Question 1:  I have a question concerning Fair Value versus Market Share Price. In particular I reviewed Fortescue Metals (FMG), currently trading at $20.56 versus a fair value of $10 (Morning Star). In looking at the other suggested ratios used to determine the value of the business, I sense that FMG is a solid investment opportunity, yet the differential between the fair price and market price still suggest the stock is way over-valued. Should I be using another frame of reference to assess this opportunity

Answer: I think you should be very careful about interpreting “fair value” or “target price” calculations for resource companies. By in large, resource companies have absolutely no control over their revenue (they are price takers), or their profitability. The only thing they can influence is how much they produce, and to a limited extent, at what cost.

The biggest influence on any valuation model will be the assumptions about the price of the commodity. Take iron ore, which has traded in a massive range of between US$50 and US$180 per tonne over the last few years. Fortescue’s cost of production is around US$15 per tonne. At US$50, it makes a profit of US$35 per tonne – at US$180, it makes US$165 profit per tonne.

In the valuation model, if the analyst is using a forward price of US$80 per tonne, he/she will get an entirely different valuation than if they use a forward price of US$50 per tonne.

Unfortunately, the data shows that analysts are not any better at predicting commodity prices than other players. I would almost throw out “fair value” concepts when it comes to resource companies.

Question 2: Ares there any ETFs or managed funds that you would recommend for  exposure to Asia?

Answer: Passive, index tracking ETFs: either Vanguard’s FTSE Asia ex Japan (ASX: VAE) or iShares Asia 50 ETF (ASX: IAA). The latter doesn’t include India.

For active managers, consider Platinum Asia Fund (ASX: PAXX) or Fidelity’s Global Emerging Markets Fund (ASX: FEMX) – the latter is about 70% Asia domicile.

I also quite like BetaShares’ Asia Technology Tigers (ASX: ASIA).

Question 3:  What is your view on Sydney Airport as a long term hold in an SMSF? Currently a non owner, I am 45 so have 20 years until I’m eligible to withdraw.

Answer: As a long-term growth play, I am not a fan. The monopoly that Sydney Airport currently enjoys will end when the new Western Sydney Airport opens in 2026, and ultimately, there will be some downward pressure on margins. The market doesn’t seem too worried about this, yet, but at some time, it will.

From an income perspective, an unfranked (forecast) yield of 0.6% for FY21 and 3.5% for FY22 is not attractive.

For a different perspective, this is what the analysts say: Target price of $6.20 (current market around $6.17), range of $5 to $6.86. On broker recommendations: 2 buy, 4 neutral and 1 sell.

Question 4: When it says credit markets are pricing a 30% chance of a rate rise, what does that mean? How is the probability calculated?

Answer: There is a futures contract traded on the ASX that is called the ASX 30 Day Interbank Cash Rate Futures. It is based on the Overnight Cash Rate published by the Reserve Bank of Australia (this is the rate the RBA targets for monetary policy purposes, currently less than  0.10% ). The futures contract is settled by reference to this rate.

If the futures contract was trading at a rate higher than the current RBA target rate, then you could say there is some probability that the market is expecting a rate rise. The more the difference, then the higher the probability. At the moment, there is no expectation (virtually zero probability) of a rate rise.