Tag Archives: alternative

RSX: OPEC, Sanctions On Turkey And The Stubborn Ruble

Summary OPEC fails to provide support to oil prices, posing a significant risk for RSX. The story with Turkey is evolving as I predicted, and does not add much to the bear thesis. The ruble remains relatively overvalued. Market Vectors Russia ETF (NYSE: RSX ) had an interesting November. The ETF moved up and down, fueled by implications of Paris attacks, the shooting of the Russian jet by Turkey and the fluctuations of oil prices. In this article, I’ll focus on two major developments – the Russian sanctions on Turkey and OPEC’s decision to leave things as they are. Turkey In my article on RSX that was published right after the jet incident I stated that Russia’s response won’t be harmful for RSX components. This what exactly happened. In essence, Russia banned tourism and food from Turkey. The food ban comes into power on January 1, 2016, but multiple reports from Russian media show that it is already next to impossible to bring food from Turkey in reasonable time due to customs’ intense checks. Short-term, this will increase inflation, as Russia imports most fruits and vegetables that it consumes in winter because of obvious geographical reasons. As for RSX holdings , this might hurt the retailer Magnit, but I don’t think that it will have a big impact on Magnit’s bottom line. Russian president promised more sanctions on Turkey, but so far there was more harsh talk than real actions. Given the nature of the incident, tourism and food bans are a very light response. I anticipate more words (like the recent mutual accusations of involvement in the ISIS oil trade) from both sides as politicians want to score some points, but I expect little action. Among RSX holdings, the biggest risk is on Sberbank (OTCPK: OTCPK:SBRCY ), which is the fund’s biggest holding. Sberbank owns DenizBank, which is a notable player in the Turkish market. In the latest interview to the Russian media, Sberbank’s head German Gref stated that he saw no significant risks for Sberbank in Turkey, and I agree with his assessment. OPEC OPEC’s decision to live things as they were was predictable, but, nevertheless, was bad for Russia. I think that OPEC’s inability to function as an organization will put more pressure on the oil market. I recently argued that a perfect storm could push oil to $25 per barrel. Such a drop will push RSX way past the lows of December 2014. However, even current prices present an enormous threat to the Russian economy as the country eats through its emergency funds. The ruble The ruble (which is an important factor for the dollar-denominated RSX) stays relatively strong given the current oil price. The ruble-denominated oil price stubbornly stays around 2900 per barrel, while the Russian budget for 2016 needs at least 3150 per barrel. Sanctions on Turkey limit the Central Bank’s ability to decrease the rate, which is currently at 11% . However, if oil stays weak in the beginning of 2016, I expect that the Central Bank will have to cut the rate to provide some help to the Russian budget. Bottom line I remain bearish. RSX was clearly not the easiest short trade in the last few months. There was some optimism about Russia and buying activity was real. However, I question the Russian economy’s ability to successfully operate at current oil price levels. Also, as I think that the next leg down in oil is around the corner, I expect further weakness in RSX.

What Is In Store For REIT ETFs Ahead?

