EFFICIENT PROPERTY STOCK PORTFOLIOS IN SINGAPORE AND HONG KONG (1984-1988)

Abstract

To date, the study of securities and portfolio management have attracted a vast amount of attention from academicians and practitioners alike. The introduction of financial publications (Journal of Finance, Journal of Financial Analysts, etc.) in the 1960s heralded a new age in the research of capital markets. Today, with progressive trends towards a globalised equity market, international portfolio management have become a new password. Much research has been conducted in the mature equity markets of the West. The emerging economic power of the East in the past 10 to 20 years have highlighted the potential of their equities in international diversification. Hence, there is a need to address the peculiarities of these Oriental markets in financial research. Portfolio diversification was defined by Hagin(1979) as "the spreading of investment over more than one company or industry to reduce the uncertainty of future returns caused by unsystematic risk". The focus of my study is on the efficiency of non-sectorial diversification in property stocks relative to conventional diversification across industries, in the Singapore and Hong Kong stock market. The objective is to clarify the popular notion that diversification across industries is the best option for an investor. The second objective seeks to determine the benefits of non-sectorial diversification in property stocks from a bi-country perspective i.e. Hong Kong. To realise the benefits of such diversification from the opinion of a Singaporean investor, all HK$ stock prices have been expressed in S$. The raw Hong Kong stock data collected were adjusted for capital changes and inflation and converted into S$ nominal terms. No data transformation was required for the Singapore stock data as they were already adjusted for capital changes. The SES All-price share index and the Hang Seng Index were used as proxies of the Singapore and Hong Kong market performance, respectively. Price relatives of individual stocks were calculated on an overlapping 4-weekly basis, using arithmetic and geometric mean measures. Individual stocks were then combined, in proportion to their average turnover, in the portfolio. Portfolio performance was measured using Jensen, Treynor and Sharpe indices. Efficient frontiers were also constructed for the bi-country property stock and market portfolio. Results of the study indicated that Singapore property stock portfolios constructed during the period of the study were more efficient than the market portfolio. However, returns from investment in risk-free assets yielded higher returns than investment in either the property stock portfolio or market portfolio. For the Hong Kong market, property stock portfolios constructed during the period of the study were also more efficient than the market portfolio. Results from both market also indicated that an investor who re-invests funds into the stock market during the period of the study will attain a lower return than one who keeps the funds aside at the end of each holding period. Results from constructing the bi-country portfolios indicated that there were gains from bi-country diversification, with the bi-country property stock portfolio achieving higher risk-adjusted returns than the market.