Implied equity risk premium STI

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Inspired by Prof Aswath Damodaran, I computed a STI implied equity risk premium (ERP). As of 30 Jun 2016, STI closing of 2,840.93 implies an ERP of 4.42%. Compared to 18 Jan 2016, when STI is at 2,580 with the implied ERP at 5.56%, STI has recovered 10%.

The way I calculate ERP is simply treating the problem as a discounted cash flow model which the price of the index is simply the net present value of future cash flows. Cash flow here refers to dividends and share buybacks done by the 30 companies of STI for the past 12 months. Growth rate will be based on analysts' consensus which I currently based on 2% growth set by DBS for STI in 2016. Growth rate can be controversial but 2% growth in 2016 will be comfortable and it is inline with the government's GDP growth of 1-3% in 2016. 

Thereafter I apply a discount rate to these cash flows to derive the price i.e. the index level. Deducting the risk free rate out of the discount rate, I will obtain the ERP.

ERP is a useful data to look at for observing investor's sentiment and the implied version I computed is dynamic enough for investors to make their decision on. I hope this information can be useful for valuebuddies and I intend to update it on a half yearly basis. You may also wish to refer to my blog, http://thatlosthorse.blogspot.sg/ for other posts.
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