The analysis of factors influencing P/E ratio and investment performance measurement in Taiwan equity market
Date Issued
2005
Date
2005
Author(s)
Liu, Shan-Chi
DOI
zh-TW
Abstract
Peter Kurz, founder of the well-known financial consulting company Mr. Taiwan.com, wrote in his book “Speculation to Investment” that the research department at Merrill Lynch has tried to find the best indicators to the stock market among dozens of figures relating to companies’ operations. According to Merrill Lynch’s research, the more complex the indicators are, the less accuracy the results show in the long term. On the contrary, simple indicators exhibit higher accuracy in predicting the market, and price to earnings (P/E) ratio is one of such indicators.
The P/E ratio of the Taiwan stock market has been trending down in recent years. The author has tried to use this simple and popular indicator with real world aim to investigate the reasons behind the downtrend and impacts on the portfolio performance.
The findings are as follows:
1. The levels of P/E ratios vary from market to market. The P/E ratio of the Taiwan stock market indeed shows a downtrend on the U.S stock market, domestic fund flows, and liquidity issues.
2. There will be a re-rating of the Taiwan market with the easing of cross-strait relations, integration of enterprises and the improvement in dividend payout ratio.
3. In the empirical study that uses PER as the only determinant of trading, the bellwethers such as Taiwan Semiconductor Manufacturing Company and Formosa Plastics Corp. are the best examples of the industries that have predictable business cycles and the profits are repetitive at the peak of each cycle. The odds of this model are as high as 75% and the model exhibits an average return of more than 15%.
Subjects
本益比
風險溢酬
現金股利發放率
企業評價
P/E Ratio
Risk Premium
Dividend Payout Ratio
and Enterprise Valuation
Type
thesis