Tag Archives: africa

Can South Africa ETF Sustain Its Recent Rally?

The South African equity market has been on a roller coaster ride this month recording big, wild moves both ways. The market took a deep plunge after South Africa’s president Jacob Zuma replaced finance minister Nhlanhla Nene, after less than two years of his appointment, with law maker David Van Rooyen (who is relatively unfamiliar and unproven) on December 9. Per reports, Nene’s efforts to cut back spending was not agreed upon in the parliament. This political upheaval dragged down the South African currency to an all-time low and punished the stocks and bonds. Following the removal of Nene, Zuma faced a series of outrages and protests and cries for Zuma’s resignation were widespread. To contain the slide in the market and soothe political uproar, South Africa’s president Jacob Zuma immediately intervened and named well-regarded Pravin Gordhan as the new finance minister who has vowed to restrain the budget deficit and total public debt, Reuters . Market Impact Given the constructive changes in the finance ministry, the South Africa ETF – the iShares MSCI South Africa ETF (NYSEARCA: EZA ) – added about 8.9% on December 14. The ETF lost over 5.8% in the last five days and is off 28.4% in the year-to-date time frame (as of the same date). The ETF also hit a 52-week low on December 11 when shares of EZA were down roughly 42% from their 52-week high price of $73.08/share. Can the Uptrend Last? The fund has been massively beaten down this year by a flurry of issues. The looming Fed lift-off has already soured investors’ mood towards this emerging market. Moreover, South Africa is a commodity-rich nation. Since the greenback is soaring on an impending rate hike, commodity prices are falling fast as most of these are priced in U.S. dollars since one can buy the same quantity of any commodity by a few dollars now. Credit agency Fitch already cut South Africa’s rating on December 4 to barely one mark above the junk status and also added that the firing of Nene “raised more negative than positive questions.” Charts Give Bearish Cues EZA has a Zacks ETF Rank #4 (Sell) with a High risk outlook. For a technical look, the short-term moving average (9-day SMA) for EZA is well below the long-term averages (both 50-Day SMA and 200-Day SMA) signaling further downward movement. Also, EZA is currently trading way below the parabolic SAR indicating a bearish trend for the product. However, the only ray of hope is that the Relative Strength Index (RSI) is around 33.67, suggesting that the ETF is on the verge of entering the oversold territory and is thus due for a trend reversal. Still, for investors who believe that the recent rise in EZA will likely continue for quite some time, we have detailed the ETF below. After all investors should note that much of the Fed-induced blows are currently priced in the present EM valuations. Though emerging market investments will be edgy in 2016, repeated comments made by the Fed on a slow hike trajectory might not hit the EM bloc as badly as is being feared. Also, the fund (EZA) has just 5.3% exposure in materials and 6.7% in the energy sector, and should not be deeply affected by the slumping commodity market. EZA in Focus This ETF looks to track the MSCI South Africa Index. It has a major focus on large and mid-cap equities. The ETF invests about $283.2 million assets in 56 holdings. EZA carries high company-specific concentration risk, with Naspers Limited N Ltd ( OTCPK:NPSNY ) (23.87%), Sasol Ltd (NYSE: SSL ) (6.51%) and MTN Group Ltd ( OTCPK:MTNOY ) (6.28%) taking the top three spots of the basket. From a sector point of view, the fund is tilted towards consumer discretionary (35.7%) and financials (28.9%). The fund charges 62 bps as fees. Original Post

