Archives for category: PE10
airport bank board business

LOL. I didn’t mean to choose a pic of such an exotic exchange.

 

We’re heading deep into the 3rd quarter of the year. The STI’s been largely directionless while U.S. markets have continued to hit new highs. Nothing surprising here as markets outside of the U.S have been weak since the start of the year. It also reminds me of a post by Ben Carlson on how U.S. markets and World Markets don’t exactly have a one-to-one correlation. In fact, the correlation can sometimes be negative. A good reminder of why we need to be diversified beyond our home markets.

Having said that, it does mean that other markets are cheap relative to the U.S. If that’s the case, then where should you put your money?

I think the answer’s fairly obvious.

Check out the PE10 stats here.

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Photo by Pixabay on Pexels.com

 

I’ve written about this before but here are what I consider the latest signs that we’re in the later stages, rather than the beginning to mid-stages, of the credit & business cycle. First, here’s Josh Brown’s take on it (emphasis mine):

I’ve never seen a seller’s market quite like the one we’re in now for privately held companies. In almost any industry, especially if it’s white collar, professional services and has a recurring revenue stream. There are thirty buyers for every business and they’re paying record-breaking multiples. There are opportunities to sell and stay on to manage, or sell to cash out (and bro down). There are rollups rolling up all the things that can be rolled up.

He goes on to explain why private equity (PE) firms, flooded with cash, can’t sit still and chill out. Do go over to the link and read the whole thing.

Reading the Signs

But also consider the following:

Those are anecdotal but all of the above can only happen if markets are rising and credit is loose. These conditions also mean that investors have to be optimistic about the kind of returns that they get.

When there’s more money chasing available assets, it bids the price of these assets up and the only way that the assets can provide the same return is if the asset’s earnings power increases. This is typically a strategy based on hope and optimism. Conversely, the best time to buy is at the depths of the market when pessimism is everywhere because that strategy is based on things getting less bad which is much more realistic.

What Conservative People are Doing

Another good cue is to see what more conservative investors do. Unknown to many investors, Warren Buffett wrote long-term equity-indexed put options from 2004-2008 and these options have started to expire, and Berkshire Hathaway has also unwound some of their other derivative exposures. Now, while Buffett constantly exhorts that it’s futile to time the market, he’s no stranger to letting cash build up when he cannot find good deals.

This is the crucial difference that many people do not understand. What Warren Buffett means is that he cannot predict whether the markets will go up or down on a certain date and time but what he does is judge whether a deal presented to him is likely to provide a satisfactory rate of return. Whether the rate of return is likely to be satisfactory depends greatly on valuations, which in turn depends greatly on the state of credit and optimism in the markets.

If Buffett is letting cash build up, what do you think he thinks about current valuations in the market?

What does it say about the Singapore Markets?

Of course, valuations in the U.S. markets may be high but what about Singapore? After all, the local market has been beaten down pretty badly since the start of the year. Many local investors are probably also feeling the pain because of how badly seemingly conservative stocks like SPH and Singpost have been beaten down by the market.

Also, if you check out the Cyclically-Adjusted Price-to-Earnings (CAPE or PE10) ratio of the STI, it is currently under the historical average and median which means that for long-term investors, the STI is not necessarily expensive. However, if U.S. markets drop, remember that local markets will not be immune to negative sentiments.

 

Let me know your thoughts on the markets in the comments below.

Following a reader’s comments on the STI PE10 data, I’ve decided to make it available for download. If you go to the site, you’ll now notice that I’ve added a “Download Data” button in the ‘Background’ section.

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Have fun with the PE10 data. It’s something I’ve compiled every month for the last 5-6 (?) years.

There are five pieces of data in the file:

(1) the STI close,
(2) the PE  ratio,
(3) the date,
(4) the implied earnings, and
(5) the average 10-year earnings.

(1), (2) and (3) are self-explanatory. You may find some discrepancies with actual data as there were certain months that I failed to update the data in time and therefore had to extrapolate the data, or I updated a day or two later than I was supposed to. However, for all intents and purposes, it should reflect the PE10 fairly accurately.

(4) and (5) are calculated based on (1) and (2). In order to get an average of the past 10 years’ earnings, I need the current earnings. This is where the “implied earnings” is easily calculated by taking (2) divided by (1). With (4), you can then calculate (5). The PE10 which is not in the file is then simply (1) divided by (5).

Some people may prefer to use an exponential moving average of 10-year earnings or you want to adjust earnings for inflation like Shiller does. Feel free to use the data as long as it’s not for commercial purposes.

If you find anything wrong with it, feel free to let me know.

 

 

In case you haven’t heard about it, I have an STI PE10 site that will track the STI PE10 and generate some simple statistics.

And I’ve updated it! It now displays a chart showing the STI’s PE10 versus its closing price all the way back till 2003.

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Here’s what you’ll see on the site. Generated the chart using chart.js

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It’s not much but I’m proud to say that it works and I made it from scratch (with a lot of dependencies and googling)

 

Finally, I got down to creating a page for the Straits Times Index’s PE10. Right now, it’s very simple. it just displays the latest month’s PE10 as well as the historical average and median values.

I’ve picked up coding for some years now but my progress was and still is, slow. However, it looks like I learned enough python and javascript to create a page where I can share the STI’s PE10. The page will be updated monthly.

