Investment Portfolio Summary in FTSE 100 Index

The purpose of the project is to present a summary of investment portfolio consisting stocks listed in the FTSE 100 index. The investment corpus is of around SGD 200,000 (GBP 100,000) which is required to be invested into the stock market of United Kingdom, and at least 10 companies’ listed in Singapore stock exchange and 10 companies listed in London Stock Exchange needs to be chosen for the purpose of investment. The stocks chosen for investment must also be listed in the Singapore stock exchange. The investment methodology includes fundamental analysis based upon which the stocks are chosen. Certain parameters are utilized to identify the outperforming sector of the respective countries and then stocks are chosen on the basis of fundamental analysis. The investment strategy consists of short term strategies which could earn alpha returns and beat the respective benchmark. The trading period commences from 28t September 2021 to 16^th January, 2022 and involves stamp duty 0.20% and commission fee of GBP10 per trade. The stocks chosen for the purpose of investment are diversified across sectors belonging to multiple sectors like financial services, mining, industrial equipment, insurance etc.

Being a moderate risk seeking investor, the portfolio is mainly made up of defensive stocks which has low risks and is immune to economic cycles. The stocks included in the portfolio were chosen based upon certain fundamental variables like P/E ratio, Dividend yield, and Earning Per Share (EPS). P/E ratio is an important element in determining the cheapness of a stock, thus stocks were screened based on the lowest P/E ratios. The dividend yield factor was chosen keeping in mind the investment period which consisted of one quarter end. Dividends are generally paid quarterly, semi-annually or Annually, hence it has a potential to impact the profitability of the portfolio. The following table summarizes the stocks chosen for investment and the respective industries they belong to:

The investments were diversified across sector with the healthcare and pharmaceuticals sector represented by three stocks. Three stocks were chosen from the Banking and Finance sector as well based upon financial performance. The consumer goods and services sector along with the Minerals and Mining sector represented two stocks each.

According to the efficient market hypothesis, all share valuations will represent all discounts of privately available information as well as publicly available information, and there will be no opportunity to earn a better rate of return. According to the EMH, markets are efficient and stock prices represent all available information in real time. This is based on the premise that all market participants have access to the right data and can react quickly to really fresh information (Å¢iÅ£an, 2015). If this is the case, efficient markets will prevent investors from outperforming the market. In other words the EMH argue that active investing and arbitraging have no role in the market since intrinsic value will be equivalent to fair market value. Those investors who are attempting to outperform the market by generating abnormal returns will dislike the Efficient Market Hypothesis because it promotes that they should not learn to handle their investments in an advanced manner because it can lead to low performance as they can never outperform the market return on capital according to the Efficient Market Hypothesis, so they should avoid active incentive to invest and instead focus on passive investment. The views of Eugene Fama, has been contradicted by several economists, one such economist was Robert Shiller, who gave a counter opinion to the theory of efficient market hypothesis. In the opinion of Robert Shiller, Bubbles in asset prices are an inherent consequence of human nature. According to Shiller, rational investors would value a company based on the current value of predicted future dividends. He thinks that the real interest rate remains constant and that stock prices change more than dividend variations can explain. He defines bubbles as a societal pandemic characterized by unrealistic aspirations for the future. People nowadays are monitoring prior price increases and believe that they will continue to rise. As a result, we can observe that there is a bubble element. He also detects a tint of fear and uncertainty, which is a component in the market and distinguishes it from previous boom markets.

Weak Form Efficiency

According to Fama, an efficient market is one in which the investor cannot outperform the market. They acted rationally with the information they had and expected the genuine market price to be available to all investors at all times. Shiller discusses the concept of behavioural finance. Behavioural finance is linked to the notion of asset pricing and discusses the market behavior of financial assets. The Fama efficiency market theory is criticized. They said asset pricing is erratic and unreliable when compared to market data. Both Fama and Shiller explain how a buyer or an equity fund manager may utilize this information to construct a perfect portfolio. As an active equities fund manager, the implications of this model are that, first and foremost, efficient market hypothesis information is necessary, but we do not rely on it since it can sometimes mislead investors or managers when making decisions on financial market instruments. Second, Shiller claims that our psychological conduct has an impact on the functioning of the financial markets and assets. Because asset prices change, you must keep a careful eye on them as a manager in order to build an efficient portfolio. The management of an equity fund ought to be such that it will not be influenced by market information or the pricing of a single equity position, as this is detrimental to society.

