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If you are a shareholder in Affluent Partners Holdings Limited’s (SEHK:1466), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. 1466 is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
Check out our latest analysis for Affluent Partners Holdings
An interpretation of 1466’s beta
Affluent Partners Holdings’s beta of 0.27 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. 1466’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Could 1466’s size and industry cause it to be more volatile?
With a market cap of HK$1.87B, 1466 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Moreover, 1466’s industry, luxury, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the luxury industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by 1466’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How 1466’s assets could affect its beta
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test 1466’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, 1466 seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect 1466 to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. Similarly, 1466’s beta value conveys the same message.