What I did is really hacky because:

  1. I have to manually key in the STI closing price and PE.
  2. Run a python script locally to process the latest entry, calculate the PE10 and output to a json file.
  3. Upload the json file to the server for the page to retrieve the data, do some calculations for the average & median, and display it.

At some point, I hope to add a chart to the page so you can track how the PE10 has changed over the years and the subsequent capital gains based on a certain year’s PE10 ratio.

You can check out the page here or from the list of resources on my blog.

If you have any tips on how I can improve the page, please let me know in the comments below.

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Markets have been hit. Are you worried?

 

So, in February I wrote this:

I’m not out of the markets because I believe timing it is a futile exercise but I moved more money to cash/bonds as valuations got higher. In fact, I stopped buying anything after Feb last year.

This week, no thanks to the government increasing the Additional Buyer Stamp Duty (ABSD) on the sale of property, the markets fell roughly 2% on Friday alone. The STI is now down some 268 points or roughly 8% from the start of the year. From the highs of 3,577 reached in April, the market is now down 11.7% which puts us firmly in correction territory.

As mentioned in my February post, I stopped buying into the markets since February of 2017 as things were getting expensive and I basically enjoyed the ride up. I also started trimming some positions towards the end of 2017 as markets climbed. Selling UMS at what was nearly the peak for it netted some accounts a nice profit.

In case, you’re thinking that I made out nicely, I haven’t.

A couple of stupid decisions, like not selling Venture at its peak (I actually placed the order to sell it at $28 but it didn’t get filled) and not selling Starhub at all (this could be one for the history books) meant that my portfolio has been hammered somewhat. Not knowing when to sell has been one of my weak points and still continues to haunt me.

However, what I’m much better at is knowing when to buy. Thankfully, I’m (relatively) young and therefore being a net buyer is still the right way to go. By all the measures that I’m tracking (e.g. CAPE for the STI, difference between PE10 yields and the 10 year government bond, and some trend indicators), it appears that a buying opportunity is starting to appear.

A word of caution. Things are NOT dirt cheap based on valuations. We have seen cheaper valuations in late ’08-09 as well as ’16-early ’17. What many people don’t realise is that the market was much cheaper in early ’17 compared to mid ’10-’11 despite them being roughly at the same levels. This is because earnings had risen from 2011 to 2017 while prices barely rose.

This is the mistake that my senior colleague made. He was anchored on the price of the market and therefore, a level of 3,000 looked expensive to him in early 2017. This caused him to basically miss out on the upswing in markets in 2017.

If you think things are going to be as bad as they were in 2009, then based on current normalised earnings, the STI should bottom out somewhere around the 2,700 level. Expecting the STI to hit 1,500 as it did in the depths of the Global Financial Crisis is expecting the market to be hit CAPEs of 6x! That’s probably even lower than levels during the Asian Financial Crisis.

 

What do you all think? Let me know in the comments below.

STI Close: 3,529.82
PE10: 14.38x

The run-up in the STI has really caused valuations to jump quite a bit. With the PE10 at 14.38x, the earnings yield is now below 7%. Furthermore, a spike in the 10-yr bond means that difference in yield between the PE10 and 10-yr Singapore Bond has fallen significantly below 5% for the first time since August 2015.

Given the pullback in US and EU markets on Friday, I suspect we’ll see a much weaker STI on Monday. Anyway, at this level, things aren’t looking attractive. I’ll consider loading up on more equities if the STI goes down to 3,200 or less.

Meanwhile, sit tight and hang on for the ride!

It’s been a long time since I published this. A couple of data points missing so I had to fill the missing points.

Anyhow, not sure if the CAPE is so efficient any longer as we’ve been seeing pretty low 5-year CAGR returns for PE10’s less than 15x but it is what it is. CAPE is supposed to be more indicative of 10-year CAGR returns anyway so 5-year may be missing the point. Unfortunately, our markets don’t have enough data to provide any insight on 10-year returns.

So for what it’s worth, here goes:

STI Close (on 29 Dec 2017): 3402.92
PE10: 13.88x

STI close: 2846.37
PE10: 11.8x

So the big news affecting the markets was the Brexit (UK’s exit from the EU) and that really hit markets on Friday when the results of the referendum were released. I was overseas but had Wifi and saw  markets in Asia get hit with some huge downs like Japan down 7 or so percent. The pound also took a huge hit and European markets all felt the effects of the vote. No surprise that when US markets opened that night, they were hit as well.

What was surprising was the speed of the recovery. The STI wasn’t really down much and from Tuesday (28th June) began a modest recovery. I was really anticipating further hits to the market (or maybe they have yet to come) and added very small positions.

The main point is, if I was away till yesterday or today and didn’t have access to the market, the whole impact of the Brexit wouldn’t have been felt at all! Overall, my portfolios have been doing nicely despite the horrendous start to the year and much credit goes to my investment plan.

Half the year’s over. How’s your portfolio doing?

STI close:2,629.11
PE10: 10.97x

What a difference a month makes!

January was horrible to say the least. China, although already in a bear market, could have qualified for a bear based on January alone. By the way, the bloodletting in the region wasn’t any better. As far as I’m concerned, all markets off their recent highs by 20% or more are in bear markets too which means that Singapore qualifies.

Going by my previous post, there is still room for a further drop. However, this doesn’t mean that it will happen. Nor does it mean that you will be prescient enough to recognise the bottom.

If you’re like me, then just stick to your plan.