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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Emerging Leaders
What are small caps telling us?
How sick is that canary? Healthier than you think
August has seen Asia-Ex small caps drop 14% after a 10-month streak of
treading water. The performance MTD is the worst since October 2008 and
eerily reminiscent of the 15% drop in January 2008 that kicked off the worst year
in Asia-Ex small cap history. How sick is the market‟s Canary in the Coal Mine?
We suggest a careful study of monthly Asia-Ex small cap under/outperformance
relative to large caps over the past 15 years. The two relevant conclusions are
1) Small cap underperformance after a bull run does not provide a clear signal.
Of the five periods of multi-month small cap under-performance, only two
preceded major market crashes.
2) Small Caps have only underperformed large caps by 3% YTD. This compares
to the 14% underperformance of small caps to large caps at the start of the
07/08 crash.
So what‟s the takeaway? Small cap underperformance has felt particularly hairraising
primarily due to (former market darlings) China small caps leading the
downward lurch. But the damage region-wide has (to date) not been severe
enough to use Small Caps as a bearish signal.
Trough valuations still 45% south of here
Asia-Ex small caps P/Bk is now 2% above its‟ seven-year average. Trough
valuations are 45% below current levels. HK and India small caps are now the
cheapest relative to seven-year averages.
Balance sheets solid…but they were in 2008 as well
With rising questions of whether equity and bond markets will remain open for
small caps, we review the balance sheets across the region. The good news is
that near term (two years) financing needs remain low for the vast majority of our
covered small caps. The bad news is the same could have been said in 2008
and that provided no safety net at the time.
Into results season – we review Quant’s earnings certainty
Our quant team recently published research showing earnings certainty can be
one of the most positive quant indicators in hard times (see excerpt inside). We
review the earnings certainty for our covered small cap universe. Going into
earnings season, this list is worth reviewing as we have no doubt small caps that
miss forecasts will be punished severely.
2 Baskets: The ‘Rebound’ and ‘Batten down the hatches’
Macquarie‟s house strategy remains that the current swoon represents a buying
opportunity. Inside, we include within our top picks of bombed out (in most cases
Chinese) small caps that should be primed for a rebound if we are in a repeat of
August 2010. However, if we are about to replay 2008, we also provide a „Batten
down the hatches‟ basket of relatively defensive small caps.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Emerging Leaders
What are small caps telling us?
How sick is that canary? Healthier than you think
August has seen Asia-Ex small caps drop 14% after a 10-month streak of
treading water. The performance MTD is the worst since October 2008 and
eerily reminiscent of the 15% drop in January 2008 that kicked off the worst year
in Asia-Ex small cap history. How sick is the market‟s Canary in the Coal Mine?
We suggest a careful study of monthly Asia-Ex small cap under/outperformance
relative to large caps over the past 15 years. The two relevant conclusions are
1) Small cap underperformance after a bull run does not provide a clear signal.
Of the five periods of multi-month small cap under-performance, only two
preceded major market crashes.
2) Small Caps have only underperformed large caps by 3% YTD. This compares
to the 14% underperformance of small caps to large caps at the start of the
07/08 crash.
So what‟s the takeaway? Small cap underperformance has felt particularly hairraising
primarily due to (former market darlings) China small caps leading the
downward lurch. But the damage region-wide has (to date) not been severe
enough to use Small Caps as a bearish signal.
Trough valuations still 45% south of here
Asia-Ex small caps P/Bk is now 2% above its‟ seven-year average. Trough
valuations are 45% below current levels. HK and India small caps are now the
cheapest relative to seven-year averages.
Balance sheets solid…but they were in 2008 as well
With rising questions of whether equity and bond markets will remain open for
small caps, we review the balance sheets across the region. The good news is
that near term (two years) financing needs remain low for the vast majority of our
covered small caps. The bad news is the same could have been said in 2008
and that provided no safety net at the time.
Into results season – we review Quant’s earnings certainty
Our quant team recently published research showing earnings certainty can be
one of the most positive quant indicators in hard times (see excerpt inside). We
review the earnings certainty for our covered small cap universe. Going into
earnings season, this list is worth reviewing as we have no doubt small caps that
miss forecasts will be punished severely.
2 Baskets: The ‘Rebound’ and ‘Batten down the hatches’
Macquarie‟s house strategy remains that the current swoon represents a buying
opportunity. Inside, we include within our top picks of bombed out (in most cases
Chinese) small caps that should be primed for a rebound if we are in a repeat of
August 2010. However, if we are about to replay 2008, we also provide a „Batten
down the hatches‟ basket of relatively defensive small caps.
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