Tag Archives: china

Russia: Surprise BRIC ETF Winner So Far This Year

Russia has hardly raised a toast to its economy in nearly two years thanks to the ban imposed on the nation by the West following its Crimea (erstwhile Ukrainian territory). Plus, the acute and persistent crash in oil prices in the second half has wreaked havoc on Russian stocks and ETFs in the last one and a half years. Apprehensions of significant economic losses and a five-year low GDP growth in 2014 led investors to excuse themselves from Russia. As a result, the biggest Russia ETF Market Vectors Russia ETF (NYSEARCA: RSX ) lost 42.3% in the last two years and 20.7% in the last one year (as of November 2, 2015). The economy has hardly shown any sign of a meaningful turnaround with its GDP shrinking 4.3% year over year in Q3. Its economy is also predicted to be contracting 3.3% in 2015. Yet RSX has managed 16.5% gains so far this year on the back of its dirt cheap valuation. If this was not enough, following the October Fed meeting, which once again sparked off the December rate hike talks, gave this Russia ETF a boost to emerge as a winner in the BRIC ETFs pack, per barrons.com . Needless to mention, emerging market investing is always threatened by Fed policy tightening as it might lead to a cease in cheap dollar inflows. But Russia ETFs have defied this norm this time while the other pillars – Brazil, India and China – followed. Below we highlight the last five-day performance of BRIC ETFs, which shows that RSX and small-cap Russia ETF Market Vectors Russia Small-Cap ETF (NYSEARCA: RSXJ ) were up 0.9% and 1.5%, respectively, while large-cap India ETF INDA and the China ETF MCHI lost about 2.9% and 2.3% and Brazil ETF EWZ added 0.6%. What’s Behind This Optimism? The main driver was the central bank meeting held at October end, wherein Russia’s central bank maintained its key interest rate, but hinted at rate cuts in the coming months as inflation is showing signs of abating, though slightly at the current level. As per Bank of Russia , the annual pace of inflation is projected under 7% for October 2016 and at 4% for 2017. The bank indicated that the reasonably tight monetary policy and soft domestic demand due to reduced expansion in the nominal income of the population will curb inflation. Along with this, the backing off of tanks and weapons by government troops and separatists in eastern Ukraine strengthened the bet over a stable truce. This should in turn lessen international sanctions against Russia, per Bloomberg . Also, the oil price recovery in early October (as Russia is a major oil-exporting nation) and weakness in the greenback last month lent this woe-begotten economy and its currency and stocks a nice bounce. Ruble gained over 23% as of November 2, 2015 from this year’s low hit in May. Best Performance in BRICS While Russia ETFs are roaring back on speculations of sooner-than-expected rate cuts, Chinese ETFs have seen a tumultuous year on slowing economic growth and overvaluation concerns. India ETFs also haven’t been able to live up to investors’ expectations as pro-growth reforms are taking time to turn into reality. And Brazil has its long-standing economic issues of slowing growth and rising inflation. Economists predict that Brazil’s economy will shrink 3.02% in 2015 and 1.43% in 2016. Brazil is nearing the worst economic debacle in 25 years. So far this year (as of November 2, 2015), ETFs on other BRIC nations – Brazil (NYSEARCA: EWZ ), India (BATS: INDA ) and China (NYSEARCA: MCHI ) – are down 36%, 4.3% and 4.9%, respectively while Russia ( RSX ) is up 16.5%. Thus, investors might consider betting on the Russian equities ETF space on this nice price surprise. As a caveat, they should note that the economy is still soft and might be vulnerable to the Fed’s interest rate policy. The U.S. central bank will likely hike its key rate by this year-end or early next year putting many emerging markets including Russia, at risk. Oil prices are still to regain the lost ground. So, ample downside risks stay hidden in this investment. RSX, iShares MSCI Russia Capped ETF (NYSEARCA: ERUS ), and SPDR S&P Russia ETF (NYSEARCA: RBL ) have a Zacks ETF Rank #4 (Sell) each with a High risk outlook while RSXJ carries a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook. Original Post

What Should Investors Know About Volatility, As We Approach The Year End?