To assess the amount to which different forms of information are absorbed into share prices, Eugene Fama, established three levels of market efficiency. Weak form efficiency, semi-strong form efficiency, and strong form efficiency are the three stages of market efficiency.

Weak form efficiency suggests that any data related to price movements, volume and data related to earnings, is of no use in predicting the future movement of the price of the stock. Fundamental analysis is the method of determining the intrinsic value of a share by analyzing the economic and financial variables associated with the stock. The analysis of the fundamentals of the particular company like the economic state, the business environment, the management of the company, can be very useful in predicting the movement in the stock of the particular company. On the other hand, technical analysis can be defined as the process of identifying price trends in the stock by looking at the historic price movements and volatility. Trading opportunities are identified by deploying various statistical techniques and conduct trading activities. The weak form implies that today's share prices are a reflection of all previous price data. It believes that by employing fundamental and technical analysis, undervalued and overpriced stocks may be identified, and investors should analyze firms' income reports to boost their prospects of outperforming the market.

Semi-Strong Form Efficiency

According to (Fadda, 2019), there really are no trends to be identified in previous stock prices, and share prices change at arbitrary. The "Random Walk Hypothesis (RWH)" is a financial hypothesis. The RWH backs up the EMH's weak form efficiency. According to him, as the movements of the stock prices are random, the prediction of the stock prices becomes immensely difficult using technical analysis as no concrete patterns can be ascertained by looking at the price charts. However, the investors can gain a certain advantage if they utilize the fundamental analysis method of stock price valuation but only in the short term. (Li, Nirei, &Yamana, 2019) in their research had mentioned that if there were free money available in the stock exchange of any country, it would not be available for very long.

As we know that Fundamental analysis is a way of estimating a stock's intrinsic value by examining the stock's economic and financial characteristics. The fundamentals of a firm, such as its economic status, business environment, and management, may be highly beneficial in predicting the stock's movement. Semi-strong form of efficiency suggests that all the information related to a particular stock are incorporated in the price of the stock and thus fundamental analysis cannot be utilized to predict the movement in the stock price. Fundamental events like earnings announcement, release of the annual financial performance report, initial public offerings, stock splits, management changes, does not have any effect on the movement of the stock prices as it is quickly absorbed in the price of the stock under semi-strong form of efficiency. According to several researches conducted, it has been determined that capital markets around the world which are developed, like the New York stock exchange or the London Stock exchange, the semi-strong form of market efficiency persists. (Ziliotto & Serati, 2015), suggested that the public announcements of fundamental information related to stocks has no effect on the behavior of the investors and the values of the stock are not going to significantly deviated from the market implied equilibrium values.

It is the form of market efficiency which implies that share prices of all the company reflect all information, and fundamental and technical analysis are of no use in predicting the movement of the stock price. It is impossible to achieve extraordinary gains in such a market by reviewing any sort of data. The strong version of efficiency proposes the idea that all private and public data is represented in the current market price, and that even crucial non-public information is weighed in (Urquhart & McGroarty, 2016). A perfect market is assumed in a strong form of efficiency, but no one has monopoly access to the common market. This form of market efficiency is often not practical and criticized by several analysts and researchers. Even well-developed financial markets cannot be regarded as strong form efficient even though it is always possible to obtain anomalous gains by leveraging insider knowledge (even if governments have made this illegal). Traders, financial analysts and investors, on the other hand, are frequently correct in their assessments of what is going on within organizations, and wealth management theory regards well-developed stock markets as extremely efficient.

Evidence is lacking for this form of market efficiency, and it is not possible for any market to be strong form efficient, as suggested by (Potocki & Swist, 2015). He suggested that markets are not strong form efficient and there are multiple methods to earn supernormal returns. (David, Manel & Anxo, 2019), suggested that there are always some information which is private to the company and has the potential to alter the valuation of the stock, hence these information can be utilized to predict movements in the stock price. According to them, the prices of the stock do not reflect all the information and there is always a scope for earning abnormal returns.

Conclusion Of EMH:

1. Since there are restriction on insider trading, market price does not reflect insider information. In other words strong form of efficiency is not realistically possible.

2. To check whether markets are weekly efficient, one can carry out serial correlation test and test of trading rules. Most of these tests showed that constant abnormal returns net off costs are not positive using technical. This means markets are weekly efficient i.e. technical analysis is useless.