DEM: Emerging Market Equities With A 4.98% Yield Are Worthy Of A Closer Look

Summary The individual company allocations won’t be familiar, but the sector allocations and country allocations can be analyzed well. The expense ratio is simply too high for my taste. The sector allocation looks fairly aggressive, but I do like the idea of getting telecommunications exposure through an emerging market ETF rather than emphasizing it in domestic equity. Allocations to Brazil and South Africa are offering investors the opportunity to incorporate exposure to South America and Africa into their portfolio. The WisdomTree Emerging Markets Equity Income ETF (NYSEARCA: DEM ) offers great yields and appealing allocations to underrepresented countries and continents. The expense ratio is a pain, but the yield looks fairly nice. Expenses The expense ratio is .63%. This is certainly too high for my taste, and that is unfortunate, because there are some really nice things about this ETF. Dividend Yield The yield is currently running at 4.98%. For an income investor, this sounds like a beautiful way to get some of the emerging market exposure. Holdings I put grabbed the following chart to demonstrate the weight of the fund’s top 10 holdings: (click to enlarge) When looking at the emerging market company allocations, I don’t expect to be very familiar with the companies. Rather than focus heavily on the individual companies, I prefer to look into the sector breakdown and country allocations for the ETFs. Sectors (click to enlarge) The sector allocation here is fairly interesting. It feels like when I’m researching WisdomTree ETFs, I’ve simply come to expect high allocations to the financial sector. I’m not thrilled seeing it, but the positions are establishing a very significant amount of income for investors in this sector, and the weak income on equity investments in foreign markets can be a disincentive for retirees to grab enough foreign equity to optimize their portfolio for risk-adjusted returns. The thing I do like seeing here is the heavy allocation to the energy sector and telecommunications services. I’ve been bearish on domestic telecommunications because the market has become so competitive relative to previous years, but it is still developing in many countries. I like the idea of getting telecommunications exposure and emerging markets exposure at the same time, so that allocation is great. Investors should take note that this fund is fairly low on consumer staples and utilities, which tend to be more resilient to market weakness, so there is the potential of some fairly substantial price movements. If an investor is going to run with this kind of aggressive high yield portfolio, they should be ready to rebalance and raise allocations if the shares are falling as part of a bear market. Country The country allocations are another major area of importance for establishing proper diversification. (click to enlarge) I have to admit, this is a fairly interesting allocation. I’d be a bit concerned that the top countries receive such a heavy allocation, which would make me favor combining this ETF with another one or two to round out the international exposure. In those ETFs, I’d be looking for lower weights on the top three countries here to enhance the diversification. The nice thing is that I’m seeing substantial allocations to South Africa and Brazil, which provides this ETF with exposure to continents that are often marginalized or excluded from international ETFs. South America and Africa are the most common continents for being mysteriously left off of international funds, so I find this allocation fairly attractive for diversification. Conclusion The yield on this ETF is great, but the expense ratio is not. Since the companies represent emerging markets, they will generally be unknown to domestic investors, but the sector allocation and country allocation give us some perspective on how the ETF should be performing. The sector allocations feel fairly aggressive, and investors using this fund may want to control for that by being prepared to rebalance if the share prices take a hard hit. The country allocations are the high point of the portfolio. The countries represented in this portfolio, and the continents they are on, are often excluded or marginalized in other international funds. For this high yield, if the expense ratio was dropped down and the sector allocation was modified to be slightly more defensive, this fund would be very interesting. I should point out that the total returns on the fund left a great deal to be desired over the funds history, but the last 8 years have shown dramatically superior domestic performance than international performance, so investors should take the weak past performance with at least a few grains of salt.

