SHCOMP overvalued?

 

In terms of price earnings ratio (“P/E”), the SHCOMP is trading at a differential premium of 144.2% against HSCEI. Is SHCOMP overvalued?

In terms of P/E, Hang Seng China Enterprise Index (“HSCEI”) usually trades at at a discount to the Shanghai Composite Index (“SHCOMP”), possibly due to “closed system” of SHCOMP as well as different constituents for both indices.

Currently, HSCEI is trading at trailing P/E of 5.97x against SHCOMP that is trading at relatively higher PER of 14.58x. The following 10-year historical P/E graph shows that HSCEI is already trading closer to its all time low P/E of 5.81x. As for SHCOMP, it is trading at relatively higher than its all time low P/E of 9.61x.

HSCEI vs SHCOMP PER.png

The following graph will show the premium / discount of SHCOMP against HSCEI:

HSCEI vs SHCOMP PER Differential.png

SHCOMP may be potentially overvalued as the premium of SHCOMP (against HSCEI) has shot way above the mean premium differential of 56.4% in year 2015 (with a current differential premium of 144.2% against HSCEI).

Assuming a mean differential premium of 56.4%, it is envisaged that the SHCOMP may trade at a P/E of between 9.09x and 12.51x, translating into implied SHCOMP index range of between 1,722.8 and 2,372.2

HSCEI PER (x) 5.81 5.97 6.50 7.00 7.50 8.00
Mean Premium 56.4% 56.4% 56.4% 56.4% 56.4% 56.4%
SHCOMP PER (x) 9.09 9.34 10.17 10.95 11.73 12.51
Implied SHCOMP Index      1,722.8 1,770.2 1,927.4 2,075.6 2,223.9      2,372.2
Note – SHCOMP currently trades at 2,736 (as of 5 Feb 2016)
Key implications: Dissecting the various components of the indices will yield clearer underlying reasons for the valuation differences between SHCOMP and HSCEI.

 

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How low will Ringgit drop?

In the past two years, we have seen significant correlation between ICE Brent Crude oil price and MYR, providing a high degree of predictability for MYR based on movement in ICE Brent Crude oil price

Statistical Inspection

The available daily prices of MYR/USD and ICE Brent Crude oil are extracted from 1 Jan 2014 till 2 Feb 2016 and a simple regression analysis is performed:

MYR vs Brent ICE.png

The statistical outcome is as follows:

A linear trend model is computed for Myr/Usd given ICE Brent Crude. The model may be significant at p <= 0.05.

Model formula: ( ICE Brent Crude + intercept )
Number of modeled observations: 534
Number of filtered observations: 0
Model degrees of freedom: 2
Residual degrees of freedom (DF): 532
SSE (sum squared error): 0.0855409
MSE (mean squared error): 0.0001608
R-Squared: 0.81583
Standard error: 0.0126803
p-value (significance): < 0.0001

Individual trend lines:

Panes Line Coefficients
Row Column p-value DF Term Value StdErr t-value p-value
Myr/Usd ICE Brent Crude < 0.0001 532 ICE Brent Crude

0.0009849

2.029e-05 48.5452 < 0.0001
intercept 0.206827 0.0015934 129.802 < 0.0001

Given the statistical significance of the regression analysis (R-squared of 0.81583 and p-value of <0.0001), we could derive a simple formula to predict the movement of Ringgit based on the movement of ICE Brent Crude Oil:

MYR/USD = 0.0009849 x ICE Brent Crude Oil Price (USD/bbl) + 0.206827

What is the forecast range of Brent Crude Oil?

Scenario 1: USD40-60

http://www.bloomberg.com/news/articles/2016-02-08/world-s-largest-energy-trader-sees-a-decade-of-low-oil-prices

Vitol CEO says crude to stay between $40 and $60 for 10 years

Scenario 2: USD25-40

Forecast Actual Q1/16 Q2/16 Q3/16 Q4/16 2020 Unit
Commodity 30.34 29.8 28.2 26.6 25.1 37.6 USD/BBL

Scenario 3: USD1o or USD20

http://www.moneycontrol.com/news/commodity/when-will-crude-oil-hitbottom_5064741.html

What is the forecast of Ringgit?

Based on the forecast range of Brent Crude Oil of between USD10/bbl and USD60/bbl, we may see the Ringgit possibly trading between RM3.76 and RM4.62:

MYR vs Brent sensitivity

Key Implications

This is a simple desktop analysis. Foreign exchange movements are subject to numerous macro factors. Nevertheless, given the significance of the statistical relationship, this allows us to forecast a broad predictable range for the Ringgit.

 

DISCLAIMER: THIS SITE IS 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.

Finding the bottom of the Straits

Singapore’s Straits Times Index has fallen significantly from a peak of more than 3,500 back in early 2015 to 2,632 (at present). So, where is the bottom?

As the Straits Times Index (STI) has fallen more than 20% from its peak, it is considered as a “bear market”. Short sellers are currently shorting this market (refer to: https://us.rd.yahoo.com/finance/external/cnbc/SIG=112m5g707/*http://www.cnbc.com/id/103355868?__source=yahoo%7cfinance%7cheadline%7cheadline%7cstory&par=yahoo&doc=103355868)

Seriously, where is the bottom?

Technical analysts may use different indicators to project the final bottom. One may use Support lines to project future rebounds. We may see strong support at 1,600-1,800 (that coincides with the 2008 financial crisis).

SGX_9 Feb

I do believe in technical analysis. However, I am more of a fundamentalist. Let us frame the STI from fundamental perspectives:

A simple question – what is your view on the long term future GDP of Singapore?

