Investment Market Portfolio Rating

Each of the six major investment markets covered by PennyWise Investment are given a score of 1 to 3 for each of three ratings criteria: trend, relative price performance and valuation. The top score is 3, and the lowest score is 1 for each criterion, meaning the maximum possible composite score across the three criteria is 9, and the lowest possible score is 3.

Investment markets are given an overall portfolio rating according to their composite score.

Portfolio Rating System
positive:  7-9 points
neutral:   4-6 points
negative: 3 points

Trend Rating

Trend ratings are based on the position of end-month prices relative to their medium-term monthly moving average. We also apply a trend filter to ensure prices are not in a range.  Prices considered to be trending and  below their moving average signal are considered in a downtrend, and given a score of "1".  Prices that are trending and above their moving average signal are given a score of 3.  When prices are considered in a range, the trend score is 2.  

Relative Price Performance Rating

Investment markets are give a relative price performance rating based on our proprietary measure of medium-term price momentum - with the strongest performing market given a rank of 1, and the lowest a rank of 6.  The top two investment markets are given a relative performance score of 3, the next two markets are performance score of 2, and the lowest two markets a performance score of 1.

Valuation Rating:

Valuation ratings are based on the deviation in current market prices from our proprietary measure of "fair value" for each investment market. Fair value is based what market prices would be needed today to generate expected annualised returns in line with an average Australian investor's assumed required returns over the next five years. This calculation is based on discounted cash flow estimates using the following estimates and assumptions:

   *current interest rates;
   *an assumed 4% equity risk premium for the Australian market;
   *how correlated ETFs losses are with those for the S&P/ASX 200 index. (i.e. downside "beta");
   *the ETF's current dividend yield;
   *forward earnings growth in line with consensus estimates and IMF growth forecasts;
   *a move in the exchange rate back to its 5-year average over the next 5 years; and
   *a move in the forward price-to-earnings ratio back to a long-run average over the next five years.

To avoid false precision, expected returns are rounded to the nearest 2.5 percentage points.

     Value Scoring System: Deviations from Fair Value
     3. more than 15% below fair value (cheap)
     2. within 15% of fair value (fair)
     1. more than 15% above fair value (expensive)
     
Gold valuations are based on an assumed move in $US dollar real prices back to their 40-year average over the following five years, and underlying US inflation of 2.5%pa.

For unhedged international equity markets, expected returns also factor in a "return to the mean" in exchange rates.  If the $US dollar, for example, is 20% below its 5 year average against the $A, we estimate it will rise back to this average over the following 5 years - boosting returns in $A terms from $US linked ETFs.

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