As the timeline of the first rate hike after a decade is approaching this month, interest-rate sensitive sectors like REITs are falling out of investors’ favor. REIT ETFs emerged a winner last year thanks to widespread volatility, but are mostly in the red this year as the Fed liftoff is looming large (read: Top ETF Stories of November ). Notably, REITs own and operate income-producing real estate. They are required to distribute at least 90% of their taxable income to shareholders annually in the form of dividends and can in turn deduct the payout from their corporate taxable income. The basic idea is that a rise in interest rates will undoubtedly lead to a high borrowing cost on which the REITs are highly dependent. Moreover, high-dividend yielding stocks like REITs usually become less attractive when treasury yields rise. At this point of time, we can say that a policy tightening is unavoidable in the mid-December Fed meeting; at least the Fed officials and economic progress are giving such cues. Minor lack in some economic readings wouldn’t come in the way of the Fed decision. Recent comments from the Fed have certainly influenced Treasury bond yields too. With the yields increasing, several investors may now be turning away from REITs. But do REITs deserve such negligence? Are investors overreacting? Let’s find out. Short-Term Yields Rising Faster Investors should note that the 10-year benchmark Treasury bond yields jumped 21 basis points to 2.33% (as of December 3, 2015) since the start of the year, a relatively slower ascent than what we saw in 2013 due to Fed taper talks. It was the short end of the yield curve that was hit hard (read: Short-Term Bond Yields Rising: Timely ETF Bets ). Yields on the six-month U.S. Treasury bonds surged 34 bps to 0.45% (as of the same date) since the start of the year as the Fed hikes the benchmark rate. In such a situation, investors can very well bet on the income-producing securities like REITs as long-term Treasury yields are not rising as fast as feared. Moreover, the Fed repeatedly asserted that it will take a slow stance in policy tightening giving yet another reason not to worry much over REIT securities. As investors continue to search for income, REITs can give them some market-beating yields which will in turn make up for capital losses also, if there is any. Economic Strength to Bode Well The negative correlation between rising rates and REITs, in all cases, is a common misconception. Notably, when rates rise on the back of a pickup in the economy, REITs actually outperform. As per reit.com , “in the 16 periods since 1995 when interest rates rose significantly, Equity REITs generated positive returns in 12.” The REITs business is associated with basic consumer requirements like apartments, shopping malls, warehouses, lodging and dining, office, hospital among others. In a growing economy, people consume and spend more in malls for discretionary purchases. An uptick in the U.S. housing sector is now a known fact; job growth will push office REITs and hospital REITs are always a stable area, irrespective of the market condition. Now, as the Fed is viewing the economy as strong enough to gobble up the first rate hike, there should not be much downside risks in REIT stocks and ETFs. After all, the job market is healing and inflation is inching up. REITs stand to gain with growth in occupancy and hike in rents. The consistent increase in rent will also help REITs to keep pace with inflation. Overvaluation Concerns However, there are hurdles in the path too as REIT ETFs are not all cheap investments. The popular Vanguard REIT Index ETF (NYSEARCA: VNQ ) trades at a P/E ((ttm)) of 34 times against the SPDR S&P 500 Trust ETF’s (NYSEARCA: SPY ) P/E of 19. So, just as the Fed pulls the trigger, a correction, probably a short-lived one, is expected in the REIT space. Below highlight three REIT ETFs that were relatively less hit by rate worries in the last one-month frame and proved sturdier in the pack. iShares Residential Real Estate Capped ETF (NYSEARCA: REZ ) The $319-million fund is heavy on Residential REITs and Health Care REITs. The 37-stocks fund charges 48 bps in fees. However, the fund has concentration risks as its first two holdings take about 23% of the basket. The fund yields 3.25% and was down just 0.02% in the last one-month frame (as of December 3, 2015). IQ U.S. Real Estate Small Cap ETF (NYSEARCA: ROOF ) The fund holds 60 small-cap stocks in the basket. It is an unpopular choice with about $86 million in assets. The ETF charges 69 bps in fees per year from investors. The product is less concentrated across its top 10 securities as no stock accounts for more than 3.50% of the basket. ROOF was down 2.5% in the last one month and yielded 5.68% as of December 3, 2015. The fund currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. iShares Cohen & Steers REIT ETF (NYSEARCA: ICF ) This $3.57-billion fund holds 30 securities. Industry-wide, retail, residential, specialized, office and health care REITs get double-digit weights. The fund charges 35 bps a year in fees. The fund lost about 2.9% in the last one month and yielded 3.22% as of December 3, 2015. Link to the original post on Zacks.com

