Have been very busy, so did not get the time to update my blog. Markets have remained quite negative, with continued worries over the European debt crisis. Singapore got hit by yet another round of measures aimed at cooling the property market which affected the property counters, and North Korea’s Kim Jong-II has just died, which would raise the political tensions on the Korean peninsula in particular and Asia in general.
Overall though, 2011 would be a year which most people preferred to forget about. But I would just like to bring the focus towards more basic fundamentals rather than concentrating on broad economic indicators or happenings all over the world at this point. The valuations of many markets at this point are at very low levels. I have said frequently they are cheap, but we really need to understand on a fundamental basis what we mean by cheap. China’s H share market, for example right now is trading at just 8.3x forward PE ratio for 2012. In the past, the China market has easily traded at over 20x forward PE ratio before.
A PE ratio of 8 times means that if the company survives for another 8 years, and doesn’t grow its earnings at all this entire 8 years, it would have made over its current value now. It’s like saying a company that makes 1 million dollars a year, is worth only 8 million dollars in the market at today’s prices now. Firstly, all companies without exception are driven to grow earnings. 1 million dollars this year may be alright, but the management will be asked constantly do even better year after year. So, unless the industry is such a dead one, otherwise, it will still continue to grow its earnings over time. People may worry about a faraway debt crisis, or North Korea going berserk in the short term, but over the years, all the earnings made by companies continue to add up. They don’t just disappear into thin air.
Another point to make is that while an individual company may go bust, an entire stock market belonging to a free capitalistic country is unlikely to go bust. (At least I have never heard or read about one yet). Let’s leave out those central command based economy which uses stuff like food stamps and concentrate on those operating in the free market. Bankruptcies are common here and there for an individual company. But for an entire stock market to go “bankrupt”, every single company listed on that stock exchange would have to delist simultaneously, or at around the same time.
While the 3rd quarter earnings reports by most companies haven’t exactly blown people away, considering all the concerns we have seen in that quarter over the Europe debt crisis, those earnings are certainly nowhere near as bad as what the markets would suggest. I could have almost imagined that the majority of companies should be bleeding red ink by now given the amount of black ink which has been spent on how scary the European debt crisis is. But there are many companies who will continue to earn money despite what is happening in Europe.
Even in a really pessimistic situation where we don’t assume any growth in earnings over the next 8 straight years, a company would have paid for itself in earnings if it is trading at 8 times PE ratio. And as we know, an entire stock market doesn’t go bankrupt, so we can say with confidence that 8 years later, the Singapore stock market, the US stock market or the South Korean stock market will still be around. Now, there could be some situation which could explain why a country’s stock market is trading at a very low valuation. But if there isn’t any good explanation for this, then it really is a sentiment thing, and sentiments always change.
On a personal note, my house is in a really big mess right now, as I am due to move in 2 days or so!
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