KLCI quietly heading north, are you too late to catch the train?

In a previous article (Read more here), the MACD indicators of KLCI suggested that a reversal pattern might be just around the corner.  Since then, the KLCI rose 38 points to 1609 on 8 Nov 2019.  The MACD divergence pattern is confirmed and the first target of this trend is 1650.

So, which stocks are driving up the KLCI on the past few weeks?  The table below shows the performance of the KLCI component stocks from 18 Oct 2019 till 8 Nov 2019.  The top 5 gainers are Genting, CIMB, GenM, HLFG, and KLK.  All these stocks gained more than 4% in 3 weeks!

In stock market, market leaders will remain as market leaders until the trend ends.  As such, those top performers are likely to continue to outperform if the market continues to improve in the coming months.

Disclaimer:  The above analysis does not imply any buy or sell recommendation.  The author disclaims all liabilities arising from any use of the information contained in this article.

Disclosure: The author may have interest in the stocks of the companies in this article.

KLCI – The worst is over? - from Technical Analysis Perspective

Since April 2018, after the KLCI hit 1896 points, it has been on the downtrend for almost 1.5 years.  The KLCI closed at 1571 on 18-Oct-2019, lost 325 points, or negative 17% to-date.  Internal and external factors such as political power transition, uncertainty of government revenue, and US-China trade tension are weighing on the stock market performance.

According to IMF recent report (Read more here), 2019 global growth is forecast at 3.0%, its lowest level since 2008–09 and a 0.3 percentage point downgrade from the April 2019.  Growth is projected to pick up to 3.4 percent in 2020 but it is still a 0.2 percentage point downward revision compared with April’s report. 

While the flip-flopping geopolitical dramas have no end in sight, what could investors do to gauge the performance of the stock market?

The following chart shows the weekly KLCI performance for the past two years.  A clear MACD divergence (Read more here) has formed since Jan 2019.  Moreover, it has formed a double -divergence pattern which indicates that the reversal of downtrend might be a strong one.  If the MACD divergence is confirmed, the first price target will be 1650, which again coincides with the projected GMMA cross-over region.  Thus, from technical analysis perspective, year-end Bull Run might be possible. 

Be prepared, don’t get caught off guard if the market suddenly turns bullish!

Disclaimer:  The above analysis does not imply any buy or sell recommendation.  The author disclaims all liabilities arising from any use of the information contained in this article.

How To Value Music Industry? (Part I)

According to the Global Music Report 2019 by International Federation of the Phonographic Industry (IFPI), in 2018, the global recorded music market grew by 9.7%. It is the fourth consecutive year of global growth and the highest rate of growth since IFPI began tracking the market in 1997.

Decades ago, people often said that the music industry was a sunset industry.  The introduction of cheap compact disk (CD) duplicating machines and digital audio coding format such as MP3 had led to the growth of piracy in music recording.  In a 2007 policy report by Institute for Policy Innovation, the estimated loses due to piracy were:

·        $12.5 billion in total output annually. Output includes revenue and related measures of economic performance.

·        the U.S. economy loses 71,060 jobs. Of this amount, 26,860 jobs would have been added in the sound recording industry or in downstream retail industries, while 44,200 jobs would have been added in other U.S. industries.

·        U.S. workers lose $2.7 billion in earnings annually. Of this total, $1.1 billion would have been earned by workers in the sound recording industry or in downstream retail industries while $1.6 billion would have been earned by workers in other U.S. industries.

·        U.S. federal, state and local governments lose a minimum of $422 million in tax revenues annually. Of this amount, $291 million represents lost personal income taxes while $131 million is lost corporate income and production taxes.

The music industry continued to lost ground from 2001 to 2014, especially in the form of Physical sales such as CD and Vinyl.  This, however, started to reverse in 2015.  The revenue of online streaming grew nearly 460% in just 4 years! 

Several factors have contributed to the reversal of the declining trend.

1.     More users are listening to music online thanks to cheaper online cost.  Coupled with the advancement of technology has made the detection of pirated content online easier.

2.     User friendly interface by music platform provider such as Spotify, YouTube and Apple Music enabled on-demand streaming.  Users can create their favourite playlists easily.

3.     Artificial intelligent (AI) suggested contents are fulfilling.  Users have broader access to the music genre that suits their taste.

4.     Subscription based provides cheaper solution than buying physical forms.

5.     Larger user based from various part of the world.

6.     Royalty collections is more transparent thanks to online streaming.  Data are readily available.

7.     Stronger authority enforcement on countering piracy contents.

While many people relate music industry to music distribution platform such as Spotify, Apple Music and YouTube, they are just part of the value chain.  A basic music industry framework could be depicted as:

Music must be created, produced, manufactured, reproduced, and distributed in order to reach a consumer, thus constituting the value chain, defined as “a sequence of activities during which value is added to a new product or service as it makes its way from invention to final distribution” (Botkin & Matthews, 1992 cited in Waltman, 2011, p. 26).

The “Creation” block consists of artists, composers, musicians and producers; the “Production” block consists of music labels such as Universal Music Groups, Sony Music and Warner Music Group while the “Dissemination” block consists of YouTube, Apple Music and Spotify etc.

This series of “How to Value Music Industry?” will analyse each block in the value chain, providing valuation opinion of each segment in the music industry.  Last but not least, to identify the investment opportunities in the music industry.  Stay online!

