. The slowdown has exposed structural challenges in implementing public investment, maintaining or raising export competitiveness, and addressing skills mismatches, the report said. The aging of the working-age population will begin to affect the Thai economy within the next five years. Kiatipong Ariyapruchya, senior country economist, noted that due to the issue of ageing, Thailand’s working population would shrink by 11 per cent from now until 2040, from 49 million to 40 million. He noted that major headwinds to the Thai economy would also involve a possible delay in mega projects as well as low export competitiveness. In the first quarter, public spending and tourism were major contributors of Thailand’s ecomic growth.

http://www.nationmultimedia.com/breakingnews/Thailands-economy-expected-to-grow-2-5-in-2016-30289300.html

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.