Fundsupermart.com
Licensed Custodian, Dealer and Financial Adviser.   CPFIS Registered Investment Administrator
 
Funds & Personal Finance  
Bookmark and Share
Share
Print
More
Two Screaming Buys To Hold For At Least One Year *Updated 29/12* November 22, 2011
Not because we say so, but because history is on your side if you do.
Author : Nick Tay


Untitled Document

Key points:

- Asia ex-Japan is currently at attractive levels
- PB ratios give an indication of how oversold a market is but are not a part of our research methodology because they are not sufficiently sensitive to market changes
- PB ratios are at screaming buy levels in two markets: Singapore (1.35 times) and Hong Kong (1.35 times) as at 18 November 2011
- Fundsupermart will track these two country’s PB ratios in this article and on our Facebook page for the rest of 2011

Two markets are screaming buys right now.

It’s not something you currently hear on the mainstream media. Many professionals are recommending their clients move their money into cash, fixed deposits or something supposedly safe. On that basis you could safely say that the above is going to be a fairly contrarian position to take. So how in the world did we arrive at such a position?

Our position isn't new. Way back in August, research updated Fundsupermart's investment outlook to reflect shifting macroeconomic realities.

But if you're still sitting on the fence on whether equities rally or rot, here's some additional thoughts to chew on. Two measures: price-book ratios and 1-year returns.

The price-book ratio is the ratio of an asset’s price to its book value. Book value is an accounting measure of an asset’s theoretical value. The price-book ratio is a measure to determine how much you are paying for an asset versus its value if the firm were to liquidate immediately. A reading of ‘1’ means an asset’s price is equal to its value stated on the balance sheet. When applied to indices, this refers to the weighted book value of the index’s constituents. 1-year return refers to the returns on an investment one year after the date of entry.

PB ratios aren’t something we monitor on a regular basis, but we have, however, used them on occasion when evaluating the financial sector, and they do come in handy when identifying extreme market valuations. The trouble with PB ratios is they very infrequently indicate extremes and their usefulness as an all-weather market analysis tool is limited. Hence they are not part of Fundsupermart’s research methodology.

Screaming buys only happen every few years or so. And corresponding PB ratios are similarly rare.

Now that we know what measures we’re using, let’s examine the data.

Charting the MSCI Asia ex-Japan

Chart 1 shows the MSCI Asia ex-Japan’s index-adjusted price book ratio against the 12-mth return from end-December 2001 till 17 November 2011.

Chart-1-MXASJ.jpg

By eyeballing the chart, one observation one can make is this: when PB ratio is less than 1.5 or so, 12-mth return is more likely to be positive than negative. As at 17 November 2011, the index-adjusted PB of the MSCI AxJ stands at 1.54 times.

To make this relationship clearer, I sorted the PB ratios from lowest to highest and plotted it against the corresponding 12-mth return in Chart 2.

Chart-2-MXASJ.jpg

Chart 2 illustrates the relationship between PB ratios and 12-mth returns. Simply put: buying at high PB ratios tend to correspond with negative or mixed 12-mth returns, while buying at low PB ratios tend to correspond with positive 12-mth returns.

And somewhere between 1.5 times to 1.6 times PB ratio is definitely an attractive level to buy into. But before you put your money into the first Asia ex-Japan fund that crosses your mind, we can go one better.

We’ve established Asia ex-Japan is attractive, and that there seems to be some relationship between PB ratios and 12-mth returns. It stands to reason that if the region exhibits this relationship, then markets within the region should also show a similar relationship.

We ran the numbers, and found two markets are currently at sufficiently low levels to warrant the ‘screaming buy’ label.

Screaming buy #1: Singapore

Based on the availability of price-to-book ratio data, we considered the period from 10 January 2008 to 17 November 2011. The STI (Straits Times Index) PB ratio versus 12-month return is shown in Chart 3.

Chart-3-FSSTI.jpg

First one must point out the limitations posed by a limited data set. We must acknowledge that PB ratio data only starts from 2008, and one should take this into account when drawing any conclusions about the data.

Having said that, the relationship seems quite clear – low PB ratios make for attractive entry points, high PB ratios make for unattractive entry points. Sorting the PB ratios from largest to smallest shows corresponding 12-month returns are positive for PB ratios up to 1.63 times. But data being limited, investors may see better results if they focus on a PB ratio of 1.45 times as an attractive entry point.

