Market-risk analysis - Indonesia and India most risky :: CLSA

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Fundamental beta defines risk
Fundamental beta (Fβ) is the bottom-up forward-looking beta of a stock,
calculated by comparing its risk characteristics against the market. In
this current volatile environment, its biggest advantage lies in decoupling
a stock’s future risk drivers from the purely price-driven observed betas
(OB). Backtests show that it is a better and more stable predictor of longterm
risk. We use our model to highlight stocks where the market might
be over/underestimating the risk compared with the fundamentals.
Fundamental beta and risk
 Fβ is the bottom-up beta of a stock calculated by comparing its risk characteristics
against the market.
 Our backtests show that Fβ is a better and more stable predictor of a stock’s future
risk, making it useful for calculating its cost of capital.
 The model uses seven risk characteristics such as earnings variability, size, value
and leverage to explain the future risk drivers for a stock or a portfolio.
Market-risk analysis - Indonesia and India most risky
 Aggregating Fβ at the market level from our model highlights that Indonesia and
India are the most risky, while developed markets like Australia and New Zealand
are the least risky in the Asia Pacific ex-Japan region.
 OB indicates a higher risk for Australia and China compared to their underlying
fundamentals, while Indian and Korean risk is being understated.
 The Philippines offers significantly lower earnings growth compared with its high Fβ.
Sector-risk analysis - Capital goods and autos most risky
 Capital goods, autos and consumer services have the most risk while telecoms,
commercial services and food & staples retailing have the least.
 The market is underestimating the risk for autos, consumer durables and software
sectors but it is overstating the risk for banks, energy and materials.
 Retailing, property and transport sectors offer lower growth with a higher Fβ, while
banks, insurance and utilities offer reasonable growth with lower risk.
Focus on risk differential
 Investors looking to add alpha to their portfolios should explore stocks where
markets might be overestimating risks, as seen through higher OB.
 Playing a high-low beta strategy during up/down markets through Fβ has generated
better returns than OB.