Coronavirus and Thoughts

I haven't been posting in a while because of my new job, but I think it is always good to take a step back and formulate my thoughts about recent news.

The best incident to fall back on while considering this issue would be the 2002-2003 SARS outbreak because both incidents are largely similar: SARS started around November 2002 and ended around May 2004. A quick look at the STI:

We can see that from the period from November 2002 to May 2003 there was a clear downtrend in the STI before rebounding decently into 2004.

Currently, the STI seems to be in the infant stage of a downtrend which suggests some potential buying opportunities. I came across this article which aptly compares the two outbreaks.

Further points to take note:

1) China's economy is much bigger now than it was during the SARS outbreak period so the impact is gonna be pretty painful as trade between China and Singapore is quite extensive.

2) Banks will be affected as they have exposure to China; OCBC has the highest exposure here.

3) Airlines are affected too as flights are being cancelled here and there. Example: Hong Kong Airlines being on the verge of bankrupt. Note to self- SIA.

4) REITs with China exposure are already feeling the pain - Mapletree NAC, CapitaChina, Sasseur.

5) Generally, retail should continue to deteriorate as everybody will most likely be minimizing their outside movements. (CapitaMall, Suntec, Mapletree Com, Starhill)

But otherwise, I think it would be a good time to look at the market to consider entry points. Cheers!

CAGR Analysis on Singtel

Building on my previous post, I would like to extend the model to a more bearish stock to see how the results are. I will be using Singtel here for my analysis and below is the CAGR for Singtel across different possible entry points on the entire time frame. (for more details on this implementation, please check my previous post)

A quick observation shows that CAGR was generally around 5% which can be attributed to the depressed levels during the 2009 periods. CAGR then plummeted below 0 around 2014-2015 periods and stayed negative aside for the anomaly there which is attributed to the 52-week low of 2.8 levels which is a distance from its current price of 2.94. This is inclusive of the dividends distributed over the period.

The point which I want to make here is that the time of entry point is not the only important factor if the stock itself is not faring well. Indeed, Singtel has not been performing up to standard since the entry of the 4th telco in Singapore. The picture we have here is definitely not as rosy as the previous example I used (Capitamall trust).

Let us look at a comparison between CAGR of the two for clearer analysis.

We see that the CAGR of Capitamall has been generally superior over Singtel, lest the 2018 periods of volatility. This further reinforces the point that finding a fundamentally sound stock which can dish out a constant stream of dividends is more important than ever.

For those who are interested in the technical details of this implementation, I downloaded the data from Yahoo Finance and used Excel VBA to calculate the ending value (with dividends) which I can in turn calculate the CAGR. I wish I could have built a more robust model without much hardcoding but I guess this is a good starting point as my time is rather limited nowadays.

I am putting the Excel VBA here and who knows, maybe someone will build something much better than me? Hopefully you will have fun with this too!

Thoughts about timing the market

I haven't posted a while because school was really busy this month with me rushing through my FYP! Nevertheless, I am glad to post again and share some ideas I have.

We always ask ourselves when to enter a stock and either lament when the stock drops after we bought, or when the stock rises if we did not buy. Now, I would like to present this situation in a more technical format, in the form of an Excel spreadsheet. One example I will be taking here is Capitamall Trust.

I scrapped the price and dividends data from Yahoo finance and did a simple analysis here. For simplicity's sake, I used the closing data of every month to look at it from a monthly point of view. The gain here is the net profit here. For example, if gain is 172.82%, that means you will get $1.72 for every $1 invested.

Compound Annual Growth Rate (CAGR) will be what I'm using to gauge here and for those not familiar with it, it is just the (Ending Value of Asset - Beginning Value of Asset) taken to the power of (1/number of years), then divided by 1. Basically, it measures the growth rate of an initial investment to its current value. To be clear too, I am accounting for dividends in the ending value to have a more accurate view and the ending value is the current price of Capitamall Trust now. For a more elaborate explanation of CAGR, you can check here.

I then plotted a CAGR graph over time here for a better visualization. 

So we notice that CAGR has been fairly constant at about 6-7% and then a sudden spike up at 2017-2018. This can be attributed to the run-up prices during the 2017-2018 period if many of you all may recall. But ignoring this outlier, we can see that any point of entry will yield us a decent CAGR of at least 6%. So during any point, it will be good to enter even when prices are higher than normal. 

But of course this model has its caveats. The reason why the picture looks so rosy is because the reit now is close to its 52-week high, which greatly inflates its ending value. If the price was any lower, CAGR would be lower than the current illustration. Another reason would be because of the consistent flow of dividends. I suppose if you replace Capitamall Trust with a bearish stock, things will not be so brilliant. 

However, I hope to bring through the message that timing the market might not be that important after all, it is identifying stocks with good potential that is the key. Of course, if we can time the market, our returns will be better enhanced but if we can't do that, we still can enjoy pretty good returns.

But of course, based on the argument that I have just presented, should I buy Capitamall Trust when it is hovering very high? Well, of course I hope I can time the market if possible. But we will see...

Learning the Shiller Ratio and some random thoughts

Happy Chinese New Year everybody! I can't believe that it has been 2 months since I started blogging.

I guess if you have been following my previous posts, I am mainly concerned about the current valuation of the stock market as it gives me an indication of when to buy. So one thing that caught my eye on Investopedia was this which was quite interesting to me.