EWZ – November Review: The Political Crisis Deepens

Summary Share price of the iShares MSCI Brazil Capped ETF declined by 1.53% in November. The development was driven mainly by the political factors. The economic situation of Brazil is worsening, the political crisis is deepening and the financial markets would welcome the fall of president Rousseff. The iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) lost 1.53% of its value in November. Although it was up by more than 11% at one point, it lost all of its gains during the last days of the month, as the political crisis deepened and investors started to fear that the government will be unable to enforce the needed economic reforms and budget cuts. The economy is still in a bad shape, the latest data show that it declined by 4.5% y-o-y in Q3, which is worse than expected. The unemployment rate is at 7.9% and growing and inflation is in the double digit area. Shares of the beverages producer Ambev (NYSE: ABEV ) are still the biggest holding in EWZ’s portfolio, with weight of 10.61%. Ambev is closely followed by preferred shares of Itau Unibanco (NYSE: ITUB ) (10.24%). Besides Ambev and Itau Unibanco, only preferred shares of another bank, Banco Bradesco (NYSE: BBD ), have weight over 5%. The 10 biggest holdings represent 61.47% of the portfolio, which is slightly less, compared to 62.22% in October. Generally, no significant changes in the structure of EWZ could be observed in November. Only common shares of Vale (NYSE: VALE )are not among the TOP 15 holdings anymore, as their value declined sharply after the disastrous dam collapse . Source: own processing, using data of iShares.com Out of the 15 biggest EWZ holdings, the biggest gains were recorded by Fibria Celulose (NYSE: FBR ) in November. The credit rating of the pulp and wood producer has improved, it has completed the financial package for its Horizonte 2 project and it declared a dividend that will bring to its shareholders dividend yield over 7%. Shares of the company grew by 8.72% in November. Shares of the Brazilian airplane producer Embraer (NYSE: EBR ) jumped by 7.5%. For Embraer, November was the third consecutive month of very big gains. On the other hand, November was very negative for Vale. After the dam collapse, shares of the miner declined strongly. Preferred shares of Vale lost almost 25% of their value. (click to enlarge) Source: own processing, using data of Bloomberg The traditionally high correlation between EWZ and Petrobras (NYSE: PBR ) share price was disturbed during the first two weeks of November, although it increased back to its normal levels in the end of the month, after the corruption scandal became one of the main topics of discussion again. Also, the correlation between EWZ and oil prices (represented by the United States Oil ETF (NYSEARCA: USO )) and between EWZ and S&P 500 was relatively low or even negative during the better part of the month. One could say that the Brazilian share market lived its own live and the share price development was driven by the political situation in the country and by the efforts to enforce the austerity measures. (click to enlarge) Source: own processing, using data of Yahoo Finance November was a relatively calm month for EWZ. Although the EWZ share price was up by 11% only a couple of days before the end of the month, but eventually ended the month with a 1.5% loss, the overall volatility measured by the 10-day moving coefficient of variation was lower compared to most of the 2015. It moved in the 1%-3% range for the better part of November, however it broke out of this range in the last days of the month. Given the early December developments, December will be probably more volatile compared to November. (click to enlarge) Source: own processing, using data of Yahoo Finance Some of the more interesting news: Fibria announced that the estimated capex for the Horizonte 2 Project has been revised from $2.5 billion to $2.2 billion. The expenditures will be funded by a combination of its own cash, Agribusiness Receivables Certificates and credit facilities, the estimated average borrowing cost is only 2% p.a. The company also announced that Moody’s has improved its credit rating from Ba1/Positive to Baa3/Stable. Fibria will pay a dividend of approximately $0.96 per shares, which means a dividend yield of over 7.2%. On November 5, a disaster occurred in southern Brazil. A tailings dam owned by iron miner Samarco collapsed and more than 60 million cubic meters of toxic mud destroyed the town of Bento Rodrigues and contaminated the Rio Doce river. Samarco is a 50:50 joint venture of Vale and BHP Billiton (NYSE: BHP ) and the disaster had a significant impact on share prices of both companies. According to the latest news, Brazil sued Samarco for $5.3 billion over the spill. Cemig (NYSE: CIG ) won generation concessions for 18 hydro plants with total installed generation capacity of 699.57 MW. The new concessions should partially offset the probable loss of the Jaguara and Sao Simao concessions with total installed capacity of 2,134 MW. Companhia Siderurgica Nacional (NYSE: SID ) together with an Asian consortium consisting of ITOCHU Corporation ( OTCPK:ITOCY ), JFE Steel Corporation, POSCO (NYSE: PKX ), Kobe Steel ( OTCPK:KBSTY ), Nisshin Steel ( OTC:NSSSY ) and China Steel Corp. ( OTC:CISEY ) combined some of their assets into a new company Congonhas Mineiros. The new company will consist of an iron ore mine, railroad and port and it will be 87.52% owned by CSN and 12.48% owned by the Asian consortium. A prominent member of the ruling Workers’ Party, senator Delcidio do Amaral, was arrested due to his participation in the Petrobras related corruption. Amaral is a close collaborator of president Rousseff. His arrest further supported the voices calling for Rousseff’s impeachment. Conclusion As the early days of December showed, the Brazilian share market is still strongly affected by the Petrobras corruption scandal and the related political crisis. On December 2, the impeachment proceedings against president Rousseff opened in the lower house of Congress. As a result, the EWZ share price jumped by almost 6% in two days. The financial markets welcomed the vision of a government change and if further developments indicate that Brazil will be able to get rid of Rousseff, EWZ will grow further.