20151023-三星证券-Value_stocks_and_interest_rates_Equity_duration-Introduction_and_application_16页_985kb

Summary: Value Stocks and Interest Rates

Core Content

This document explores the relationship between value stocks and interest rates, emphasizing the concept of equity duration as a key determinant of relative performance. It discusses how the sensitivity of stock prices to interest rate changes can be modeled similarly to bond duration, and how this sensitivity influences the performance of value versus growth stocks in different interest rate environments.

Main Points

• Value vs Growth Stocks: Value stocks are typically characterized by lower valuations (P/E, P/B), higher dividend yields, and cash flows concentrated in the near future. Growth stocks, on the other hand, have higher valuations, strong earnings growth potential, and cash flows concentrated in the distant future.

• Equity Duration: The concept of duration, originally used for bonds, can be applied to equities. Equity duration measures the weighted average time until cash flows are received. Shorter duration equities (value stocks) are less sensitive to interest rate changes, while longer duration equities (growth stocks) are more sensitive.

• Interest Rate Impact:

  • When interest rates rise, value stocks tend to fall less than growth stocks, giving them relative strength.
  • When interest rates fall, growth stocks tend to rise more than value stocks, giving them relative strength.

• Empirical Evidence:

  • In the US, the MSCI US Value Index has shown strong correlation with changes in 10-year U.S. Treasury yields over both 15-year and 30-year periods.
  • In Korea, the MSCI Korea Value Index outperformed the MSCI Korea Growth Index until 2010, after which the Growth Index began to dominate.

• DCF Model and Duration Calculation:

  • The document uses a perpetual growth DCF model to calculate equity duration.
  • Modified duration is derived from the present value of future cash flows and the terminal value.
  • A low P/E indicates that cash flows are concentrated in the near future, leading to shorter duration, while a high P/E suggests cash flows are concentrated in the distant future, leading to longer duration.

• Example of Duration Calculation:

  • For Samsung Electronics (SEC) and Amorepacific, the modified equity durations are 8.43 years and 14.16 years, respectively.
  • SEC's lower P/E and more immediate cash flows result in a shorter duration compared to Amorepacific.

• Backtesting and Strategy:

  • A long-short strategy based on equity duration can benefit from changes in interest rates.
  • The document recommends using a combination of valuation metrics (P/E, P/B) and earnings momentum for screening value stocks.

Key Information

• Table 1: Shows the relationship between P/E, duration, and returns in different interest rate environments.

  • High P/E (growth stocks): Long duration, prices fall more when rates rise, rise more when rates fall.
  • Low P/E (value stocks): Short duration, prices fall less when rates rise, rise less when rates fall.

• Table 2: Demonstrates how the same interest rate change affects two stocks with different cash flow timelines.

  • Stock A (low P/E): Cash flows concentrated in the near future, lower price impact from rate increases.
  • Stock B (high P/E): Cash flows concentrated in the distant future, higher price impact from rate increases.

• Table 3: Provides modified equity duration for Samsung Electronics and Amorepacific.

  • Samsung Electronics: 8.43 years
  • Amorepacific: 14.16 years

• Table 4: Lists modified equity duration for major Korean large caps.

  • Kepco: 5.0 years
  • Hyundai Motor: 6.2 years
  • SK Hynix: 6.2 years
  • Hyundai Mobis: 6.4 years
  • Kia Motors: 6.5 years
  • Samsung Electronics: 8.4 years
  • SK Telecom: 8.8 years
  • Amorepacific: 14.2 years
  • Samsung C&T: 14.3 years
  • Samsung SDS: 15.0 years

• Interest Rate Outlook:

  • The U.S. Federal Reserve is expected to start normalizing interest rates, which will likely cause long-term rates in both the U.S. and Korea to rise.
  • This is expected to benefit value stocks over growth stocks in both markets.

• Recommendations:

  • The report recommends 10 value stocks, including Hyundai Motor and others, with strong earnings momentum and growth potential.
  • The screening criteria include forward P/E, forward P/B, and changes in EPS over the past months.

Conclusion

The document concludes that the relative performance of value and growth stocks is strongly influenced by interest rate changes, as reflected in equity duration. Value stocks, with shorter durations, are more resilient in rising interest rate environments, while growth stocks, with longer durations, benefit more from falling rates. It emphasizes the importance of using equity duration in investment strategies and recommends value stocks with strong fundamentals and low valuations for investment when interest rates are expected to rise.