3. Supporters of technical analysis criticize these tests on the reasoning that all trading rules were not tested and what about subjective judgment involved when we look at a chart.

4. Developed markets are primarily efficient in the weak form and emerging markets may be weakly inefficient.

5. On a large scale fundamental analysis is useless in developed markets. However, here are some exceptional fundamental analysts who can beat the markets using fundamental analysis. However, in emerging markets fundamental analysis is generally useful.

6. In the presence of EMH, active portfolio management is not recommended; returns net off costs under active management would be less than passive management. Passive portfolio management is significantly useful even if markets are efficient. Portfolio management helps in diversification and achieving client objectives and constraints such as tax constraint, liquidity constraint (Rossi, 2015).

There are several criticisms and challenges to the Efficient Market Hypothesis, there are multiple anomalies that the EMH cannot explain:

1. Small cap bias – The stocks of small cap companies have previously outperformed the well-established large cap companies which are not explained by the EMH.

2. Calendar effects and cyclical effects – Calendar anomalies are linked to a certain timeframe, such as stock price fluctuation from day to day, month to month, year to year, and so on. Weekend effects, month-end effects, and year-end effects are only a few examples (Market, 2019). These events have been labeled anomalies even though they can be described using the current EMH paradigm.

3. Value investing – This method of investing is based upon the premise that value stocks outperform the market. Stocks that are primarily undervalued or not regarded as profitable investment by investors are regarded as value stocks and generally outperform other stocks in terms of returns provided. A value investor always seeks for good bargains that an undervalued stock offers. This method of outperformance are not considered by the EMH, hence it is one of the challenges to EMH.

4. Equity risk premium puzzle – According to (Shirvani, Stoyanov & Fabozzi, 2021), IPO stocks have been historically under looked by investors all around the world. There are deviations in the behavior of the investors when it comes to IPO stocks. The EMH has also failed to explain multiple global financial crises like the dot-com bubble or the sub-prime crisis.

The primary step in construction of the portfolio is to select industries based upon the expected outperformance in the future. Although our portfolio contains different industries to for the purpose of diversification, some of the rationales behind selection of some industries are discussed below:

Healthcare - Defensive industries are those that are unaffected by economic downturns and remain relatively steady throughout the economic cycle. The healthcare business is an illustration of a defensive industry, and healthcare-related stocks have done very well in recent markets. Healthcare-related equities are functioning well in the midst of a crisis because consumers are willing to keep buying universal health care items even if the market is in upheaval. AstraZeneca, Mediclinic GlaxoSmithKline from UK and Vicplas, Haw Par and Tianjin Z Group from Singapore are the stocks chosen for the purpose of investment under this industry. The EPS of the companies are shared below in the table along with the P/E ratio of the companies which shows the demand of the stock amongst investors due to the expected future performance. The dividend yield of the stock which ensures regular stream of income is also shown in the table below based upon which the stocks have been chosen for investment.

Consumer goods and retail services - Customer and retail services are the most important companies in the UK, contributing for around 5.1 percent of total GDP. Vital goods such as food, cleanliness, groceries, grocery stores, and others are expected to function very well once pandemic restrictions are lifted and people are progressively allowed out of their houses around the globe. Internet shopping services became extremely popular throughout the lockdowns, helping the sector to continue operating. Compass Group and Dignity PLC are the stock from LSE along with Jardine Matheson and Keppel Corp from Singapore are the stocks chosen under this industry. All the parameters based upon which the stocks were selected are shared below in the table.

Financial Services industry – As the economy of the world is expected to be back on track after the impact of covid-19 pandemic, it is expected that financial services and banking would be improved significantly in the years to come due to the increased lending. The lending activities would be able to boost the profitability aspects of the industry in the face of Brexit and the uncertainty that comes associated with it. Barclays PLC, NatWest PLC and Lloyds banking group are the stocks selected from the UK market and OCBC, Hong Leong and DBS are the stocks listed in Singapore exchange that are expected to outperform based upon PE ratio, EPS and Dividend yield of the company which are shared in the table below.

Minerals and railroads – The sector is expected to perform well in the period to come as fiscal stimulus in the US in view of the pandemic would see in increased demand. The resulting infrastructural development due to the fiscal stimulus would help the industry to be profitable. The stock chosen under this industry is the Antofagasta PLC. The EPS of the stock stood at GBp76.70 and the P/E ratio is around 19. This makes the investment quite lucrative due to the cheap valuation of the stock. The dividend yield of the company is also 3.62% which is capable of providing a regular stream of income.