The Shiller Ratio is a measure which is equivalent to the current price divided by the average of 10-year period of real earnings per share. It is inherently an extension of the Price-Earnings ratio, albeit adjusted for inflation and different phases of a normal economic cycle. It is a ratio to determine an overvaluation or undervaluation of any financial asset, but also accounting for cyclical factors that artificially inflate or deflate a company's earnings.

Of course, Singapore is my main point of interest, so I managed to find the historic Shiller Ratio from the Barclays website.

Source: Barclays Shiller Ratio (Singapore)

As of 31 December 2018, Singapore's Shiller Ratio stands at 15.21, which is pretty decent considering that it is rather low given the peaks you see in the above diagram. Notably, the peak was around 35 in October 2007 before plummeting during the Great Financial Crisis. Looking at current levels, it does seem compelling for a buy.

Let's look at the pros and cons here. The pros should be quite evident, where the Shiller Ratio has accounted for expanding and contracting business cycles using a 10-year period to smooth earnings, which is not represented in a normal PE ratio. This can ensure that outliers like the Great Financial Crisis will not greatly affect the conclusion we will get. After all, this is all about the law of large numbers, where the end result should be stable and generally similar.

Obviously, there are some disadvantages which might/might not be of significance. I think the first point is that the Shiller Ratio is based on past data which is retrospective and does not provide any prospective meaning, aka knowing what happens in the past does not make you 100% sure about what the future entails. 

But still, I think the Shiller Ratio is a good enough gauge for us to assess the valuation of the market.

As we celebrate Chinese New Year in Singapore, US markets are still up and running so I thought I should have a look there too 

I am currently thinking of diversifying outside of Singapore and buying some undervalued US shares but if we do apply the Shiller Ratio which we previously discussed, it seems that the US market is even more overvalued than the Singapore market.

Source: Barclays Shiller Ratio (Singapore and USA)

The US market has a Shiller score of 26.64 which represents a pretty huge margin over Singapore's score of 15.21, which generally means it is harder to find undervalued gems in the market. But it is always good to shortlist first, and then pull the trigger later.

The current Shiller Ratio for the S&P 500 is 29.75, with mean of 16.6, median of 15.7 and a range from 4.78 to 44.19, where the current market is slightly overvalued and above its mean.

My recent call on SATS at 4.5 has not been feasible, where SATS is trading at 4.8 currently. Parkwaylife Reit is also at 2.79 and Capitamall Trust at 2.39 which is a tad too high for my taste. Mapletree Industrial is at 1.99 and Mapletree NAC is at 1.25. All the stocks had run up pretty high after my writing so I didn't get the chance to buy. But I do hope I am rewarded for my patience as I am of the view that high prices don't always last, just like how bullish markets don't continue forever. We will see again!

I will write more again after the new year about some US stocks I had some interest in. But for now, it's visiting time. Cheers to the new year ahead!

My Capitamall Trust Ideas

It has been a bullish market so far where there has not been much buying opportunities in my opinion. SIA is the nearest to its 52-week low at 9.64.

Even so, I am quite amazed at the bullish streak so far. Capitamall Trust is now trading at 2.4, a 52-week high and a whopping 38 cents premium over its NAV of 2.02. It is on my radar but I will be waiting to drop back. A 52-week high is definitely not the best time to go in but still, it will be good for me to document my rough analysis here.

So a quick glance here tells us that the DPU has increased from last year, which is a pretty good sign with all the rejuvenation and asset enhancement works in FY18, which we can superficially infer that there is some correlation. Dividend yield is 5.22% at the time of the report, and probably lower now when Capitamall Trust is trading higher now.

Source: Capitamall Trust Full Year 2018 Financial Results

What I also like here is the general increase of distribution income (DI) over its 2003 inception with a 13.1% CAGR. But a observation I would like to point out here: we can see that the rate of growth of DI was generally much higher during the 2003-2008 periods where DI increased by roughly 20-30% yearly as opposed to recent periods where increase year to year was slightly less than 10%. This may suggest a slowdown as we are approaching a saturated market in Singapore where future growth might be inhibited.

Source: Capitamall Trust Full Year 2018 Financial Results

At an individual property basis, net property income is generally increasing by 3.2%, where we can see that redevelopment and selling of Sembawang Shopping Centre did not adversely affect the whole portfolio.

Source: Capitamall Trust Full Year 2018 Financial Results

Other important information include a gearing of 34.2%, interest coverage of 5.2 and a 3.1% average cost of debt.

Lastly about the debt undertaken by the reit: 

Source: Capitamall Trust Full Year 2018 Financial Results

We can see here that the reit has averagely S$400-500 million worth of debt from 2019 to 2024, which accounts to a rough gauge of S$12.4-15.5 million of interest coverage assuming a 3.1% cost of debt. This is still pretty manageable by the reit for this period if they can maintain their net profit.

Talking from a macro point of view now: Capitamall Trust is easier for me to evaluate as it is local and in Singapore. Although the threat of e-commerce is still there, it is not as prominent as in other countries like China. Consumers still like the brick and mortar feel where they can enjoy the love of shopping. I am also inclined to believe that the shopping malls here cater to families who just want to enjoy a lovely weekend night out, so e-commerce should not too much of a threat here.

However, if the slowdown from China persists and there is a macro recession, Capitamall Trust may not be spared too. Nevertheless, it should be less affected by the other reits who derive overseas income so it is a good bet if we are banking on the Singapore consumer industry. 

2.4 is too expensive for me and I will be looking at a price of 2 which represents a comfortable margin of safety for me. Once again, the only cost I am going to incur here is opportunity cost but I will like it over an unrealized loss so we will see how it goes with the Singapore Budget 2019 coming next week. Cheers!