Wednesday, October 29, 2008

Risk-Reward Ratio Improving

Let's look at valuations. Asia's valuations have reached 1.2x P/BV. That figure is all of Asia minus Japan as Japan is a weird animal on its own. Earlier this year the valuations went as high as 3x P/BV, thus Asia as a whole has corrected severely. The question is whether it can go down some more. Well yes of course it can go down some more, there is always 0.00 to that P/BV figure.

The biggest crises for the past 40 years in Asia had been in 1982 and 1998 and during those times the P/BV went as low as 0.9x. Will we get there? I don't think so. I think we are pretty close to the bottom give or take 10%.

Its interesting to also look at what the Asian investment banks are weighting Asia as a whole with the "new clearance prices". Most are putting just 4 countries in the Overweight category, in order of attractiveness and weightage: Korea, Taiwan, HK and Malaysia. The countries getting the biggest Underweighting are: China, India and Singapore. As for sectors, most analysts prefer to look for bargains in: telecommunications, then banks followed by information technology. The ones that should be the LAST on anyone's buy list should be: construction materials, consumers, real estate and energy related counters.

Just how big is the financial mess we are in and why it is so prevasive. Much of Asia did not even touch those bloody CDS or CDOs, why are we like a pinyata in a Mexican party full of drunks. According to some estimates, this crisis is about twice as big as the Japan financial crisis back in the 90s and 3 x bigger than the US savings and loans bailout. Fair enough but it should not wipe out so much from Asian markets, should they? If Asia was part of the culprits dabbling in those instruments, then yes. Because then you would be seeing a significant amount of "capital being decimated" and wealth being destroyed overnight. The capital and wealth destruction were mainly in the US and Europe.

Some countries which may not be part of that mania but had problems of their own, including Russia, Iceland, Pakistan and Korea, may collapse as well under the distressing scenario. As for the rest, the flight to safety and confidence crisis are not "solid enough reasons" to whack the rest of the world with.
We still have our domestic economy. Yes, our exports will be affected and property values will drop but surely it cannot be anything like the 1997-2000 financial implosion for us as then we were directly responsible, and we saw huge amounts of wealth and capital being depleted.

As for Malaysia our markets is trading at 1.5x P/BV now, which sticks out like a sore thumb when compared to the 1.2x P/BV for Asia (ex-Japan). We should remember that we were the hardest hit during the Asian financial crisis where we went as low as 0.7x P/BV briefly. During the internet collapse in the US the Malaysian market dipped to 1.4x P/BV. The problematic SARS period saw the local bourse going to a low of 1.5x P/BV. Hence technically speaking the local bourse is holding up very well. We have to also acknowledge that the country's balance sheet is a lot better today than in 2000 or 2003.

p/s photos: Linda Chung Kar Yan


Datuk said...

Although the risk-reward has been improving if you based on static valation of price/book value ratio.

But i think it would be more appropriate to ignore this ratio as the earning prospect is bleak and the confidence of investor has been damaged.

The negative impact of demand destruction to the company earning is expected to be felt in second half of 2009 and full year of 2010. As such, i don't think it's the right timing to venture into equity investment.

Stay out of market at least after the coming Chinese New Year.

Preservation of capital outweigh all other priorities.

Salvatore_Dali said...


Cannot ignore tried and tested facts... you view that earnings will be decimated is fair enough, but these figures would have taken into account the decimation in earnings as well in 1998 and 2001... like for like.

Can conserve capital, better to give up the first 15% of a rebound, trade only when we go above 1,000... plenty of time... no need to to buy now and live with the volatility, so you are right there.

Datuk said...

Thank you Dali. Indeed, it had given me more opportunity to exercise my mental and thus improve its clearity when blogged in yr website.

Good Day.

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