The average dividend yield of the stock selected for the purpose of investment including stocks from both Singapore and UK is 3.055%. The average PE of the portfolio is around 27.58 which represent our focus on cheaply available stocks. The EPS of the stocks are the optimum amongst industry peers, which became the reason for selecting them in the portfolio.

4^th October 2021 To 31^st October 2021

In the month of October, all equities from the London and Singapore stock exchanges were acquired. The acquisition date of the stocks is shown in table 1. On October 31st, AstraZeneca stock from the LSE was sold for a profit of GBP 272.07, while Haw Par stock was sold for a profit of SGD 1088.93. Until the end of October, the unrealized gain for the LSE portfolio was about 4.75 percent, while the unrealized gain for the SGX portfolio was around 5.12 percent.

Table 1

1^st November 2021 To 29^th November 2021

AstraZeneca PLC’s stock was re-purchased on 12^th November 2021 with total value of shares amounting to GBP 3859. On November 14, 2021, the stock of Mediclinic and GlaxoSmithKline was sold for a profit of GBP 568 and GBP 476, earning returns of 8.60 percent and 12.34 percent, respectively. Due to a price increase, three equities were sold on the Singapore market. CNMC and Vicplas International stock were sold on the 14th and 28th of November 2021, respectively, at a profit of SGD 335 and SGD 510. GlaxoSmithKline and Mediclinic was purchased on 18^th and 26^th November respectively with a total capital investment of GBP around 10,500. The stock of Mediclinic was available cheaply which was the reason that supported the purchase of the stock. GlaxoSmithKline’s stock was re-purchased again to enjoy the prevailing price momentum. Jardine Matheson was sold on 14^th November 2021 due to a profit booking opportunity booking a profit of SGD 1301. Stock of Jardine Matheson and Haw Par was re-purchased on 26^th and 29^th of November, with a companied value of shares equal to SGD 20,147. For the month of November, the value of unrealized gains in the LSE portfolio fell. At the end of November, the unrealized loss for the LSE portfolio was about GBP 2470, and for the SGX, it was around SGD 1645, representing 1.65 percent gains in percentage terms.

29^th November 2021 To 26^th December 2021

Mediclinic, GlaxoSmithKline PLC, Compass group, and BHP stock were sold during this trading period as a result of positive price movement. After deducting costs, we made a combined profit of GBP 2260 which equals to 4.16 percent profit. We continued to keep NatWest, Dignity and Antofagasta Plc. shares despite the fact that it was losing money until the end of January. Until the end of December, 4 out of 10 equities were sold, resulting in an unrealized loss of about GBP 2162 in the LSE portfolio. Stock of CNMC as repurchased on 6^th December with a total investment of SGD 4554.  The total unrealized loss from the LSE portfolio stood around GBP 2162 and the realized profit from the portfolio amounted to around GBP 2260. For SGX portfolio, the total unrealized profit was around SGD 1383 with no additional stocks sold during the entire period.

27^th December 2021 To 23^rd January 2022

The stock of Compass Group was re-purchased on 27^th December 2021 with a total investment of GBP 6659. Stocks of Dignity PLC, Barclays PLC and Lloyds PLC were sold on 9^th of January 2022 booking a total profit of GBP 1406. Lloyds and Barclays PLC stocks were purchased again on 22^nd and 23^rd January 2022 with a total investment value of GBP 13,876. Tianjin Z Group and Hong Leong were the stocks sold on the SGX in the first half of January. We made a large profit of roughly SGD 2341 on Tianjin Z Group's shares but had to reduce our position on Hong Leong's stock virtually at cost, producing a tiny profit of SGD 12. On the last day of this trading session, Haw Par, Keppel Corp, DBS, and OCBC were sold, resulting in a total profit of roughly SGD 3525, or a return of around 3.53% of the entire invested amount. On 23^rd January 2022 the total unrealized loss of the LSE portfolio reduced to GBP 669 whereas the total unrealized loss on the SGX portfolio was around SGD 219. During the period, the realized profit from the SGX portfolio was around SGD 3525.

