Money
Issue No. 40 - April/ /
What happened to bear proof
by David Leon
So far, 2008 has been a year of ups and downs on the share-market in marked contrast to the long-running bull market many have become accustomed to.
Most sectors have incurred significant losses since US sub-prime credit crisis swept financial markets last July. Since then, the S&P/ASX 200 has lost about 880 points (see figure 1).
Indeed, many investors may begin to question whether the market has entered bear territory. Several commentators observe the 11.3% fall in the market during January was bigger than any monthly fall since the October 1987 crash, although not to the same 42.4% magnitude seen then.
We will explore the behaviour of stocks under more challenging market conditions by adopting a quantitative framework to observe behaviours across select measurable factors.
Since the credit crisis led the charge to swift de-leveraging of portfolios, one quantitative observation in Australian equities has been significant multiple contraction. Since late October the forward year PE of the ASX200, based on GSJBW analysts’ forecasts, has declined from a little more than 17x to about 14.5x, representing a reduction of 15%.
Our quantitative research team identified five factors influencing multiple contraction:
return on assets (ROA),
the level of company gearing (debt to equity or D/E ratios),
forward year EPS growth,
market capitalisation,
and the valuation of the stock (richly valued expensive stocks versus stocks at a discount to the benchmark).
The results provide some interesting insights. Those firms with the highest debt-to-equity ratios, highest valuations and highest prospective growth in late October have experienced the largest price earnings (P/E) contractions (in percentage terms) since the credit-induced downturn. The correlation analysis suggests high ROA stocks have experienced greater multiple contraction than low ROA stocks.
This may come as no surprise; highly gea...