Don’t Fall Victim To Home Country Bias

Summary The US only makes up 22% of the world economy. Emerging markets in Africa and the Pacific are showing the strongest growth. International stocks are trading at lower multiples than US stocks. We’ve written a several articles in the past about what investments and assets classes shouldn’t be in your portfolio such as commodities , currency funds , and bank loan funds . We also wrote a few articles about asset classes that should be in your portfolio such as international bonds . But, we’ve never discussed how to assemble a comprehensive, well diversified portfolio. It’s important to note we are talking about an investment portfolio so we will not be considering cash which would be part of someone’s savings portfolio. In this ongoing series of articles we’ll be discussing each of the asset classes we use to assemble client portfolios. Over the next few weeks we’ll be discussing each asset class in depth and talking about what risk and reward attributes they bring to a portfolio. For this series of articles we’ve divided the asset classes into three conceptual categories: low risk, medium risk, and high risk. The links to previous articles are below. Low Risk Treasury Inflation Protected Securities ( OTC:TIPS ): Why TIPS Deserve a Spot in Your Portfolio Domestic Government Bonds: Government Bonds Greatest Strength is Downside Protection Medium Risk Currency Hedged Foreign Bonds: International Bonds Belong in Every Investors Portfolio Corporate Bonds Municipal Bonds: Comprehensive Guide to the Municipal Bond Market High Risk Real Estate: REITs Belong In Your Diversified Portfolio Domestic and International Stocks: Don’t Fall Victim to Home Country Bias Summary How to Assemble a Comprehensive Investment Portfolio For investors looking for growth, stocks usually make up the bulk of their accounts. The reasons for investing in stocks are well known; they provide the highest potential returns of all the major asset classes and thus are the growth engine of your portfolio. So rather than rehash the well known case for owning stocks over the long run ( hat tip to Jeremy Siegel ) What I want to focus on is how to properly allocate the stock section of your portfolio to domestic, international, and emerging market stocks. When reviewing client portfolios one of the biggest issues I come across is home country bias. Investors typically overweight their home country and severely underweight global equities. Before we get into why you want to own international and emerging market stocks let’s first examine the one case where home country bias might be the best course of action. Also, since I’m from the US and most readers are from the US I’ll be writing this article from the perspective that the US is our home country. However, everything here still applies no matter what country you are from. When Domestic Bias Can Be a Good Thing Probably the number one argument for overweighting your home countries stocks is if you are a retiree or anyone else on a fixed income that is depending on the dividend income generated from your stocks for living expenses. The reason why you may want to have a portfolio of all or predominately all domestic stocks has to do with currency fluctuations. If all of your living expenses are denominated in dollars then you may want all of your dividend income denominated in dollars as well. While currencies as a whole are a zero sum game and over the long-term currency fluctuations tend to cancel each other out they can be quite volatile in the short term. If your income is close to your expenses, you may not be able to weather a 10% drop in the value of a currency you are receiving dividends in. After all, you can’t very well call the electric company and tell them you’ll pay this month’s bill later once the Norwegian Krone regains its value! This doesn’t mean a retiree should own no foreign stocks. If your expenses are below your income or if you have a decent cushion of cash and can weather some fluctuations, then owning foreign stocks is a great idea. You can also concentrate on companies whose dividend payments are denominated in “safe haven” currencies such as the British Pound or Swiss Franc (this is what we do for our dividend portfolio) instead of more volatile currencies like say the Argentinean Peso. Reasons to Avoid Domestic Bias The primary reason to own international stocks is diversification. United States stocks make up roughly half (depending on what index you look at) of the global stock market. However, because the US has some of the best-developed capital markets and a large amount of publicly traded companies that doesn’t tell the whole story. The United States only makes up around 22% of world GDP according to data from 2014 from the International Monetary Fund. Investing in either foreign companies or US companies that have significant foreign operations gives investors much needed exposure to the 78% or so of the world that is not the United States. While global conditions are always changing, right now international markets have two attractive factors. First, many international markets particularly emerging markets have economies that are growing faster than developed countries. The graphic below based on data from the World Factbook puts worldwide growth rates in perspective. (click to enlarge) We can see that Africa and Asia have many fast growing economies while Western Europe is quite stagnant. Exposure to these high growth markets should be an important component in investors’ stock allocations. Second, and probably most important is that international markets right now can give investors stock exposure at lower multiples then the US market. The table below shows the TTM P/E for the total US stock market ETF offered by Vanguard compared with various Vanguard international market stock ETFs. Fund Index Current Valuation (TTM P/E) Vanguard Total Stock Market ETF (NYSEARCA: VTI ) CRSP US Total Market Index 20.2 Vanguard Total International Stock ETF (NASDAQ: VXUS ) FTSE Global All Cap ex US Index 16.4 Vanguard FTSE Developed Markets ETF (NYSEARCA: VEA ) FTSE Developed ex North America Index 14.3 Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) FTSE Emerging Markets 15.2 Vanguard FTSE Europe ETF (NYSEARCA: VGK ) FTSE Developed Europe All Cap Index 18.7 Vanguard FTSE Pacific ETF (NYSEARCA: VPL ) FTSE Developed APAC All Cap Index 13.9 Many international markets are trading at levels significantly cheaper than the US market. With international stocks, particularly emerging market stocks, having underperformed US stocks in the current bull market it might be hard for investors to rotate out of the winning hand of US stocks. If you’re a macroeconomic expert then by all means concentrate your portfolio in the best geographic areas. However, for most investors they would be best served with a diversified portfolio spread among the entire world. You will have exposure to better performing economies like the US but at above average multiples, underperforming economies such as Western Europe at slightly below average multiples, and faster growing economies albeit with currency concerns at very low multiples. A global stock portfolio insures that no matter which area of the globe is poised to outperform you’ll have some exposure to it.