24^th January 2022 To 4^th February 2022

The six companies in the LSE portfolio were sold for a combined profit of around GBP 1044 with the stock of Antofagasta and AstraZeneca resulting in a loss of 17.19 percent and 2.45 percent respectively. The stock of Compass Group was sold at a good profit of GBP 1236. SGX's Jardine Matheson, CNMC and Union Steel stocks were sold on February 4th for a profit of SGD 245, a loss of SGD 190 and a loss of SGD 569, respectively. The final value of the SGD portfolio was around SGD 105,828 compared to an initial investment of SGD 100,000.

The trading period lasted from the 4th of October to the 4th of February, and a total of 20 stocks were purchased and sold at regular intervals. The overall profit gained from the LSE portfolio was around GBP 5813, corresponding to a 6.51 percent return. After deducting all expenditures, the SGX portfolio produced a return of roughly 6.73 percent. On an initial investment of roughly SGD 100,000, the overall profit for the SGX portfolio was around SGD 8398.

Conclusion

The project's goal is to offer an overview of an investment portfolio made up of equities from the FTSE 100 index. The investment corpus is around SGD 200,000 (GBP 100,000), which must be invested in the stock market of the United Kingdom, and at least 10 companies must be picked for investment. The equities to be purchased must be listed on the Singapore stock exchange. The fundamental study on which the stocks are picked is part of the investment approach. Certain metrics are used to determine which sectors of the individual nations are outperforming, and then stocks are picked based on fundamental research. The trading period runs from 28^th September, 2021, to January 16, 2022, and includes a 0.20 percent stamp tax and a GBP 5.436 commission fee per trade. The equities picked for investing purposes are diversified throughout several industries, such as financial services, mining, industrial equipment, and insurance. The portfolio which included stocks from United Kingdom listed on the London stock exchange was more profitable compared to the portfolio comprising of stocks listed in Singapore Stock Exchange. The UK portfolio yielded a return of 10.81% which is higher when compared to the return of 6.25% provided by the Singapore portfolio. Jardine Matheson, DBS and Tianjin Z group were the top three profitable investments in the Singapore portfolio with a yield of 10.58%, 18.68% and 9.84% respectively. Whereas the top three most profitable investments in the UK portfolio were GlaxoSmithKline, Compass group and BHP PLC with returns of 22.33%, 20.78% and 18.61% respectively. Antofagasta was the only one stock in the UK portfolio which suffered a loss of 4.51% whereas there were three stocks in the Singapore portfolio which suffered a loss, those were Vicplas International, CNMC and Hong Leong with negative returns equal to -0.70% , -1.43% and -0.33%.

Reference

David Peón, Manel Antelo, & Anxo Calvo. (2019). A guide on empirical tests of the EMH. Review of Accounting and Finance, 18(2), 268–295. https://doi.org/10.1108/RAF-02-2016-0031

Fadda, S. (2019). Testing the random walk hypothesis of stock indexes through variance-ratio. Periodicals of Engineering and Natural Sciences (PEN), 7(1), 12-19.

Li, W. C., Nirei, M., & Yamana, K. (2019). Value of data: there's no such thing as a free lunch in the digital economy. RIETI. 

Market, V. O. P. O. S. (2019). Impact Of Calendar Anomaly Effects And Stock Price Volatility On Performance Of Stock Market Return In Nigeria (1986–2018).

Potocki, T., & Swist, T. (2015). Empirical test of the strong form efficiency of the Warsaw stock exchange: the analysis of WIG 20 index shares. South-Eastern Europe Journal of Economics, 10(2). 

Rossi, M. (2015). The efficient market hypothesis and calendar anomalies: a literature review. International Journal of Managerial and Financial Accounting, 7(3-4), 285-296.

Shirvani, A., Stoyanov, S. V., Fabozzi, F. J., & Rachev, S. T. (2021). Equity premium puzzle or faulty economic modelling?. Review of Quantitative Finance and Accounting, 56(4), 1329-1342.

Å¢iÅ£an, A. G. (2015). The efficient market hypothesis: Review of specialized literature and empirical research. Procedia Economics and Finance, 32, 442-449.

Urquhart, A., & McGroarty, F. (2016). Are stock markets really efficient? Evidence of the adaptive market hypothesis. International Review of Financial Analysis, 47, 39-49.

Ziliotto, A., & Serati, M. (2015). The semi-strong efficiency debate: In search of a new testing framework. Research in international business and finance, 34, 412-438.