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Fear is the key
• VIX has a strong influence on the Asia market's PBR - we present a
sensitivity analysis of VIX, ROE and PBR
• The market is not cheap given high risk aversion; recent behaviour
reflects concerns about a severe earnings recession
• More money is likely to be lost in a VIX spike to historical highs
than is likely to be made in a decline to historical lows
We find the variation of the MSCI
AC Asia-Pacific ex-Japan Index for
the period 1995-2011 to be
influenced strongly by changes in
the ROE and the risk-proxy VIX.
The estimated historical relationship
between the PBR, ROE and VIX has
been used to derive our sensitivity
table below. The cells in the table are
estimates of what we should expect
to be the market’s PBR for any given
combination of risk aversion (VIX)
and profitability (ROE).
The market’s current PBR of 1.8x is
no different from what one should
expect given a VIX level of 35 and
the current ROE of 13.5%. From this
perspective the market is not cheap,
and as such technicals would
probably provide better clues to
near-term directional movements. A
long position is unlikely to be
profitable in the short term without
a rapid reduction in risk aversion.
The history of VIX suggests that
current high levels of risk aversion
will eventually subside, perhaps to
spike again when a new round of
angst strikes the investment
community. If VIX returns to its
historical average of 23% and the
market multiple does not increase
from its current levels, the
sensitivity table suggests we should
expect an ROE contraction from
13.5% to 7%. This, in turn, would
imply a severe earnings recession of
the sort we saw from March 2000 to
May 2002 and June 2008 to
September 2009, when index EPS
declined by 41% and 48%,
respectively. It appears that recent
market behaviour is beginning to
reflect this concern.
VIX rose to 80% during the Lehman
crisis. Our sensitivity table below
suggests that a spike to that level
would be likely to see the market fall
to trade below its book value, or a 50%
downside from the current level. On
the flip side, happy days could
miraculously return again, with the
VIX falling to 10%, a level last seen in
early 2007. According to the
sensitivity table, given the current
ROE we should expect a valuation
expansion to a PBR of 2.3x, or a 27%
upside. This risk-reward profile looks
unbalanced to us.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Fear is the key
• VIX has a strong influence on the Asia market's PBR - we present a
sensitivity analysis of VIX, ROE and PBR
• The market is not cheap given high risk aversion; recent behaviour
reflects concerns about a severe earnings recession
• More money is likely to be lost in a VIX spike to historical highs
than is likely to be made in a decline to historical lows
We find the variation of the MSCI
AC Asia-Pacific ex-Japan Index for
the period 1995-2011 to be
influenced strongly by changes in
the ROE and the risk-proxy VIX.
The estimated historical relationship
between the PBR, ROE and VIX has
been used to derive our sensitivity
table below. The cells in the table are
estimates of what we should expect
to be the market’s PBR for any given
combination of risk aversion (VIX)
and profitability (ROE).
The market’s current PBR of 1.8x is
no different from what one should
expect given a VIX level of 35 and
the current ROE of 13.5%. From this
perspective the market is not cheap,
and as such technicals would
probably provide better clues to
near-term directional movements. A
long position is unlikely to be
profitable in the short term without
a rapid reduction in risk aversion.
The history of VIX suggests that
current high levels of risk aversion
will eventually subside, perhaps to
spike again when a new round of
angst strikes the investment
community. If VIX returns to its
historical average of 23% and the
market multiple does not increase
from its current levels, the
sensitivity table suggests we should
expect an ROE contraction from
13.5% to 7%. This, in turn, would
imply a severe earnings recession of
the sort we saw from March 2000 to
May 2002 and June 2008 to
September 2009, when index EPS
declined by 41% and 48%,
respectively. It appears that recent
market behaviour is beginning to
reflect this concern.
VIX rose to 80% during the Lehman
crisis. Our sensitivity table below
suggests that a spike to that level
would be likely to see the market fall
to trade below its book value, or a 50%
downside from the current level. On
the flip side, happy days could
miraculously return again, with the
VIX falling to 10%, a level last seen in
early 2007. According to the
sensitivity table, given the current
ROE we should expect a valuation
expansion to a PBR of 2.3x, or a 27%
upside. This risk-reward profile looks
unbalanced to us.
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