I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Wednesday, September 2, 2009

HSI Long Term P/E Analysis

hhasia and I were discussing the Asian markets in this post of mine: (A Look At Some of the Asian Markets). We also have some long term P/E data to play around with. Here is my stab at some long term P/E Analysis for the Hang Seng.

When I look at the data and trends I see the HSI calling for lower valuations in the future (long term). Could be risk aversion or any number of issues as I have talked about in several posts of mine. The HSI is also heavily weighted in financials, and it is no secret that I am *hugely* bearish on financials.

Also, this is a good time to bring up the concept of long valuation waves. For the US markets, market valuation bottoms / peaks / bottoms in ~35 year cycles. And in US markets, the last bottom in the Dow 30 was in 1981 with a P/E of 6.6 and the last peak was in 2000 with a P/E of 44.2. This is 19 years or roughly half a 35 year cycle. Based on historical trends, the US markets can expect to see lowering valuations (on average, nothing goes up/down in a straight line) until 2016, where it should make a bottom *from a valuation perspective*. (Prices may bottom earlier and stay flat in 2012-2014 while earnings begin to grow. The are a number of scenarios where the valuation bottom and the price bottom are not necessarily the same).

Looking at the HSI chart, we also see a P/E bottom in 1981 of 5.6 and a P/E peak in 1999 of 27.9. These dates are similar to the last valuation bottom/peak in the US Markets. Assuming that the Valuation Cycle will be similar for Hong Kong, then that would confirm some of the long term bearish valuation trends the being observed on the chart above.
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