One positive effect of the pandemic is that investment courses can now reach students around the world. Ludovic Chou, an Australian student and IT consultant, had the privilege of attending the last run of the Early Retirement Masterclass (ERM) remotely. Since he is currently living in Sydney with a different timezone, he completed his class attendance by accessing the recorded videos of the EMR Batch 2 live classes.
Although the class used data from the Singapore stock exchange, Ludovic was successfully able to replicate the ERM approach on the Australian Stock Exchange (ASX).
This article shows the flexibility of our ERM approach as it can be applied even to foreign markets. It is also a good framework for Australian investors or Singaporeans who have sought a new life in Australia.
a) Getting into the Australian Markets
Singaporeans who are interested in trading Australian stocks need to have a feature explicitly enabled on Interactive Brokers.
To do this, simply go to your account settings, scroll down to “Stock trading permissions”, then add “Australia” to the list of countries. Trading permissions will be granted within 24 hours.
Dividend investors should take note that withholding taxes for Singaporeans who invest in Australia is currently at 15%, thanks to the Singapore-Australia Double Tax treaty. On the other hand, Australians who own Singapore stocks are not subject to dividends withholding taxes.
b) Exploring blue-chips in the ASX
Ludovic’s first step was to build a baseline performance of stocks and then he meticulously backtested different one-factor strategies over 1, 3, 5, and 10 years, to find out what works best in Australia.
Each strategy has been tagged using the Sortino ratio, a measurement that calculates the highest risk-adjusted return. In ERM, only the highest Sortino ratios would qualify a strategy that will be used in stock screening.
The following table was generated using Pyinvesting.com, and is covered in greater detail in the ERM program:
The winning strategy for the Australian market are the following:
- The low Price-Earnings ratio stocks tend to outperform.
- The low Price-Book ratio tend to outperform.
- High 180-day RSI stocks tend to outperform.
- High revenue growth stocks tend to outperform.
As it turns out, Australia is a balanced market that rewards Value, Growth, and Momentum metrics and rewards different classes of investors. This is quite unique if you compare it to Malaysian and Chinese markets, which seem to be driven by momentum alone.
The ASX blue-chip universe of the 50 most iconic Australian counters is an excellent place for ERM students to build their first portfolio.
c) Screening a starter portfolio of ASX stocks
Now that the hard part of backtesting is over, we have a framework for selecting Australian blue-chip stocks. We will now find a way to score Australian blue-chips by looking at stocks that score the highest based on the four criteria above.
ERM uses the same statistical process used in the Singapore PSLE exams to rank Primary 6 students. Without getting too deep into the mathematical details, in the ERM framework, it’s as if we force each stock to take four “exams” and then categorise them as low PE, low PB, high momentum, or high revenue growth.
After ranking them, we have the following table:
The portfolio is almost ready at this stage. Before deciding to purchase the portfolio, my students would usually look for an analyst report of the company and review it to see if there are any red flags.
d) Reviewing my first Australian stock
After seeing Ludovic’s fantastic application of the ERM to the Australian market, I decided to make my first stock purchase as soon as Interactive Brokers gave me trading permission.
Suncorp Group (ASX:SUN) provides banking, insurance, and wealth products to Australians. From simplywall.st (which briefly describes each stock in detail), I can see that Suncorp produces dividends of 5.26% (top 25% of Australian companies) and its earnings are forecasted to grow at around 4.5% yearly.
Suncorp’s stock chart is quite attractive, and its stocks have been going up since March 2020.
See a screenshot from Yahoo Finance below:
The ERM program contains a robust framework that can be readily applied to global markets, and it is as significant as other programs.
Because of the research and ERM application of a student based in Sydney, this trainer was able to have his first stock position in a market he was previously unfamiliar with. Join me at my next webinar to learn more about the ERM framework.