Reference:

1.     https://www.ifpi.org/news/IFPI-GLOBAL-MUSIC-REPORT-2019

2.     https://www.riaa.com/wp-content/uploads/2015/09/20120515_SoundRecordingPiracy.pdf

3.  https://kunnskapsverket.org/sites/default/files/reports/the_music_industry_ricardo_alvarez_2017.pdf

Why Analysts’ Valuation Does Not Apply To Retail Investors?

Not many retail investors do their own valuation analysis when investing in the stock market.  Some rely on news, technical analysis or analyst’s report.  In many analysts’ reports, especially those who use discounted cash flow method or dividend discount model (DDM), the stock value is estimated based on certain assumptions, which may not be applicable to retail investors.

One of the key factors in valuation is the required rate of return, k.  It is inversely proportional to the value of the stock.  There are few methods to estimate k, the most common one is Capital Asset Pricing Model (CAPM).

The formula for CAPM is

where,

k = required rate of return

R_f = Risk Free Rate

β = Beta

R_m = Market Return

R_f and R_m are the invariant to all investors.  The factor that differentiate analyst and retail investor is the β.  Beta (“β”) is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors.  β is measured through the eyes of the marginal investor in equity (rather than the retail investor). The marginal investor is an investor who owns a well-diversified portfolio and trades frequently, for example, a Fund Manager.

If you are a retail investor who does not hold a well-diversified portfolio, the beta has to be adjusted to reflect your risk.  Aswath Damodaran, the valuation guru from NYU Stern Business School, stated that “total beta” is more appropriate for the average investor (Read more here).   The “total beta” is derived by dividing the beta with the correlation coefficient of the stock and the market portfolio.

The mathematics involved in calculating “total beta” may be discouraging, so what could a retail investor do in order to correctly adjust for the risk?  Since the correlation coefficient is always less than 1, which means the “total beta” will be always higher than beta.

As such, the required rate of return, k, is relatively higher for a retail investor.  This means that the value of the stock from the eyes of retail investor shall always be lower than the number reported by an analyst!

Moving Average as Momentum Indicator

Moving Average (MA) is a very popular indicator to gauge the trend of stock market.  Conventionally, 200-days MA is the barometer of portfolio managers to rebalance their position.    This week, we are going to demonstrate another usage of MA, as a momentum indicator.

In a previous article, we demonstrated the usage of Fourier Transform to determine the market cycle of KLCI (Read more here).  From a medium-term perspective, 61 days is a significant market cycle.  As such, a 61-day simple moving average is plotted on top of KLCI data in the following chart.  The black curve is the daily closing price of KLCI while the blue curve is the 61-day MA.

The Over Sold indicator is computed by studying the gap between 61-day MA and daily closing price.  If the immediate gap is larger than 70% of the normalized gap over the observation period, it will be classified as Over Sold, which is plotted as red in the chart.  The Over Sold indicator did detect several reversal points over the observed period.

Fourier Transform to Determine Market Cycles

Fourier Transform is one of the most important tools in the modern signal processing world.  It is widely used in communications, geology, acoustic and engineering field.  However, its capability to decompose time series data into frequency domain has extended its usage to other fields such as finance and business (Read more here).

In finance, moving average is a common indicator to track the movement of the stock market.  However, the period of the moving average indicator is normally selected at the discretion of the users, which sometimes may not be appropriate.  Fourier Transform is a good tool to determine the period for the moving average.  The following graph shows the significant period of the KLCI daily closing price determined by Fourier Transform.

From the graph, short term significant periods are 8 and 17 days while medium term significant periods are 28, 43, and 61 days.  Fourier Transform computations could be found in popular engineering software such as MATLAB or Excel Analysis ToolPak (Read more here).

“Recession” or “Rebound”?

In a previous article, stock market movement prediction using Google Trend search term (Read more here) was demonstrated.  This week, a new search term will be used to study the stock market direction.

In the following graph, the search term “Recession” frequency and the MSCI World Index were plotted together from 2004 to 2018.  The frequency of the search term is plotted in orange while the blue curve is the MSCI World Equity Index.

Coincidently, two significant peaks of the search term frequency (red circle) occurred at the reversal of the market down trend.  This suggests that market might rebound when the sentiment is very negative.  So, our next question is whether the current “recession” sentiment has reached its peak?  Google Trend might have the answer perhaps?

Asset Class Performance in 2018

Wondering you have chosen the correct investment in 2018?  The following graph shows the various asset class performance in 2018.  2017 market’s darlings such as cryptocurrency and oil were the biggest losers in 2018.  Bitcoin and Oil dropped more than 70% and 25% in 2018 respectively.  Hang Seng dropped 14% while S&P500 and KLCI dropped 6.2% and 5.9% respectively.  Gold lovers were not amused with their collection as their return was at negative 1.7%.  The safe haven was fixed deposit which yielded 3.5%.

In a previous article on P2P lending investment (Read more here), we featured the return could be at an average of 10%.  The author has experimentally invested in the P2P platform and gained 12.59% in 2018.  This shows that it is always good to diversify your portfolio in some alternative investments.

If you are interested to invest in P2P lending, you could sign up using the following link

https://fundingsocieties.com.my/sign-up-investor?referral=jakdytp6

Disclosure: The author will receive a one-time referral fee of RM50 for each new investor who signs-up via the above link AND invest at least RM1,000 (Read more here).