I am not a qualified economist. Keeping things simple, just trust someone else to do the job. For desktop forecast, please refer to http://www.tradingeconomics.com/singapore/gdp-growth/forecast

SG GDP Forecast

Frankly, it is not unreasonable to assume the long term GDP growth rate of Singapore to range about 2.0 – 2.25%.

So what is next:

We may employ the method Justified P/E to determine the fair value of STI. Refer to http://seekingalpha.com/article/3239016-justified-p-e-ratio-why-its-my-go-to-valuation-tool?page=2

Justified P/E is based on the formula:

Fair P/E = (1-Div Payout) x (1 + Growth Rate) / (Cost of Equity – Growth Rate)

Let’s analyse the current components of STI index

STI Components 9 Feb 2016

From the above table, STI is currently trading at P/E of about 11.55x, P/B of 1.09x, Div Yield of 4.11% and div payout of 47.41%.

What is a fair PE for STI:

  1. Based on the justified PE formula, the implied current growth rate is 3.95% (based on dividend payout of 47.41% and assumed cost of equity of 8.7%)
  2. If we assume the long term growth rate of STI to equate the forecast GDP growth rate of 2.0%, we may see the fair value of STI to be around 1,821.78
  3. If there is slight optimism in global outlook and somehow people believe that Singapore can achieve 4.50%-5.0% in terms of GDP growth rate, we may see a positive rebound in the STI to a range of between 2,980 and 3,400.

Summary SGX

Key Implications

This is a quick-and-easy method in predicting the fair value for the index. Hence, it will be prone to errors. For future research, I would dwell into the detailed analysis of each of the component stocks of the STI index in order to have a detailed forecasting of the STI index. Since Singapore is an open economy we should continue to monitor the macro indicators.

 

DISCLAIMER: THIS SITE IS 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.

Time Is Running Out For Japan

Imminent financial crisis of Japan

Japan is the country with the highest Debt/GDP and is currently running a fiscal deficit. How long will it be able to withstand?

Currently, Japan has the highest Debt/GDP and is running a fiscal deficit. As per the table below, Japan is similar to other countries that are facing serious financial problems: Venezuela, Egypt, Brazil and Greece (countries that are in the most left-upper quadrant have high debt / GDP and are running fiscal deficit)

Japan

The Bank of Japan blindsided global financial markets Friday by adopting negative interest rates for the first time ever, buckling under pressure to revive growth in the world’s third-largest economy. http://www.cnbc.com/2016/01/28/bank-of-japan-adopts-negative-interest-rate-policy-reuters.html

However, will it work?

Refer to https://www.quora.com/Why-does-Japan-have-so-high-debt-GDP-ratio-Will-it-default-like-Greece

  1. Japan has a very high debt to GDP partially because it has attempted to use fiscal stimulus (i.e. paving roads) to jump start its economy over the last two decades. In addition, up until this point most Japanese Government Bonds (about 90%) are held by citizens of Japan, and this has allowed it to take advantage of extremely low interest rates. Low interest rates mean that Japan does not have very high interest payments in relation to it’s level of debt.
  2. The two factors which are likely to most significantly impact the Japanese ability to repay its debts in the future are it’s demographics and it’s economic growth
  3. The Japanese population peaked in 2010 and is now declining. In addition, an increasing proportion of its population is elderly. This, of course, means fewer working age people which means more difficulty growing GDP. More significantly, though, this also means that there are fewer people to finance Japan’s massive debt within the country. In particular, much of Japan’s debt is financed through Japanese citizens’ savings which are channeled through things like pension funds and life insurance.
  4. As the Japanese populace ages, people are going to start withdrawing from these funds making it increasingly difficult to finance the debt within the country. At the same time, the savings rate for younger people in Japan is also falling indicating that the fewer younger people in Japan will also not be contributing as much per person to financing the Japanese debt as in the past. Instead, Japan will have to venture out into the broader world in order to roll over it’s massive debt. This is likely a gradual process, but it seems likely that at some point enough debt will be held by non-Japanese citizens that Japanese Government Bonds will become susceptible to interest rate fluctuations similar to many other countries. At that point, Japan may start having difficulties paying back it’s debts.

In terms of technological innovation / competitiveness, is Japan falling behind Korea? We see Japanese firms folding up, whilst Korean companies are fast exporting their products globally.

Key Implications

Time to short Japan?

 

 

DISCLAIMER: THIS SITE IS 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.

August: Negative month for FBMKLCI?

Market anomalies in FBMKLCI

The probability of achieving positive monthly movement in August is relatively lower than the rest of the months in a year for FBMKLCI

Compiling FBMKLCI index data from year 2004 till 2015 and sorting them into monthly movement. The following table illustrates:

  1. Only 25% probability of achieving m-o-m positive movement in the month of August, lower than annual average of 63.9%;
  2. Month of August has the highest average m-o-m negative movement of 2.0%;
  3. Both month of October and December have the highest probability (at 83.3%) of achieving of positive m-o-m movement  

FBMKLCI_Aug Month

Possible reasons for such anomalies for FBMKLCI:

  1. Most of Q2 corporate earnings would have been announced by August, thereby presenting a clearer basis for revising consensus for the remaining months of the financial year
  2. Presentation of Malaysian budget in Oct as well as  year end window-dressing will yield positive movement for FBMKLCI in October and December respectively
  3. Perhaps, investors’ behaviour (?) – see New Zealand case study as per http://www98.griffith.edu.au/dspace/bitstream/handle/10072/35737/66356_1.pdf?sequence=1

Key Implications:

  1. Long term portfolio strategy will normalise anomalies
  2. Short term trading opportunities may exist by going long / short in certain months
  3. To consider analysing data in other indices whether such anomalies exist
Disclaimer: This site is 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.