There are many Singapore funds available, and these include, Aberdeen Singapore Equity, Amundi Spore Dividend Growth, DWS Singapore Eqty Fd, United Growth Fund, JF Singapore A (dist) USD and Schroder Singapore Trust Cl A.

Key takeaway: The STI is a screaming buy at PB ratio of 1.45 times and below. As at 17 November 2011, the STI’s PB ratio stands at 1.33 times.

Screaming buy #2: Hong Kong

We considered data from end-December 2001 to 17 November 2011. The HSI (Hang Seng Index) PB ratio versus the 12 month return is shown in Chart 4.

Chart-4-HSI.jpg

Clearly, we can see a similar pattern - low PB ratios make for attractive entry points, high PB ratios make for unattractive entry points.

After sorting PB ratios from smallest to largest, we found corresponding 12-month returns positive up to PB ratios of 1.6 times. But with some near-zero 12mth returns around the 1.6 times region, investors may see better results if they focus on a PB ratio of 1.49 times or lower.

Currently, there are several options to gain exposure to Hong Kong. One way is through Allianz RCM HK Cl AT SGD – a HK equity fund. Another is through China funds with significant H-share exposure. These include Aberdeen China Opportunities, DWS China Eqty Fund Cl A SGD and HGIF Chinese Eq SGD AD, all of which have significant H-share exposure based on their latest factsheets (as at 17 November 2011).Key takeaway: The HSI is a screaming buy at PB ratio of 1.49 times and below. As at 17 November 2011, the HSI’s PB ratio stands at 1.31 times.

So there you have it – two screaming buys in Asia ex-Japan, which itself is an attractive region based on valuations.

But wait! This is important: don’t rush.

Don’t Rush, Enter Slowly

Fundsupermart has generally advocated taking positions through DCA (dollar-cost averaging), rather than lump-sum investing. The pros and cons between DCA and lump sum investing are beyond the scope of this article, but in general, DCA is better-suited for volatile markets, much like those we are currently experiencing.

Every week, for the next 2 months, we will update Table 1 with the weekly average index-adjusted PB ratio for Singapore and Hong Kong. We will also post the weekly average index-adjusted PB ratio on the Fundsupermart Facebook page. To stay updated, bookmark this article, or ‘like’ the article on our Facebook page.

Table 1: Weekly Average STI and HSI PB-ratio

Screaming Buy Level

1.45

1.49

Week of

Straits Times Index

Hang Seng Index

14 to 18 Nov

1.35

1.35

21 to 25 Nov

1.29

1.27

28 Nov to 2 Dec

1.31

1.31

5 to 9 Dec

1.32

1.37

12 to 16 Dec

1.28

1.32

19 to 23 Dec

1.27

1.31

16 to 29 Dec

1.28

1.33

source: Fundsupermart compilations, in SGD terms

Our aim is to help investors keep track of these two screaming buys – HSI at PB ratio below 1.49 times, and STI at below 1.45 times – and like our tagline says, help you invest profitably. Investors may use Table 1 as a guideline to entering these two markets at screaming buy levels. If the previous week’s average was below screaming buy levels, the current week is an opportunity to enter the market at similar levels.

But remember, this entry point is based on a holding period of at least 1-year. Investors should be aware that holding periods of less than a year do not exhibit the same degree of correlation with positive returns.

What happens after one year? Generally, the data has shown the longer you hold, the better your returns. But the important point is the minimum one year-holding period, and we will revisit these markets a year from now. Stay tuned.

You can reach Nick Tay via email, Facebook and Google+, or leave a post on the Fundsupermart forum. I promise to read all feedback, and will make every effort to respond where possible. If you found this article valuable, I humbly request you share it with three other people – but only if you think it’s worth sharing!


iFAST and/or its licensed financial adviser representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.


 
RELATED FUNDS
Schroder Singapore Trust Cl A (Dist) SGD
United Singapore Growth Fund
Aberdeen Singapore Equity
Aberdeen China Opportunities
Deutsche China Eqty Fund Cl A SGD
Deutsche Singapore Eqty Fd
JPM Singapore A (dist) USD
HGIF Chinese Eq SGD AD

Live Chat