STI close: 3391.20
PE10: 14.4

HSI close: 24,507.05
PE10: 15.59

I’ve begun tracking the HSI PE10 as well because the question of the PE10 for the Hang Seng was brought up by a good friend. Also, recent thoughts are that I should diversify away from the SG market and well, the HK stock market frankly isn’t a bad choice- tax considerations wise as well as the economic hinterland of China should mean that HK businesses have lots of middle class people to cater to for some time to come.

The other aspect of it is to see if the PE10 works for other markets. After all, the SGX may be an anomaly. Good thing is that the HKex has monthly PE and dividend yield data on their site and it goes way back to 1973. Problem is that Yahoo! only has price data starting from december 1986 so my PE10 only starts from 1996.

Otherwise, I’m happy to say that the PE10 seems to work very well for the HSI as well. Take a look at this.

Strong negative correlation between PE10  and subsequent 5yr CAGR

Strong negative correlation between PE10 and subsequent 5yr CAGR

As you can see, the higher the PE10, the lower the subsequent annual returns over a five year period. Why five year? Because the short term returns doesn’t seem to matter with regards to the PE10. I tried calculating the 1 year, 3 year, 5 year and 7 year returns. 5 years seems to be the minimum for predictable returns to start to show up. Plus it gives me a lot more data points to work with.

As far as other markets are concerned, I’m not sure how well the PE10 works. I know for certain that it doesn’t work as well for the S&P 500 because of the crazy valuations that occurred during the dot-com boom. That skewed the entire valuation range upwards such that PE10 of 20-something was no longer considered expensive even though the inverse would show that implied yield based on the PE10 was less than 5%.

Having said all this, the PE10 isn’t the be all and end all but so far, it’s been a pretty good indicator of where the market will be five years on.