Friday, May 28, 2010

Buy Singapore, sell Hong Kong?

Further to my last post about buying Australia and selling Canada, an alert reader emailed me and asked me to comment about buying Singapore and selling Hong Kong as another pair trade with the Asia Ex-Japan region.

Here again, is Bill Hester's analysis of relative country valutions based on cyclically adjusted P/Es and dividend yields. Indeed, it shows that Singapore as very undervalued and Hong Kong as roughly fairly valued.

The chart below shows the relative total performance of the iShare Singapore ETF compared to the iShare Hong Kong ETF, both in USD. This chart casts more doubt on the profit potential of a Singapore/Hong Kong pair trade.

I wrote in my previous post: "Hester’s analysis, combined with the above chart, screams out for a trade of going long Australia and shorting Canada."

The Australia vs. Canada pair trade that I proposed had the benefit of a valuation spread and price mean reversion. In the Singapore vs. Hong Kong case, the pair is already moving in Singapore's favor and it does not appear to be a mean reversion trade. There appears to be less of a historical price relationship between those two markets than Australia and Canada.

Under these circumstances, I would steer clear of the trade.


Achiever said...

Hi your notes states EWG as Ishares Singapore. Isn't EWG for Germany instead ?

Cam Hui, CFA said...

You are right. The chart is mis-labeled. It should state EWS vs. EWH.