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India Equity Research Reports, IPO and Stock News
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• What drives property stocks? It seems that volumes matter, pricing
doesn’t – the Indian real estate sector has been a high beta one where
returns can get fairly concentrated in short periods of time. Considering
most of the stocks have fallen significantly vs. last year’s levels, we try
to find what metrics can help investors call for an inflexion point on
these share prices.
• Running a series of correlations with various input variables we find
the best predictor of stock prices over a 3 month period seems to be
physical volumes. Hence, simply tracking movements in the physical
market, we think volumes will probably be a pretty decent strategy to
trade the sector. Stock movements seem to be hardly concerned with
physical pricing movements, which is a bit surprising as arguably they
are far more powerful drivers of sales and earnings.
• The math shows “stock returns lag volumes” by 3 months… We ran
the correlations between 3 month quarterly BSE Realty returns vs. 3
month (qtrly) change in volumes (in 5 key markets) on a monthly basis
starting July 2007. That’s the longest volume history available to us, but
arguably captures a good part of a cycle (bubble, bust, recovery,
slowdown). The correlation coefficient at 0.66x was the highest when
stock prices were correlated to 3 month lagged volumes. Simply put,
next 3 month returns depend on how the last quarter’s volumes fared.
• … which is counterintuitive – aren’t markets supposed to price
ahead of fundamentals? The lag effect of stock prices is surprising.
This, in our view, may be attributed to information asymmetry that exists
in the physical market. Real estate is a relatively unorganized sector and
volume numbers (available from private agencies and non authoritative
in nature) typically come out with a delay (1-2 months). Even accounting
for that, the lag is a bit long. Maybe it’s simply that the bar on trusting
the numbers from property developers is a bit high
• So what does this mean for stocks? Conclusion: To call for an
inflection point on share prices hereon means that we need to see some
hard evidence of a volume recovery. The good news is we don’t have to
anticipate it in advance (as regression shows lagged information is
perfectly good information) and can wait for numbers to show up. The
bad news is they aren’t going up (at least not yet).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• What drives property stocks? It seems that volumes matter, pricing
doesn’t – the Indian real estate sector has been a high beta one where
returns can get fairly concentrated in short periods of time. Considering
most of the stocks have fallen significantly vs. last year’s levels, we try
to find what metrics can help investors call for an inflexion point on
these share prices.
• Running a series of correlations with various input variables we find
the best predictor of stock prices over a 3 month period seems to be
physical volumes. Hence, simply tracking movements in the physical
market, we think volumes will probably be a pretty decent strategy to
trade the sector. Stock movements seem to be hardly concerned with
physical pricing movements, which is a bit surprising as arguably they
are far more powerful drivers of sales and earnings.
• The math shows “stock returns lag volumes” by 3 months… We ran
the correlations between 3 month quarterly BSE Realty returns vs. 3
month (qtrly) change in volumes (in 5 key markets) on a monthly basis
starting July 2007. That’s the longest volume history available to us, but
arguably captures a good part of a cycle (bubble, bust, recovery,
slowdown). The correlation coefficient at 0.66x was the highest when
stock prices were correlated to 3 month lagged volumes. Simply put,
next 3 month returns depend on how the last quarter’s volumes fared.
• … which is counterintuitive – aren’t markets supposed to price
ahead of fundamentals? The lag effect of stock prices is surprising.
This, in our view, may be attributed to information asymmetry that exists
in the physical market. Real estate is a relatively unorganized sector and
volume numbers (available from private agencies and non authoritative
in nature) typically come out with a delay (1-2 months). Even accounting
for that, the lag is a bit long. Maybe it’s simply that the bar on trusting
the numbers from property developers is a bit high
• So what does this mean for stocks? Conclusion: To call for an
inflection point on share prices hereon means that we need to see some
hard evidence of a volume recovery. The good news is we don’t have to
anticipate it in advance (as regression shows lagged information is
perfectly good information) and can wait for numbers to show up. The
bad news is they aren’t going up (at least not yet).
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