Summary Volatility is a powerful tool that allows to profit from market sentiment. Seasonality data suggests volatility is set for more downside. U.S. economic data will take a center stage for the remainder of the year, but unexpected developments overseas may bring about more volatility. The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. H. P. Lovecraft The wounds are still fresh. The last couple of months were tragic for global capital markets. It was all about the turmoil in equities, caused by global economic uncertainty, slowdown in China, and the Fed’s indecisiveness to raise interest rates due to inflationary and employment concerns. This has pushed the U.S. and global capital markets into correction territory, the second worldwide decline in less than a year. The markets bottomed on August 23rd, and reversed in ironic fashion, climbing back up to the pre-correction levels of mid-August. As of November 3rd, the U.S. major indices were mostly flat for the year. Following the action in the equity markets, CBOE’s Volatility index , or VIX, advanced rapidly, as investors rushed out of their positions. The Volatility Index (VIX), often referred to as the gauge of fear, has gained 140% over the course of one week, following the dovish announcement from the Federal Reserve to keep interest rates unchanged at the FOMC meeting on August 19. VIX, of course, has a negative correlation with the S&P 500 index, which lost close to 10% during the same period of time. (click to enlarge) As markets reversed their trend, so did the VIX. It declined steeply to the lows of early August, to indicate the rising confidence of market participants. Investors who have not watched the markets closely during that period of time might have spared themselves some sleepless nights. For some people however, the global turmoil and rising uncertainty in the stock market had equally presented an incredible opportunity to profit, by investing around wild swings in volatility. With the correction behind us, I’d like to give my projection for the VIX, as we now entered the last two months of the trading season. Short-term volatility outlook. Following the recovery in equity markets, volatility has declined more than 70% from it’s peak on August 23rd. While that is undoubtedly a significant move to the downside, I believe that the VIX has yet to hit its bottom. Below are several factors that are set to weight heavily on VIX performance going forward. Seasonality It is no secret that the behavior of certain investment instruments differ throughout the year or from one stage to another within the economic cycle. Constantly recurring seasonal events fundamentally affect the performance of individual stocks, indices, and overall markets. Many traders look out for these patterns on the chart to determine the momentum of the instrument in question. Volatility is one of those affected by the seasonality. (click to enlarge) If history holds any clue, both November and December comprise the period of declining volatility, that generally peaks in October, as per chart above, which indicates the average annual performance of the VIX over the last 20 year period, ending 12/31/2014. Interestingly enough, the Volatility Index behaved astonishingly similar in 2015. And although certain skepticism still prevails in the market, it is unlikely we see another correction any time soon, that might propel volatility higher. In fact, investors should now feel more confident, after tackling a pullback in equities, believed by many to be overdue. Specificities . December is certainly the month to watch, as both year-end portfolio rebalances and more surprises from the Fed may cause investors to become uncertain. The U.S. economic data will take center stage during the last two months of the year, as non-farm payrolls for October and November will be dissected for clues in regards to the timing of the initial rate hike. As futures indicated a 50% chance of December rate hike as of November 3rd, I predict any negative number to add volatility to the market. The first GDP estimate for the third quarter was driving U.S. markets this past Thursday. Nevertheless, this figure will be subjected to further revisions in November and December, and will not cause much volatility, as market participants have already priced in the increase of only 1.5% for the quarter. More stimulus from China and Japan, as well as positive remarks from ECB’s Mario Draghi on situation in Europe, will definitely propel markets higher. China, on the other hand, still poises the biggest threat for global capital markets stability. An additional slew of worse-than-expected data from Beijing will likely trigger GDP downgrades, that will re-ignite the fear of global slowdown. Lastly, expect the end of the year trading activity to be light. The holiday season is likely to keep investors on the sidelines until the new year sets in. This does not necessarily mean a quiet period for the markets. Investors should follow the news closely, as illiquid exchanges are less likely to absorb selling pressure caused by global developments. The ways to use volatility to your advantage Every investor who would like to trade around market sentiment might want to consider gaining an exposure to the CBOE’s Volatility Index (VIX). Although it’s impossible to purchase VIX directly, there are ways to gain such exposure either through options, or by taking a position in one of the designated ETFs. Volatility as an investment vehicle has unquestionably gained in popularity among investors. Almost every ETF provider now issues products that are linked to the volatility of a broader market. These products vary substantially in terms of leverage, liquidity, and underlying assets, but they all try to replicate either a long or short position in the Volatility Index. VIX currently trades at $14, which implies roughly 15% downside, if traded against its long term support. One of the ways to speculate on that is by shorting the Barclays S&P 500 VIX Short Term Futures ETF (NYSEARCA: VXX ), that re-invests in volatility futures on a rolling basis. From my observations, VXX incorporates 30% to 70% movement of the VIX during short periods, suggesting 5% to 15% move to the downside, excluding contango drag down. For investors who might want to gain a leveraged exposure to the VIX, the VelocityShares Daily 2x VIX Short Term ETN (NASDAQ: TVIX ) would be the second best instrument to short. It currently trades for $5.85, or more than 15% above it’s pre-correction levels. In addition to that, the current state of contango is expected to weigh heavily on volatility ETFs if shorted for an extended period of time, suggesting even more downside. Risk-reward, however, is not as attractive as it was a month ago. After falling significantly from its peak, volatility still preserves enough momentum to justify an ongoing decline. However, investors now face far greater risk associated with the strategy, and should be aware of any potential loss related to it. Despite my bearish volatility outlook, I generally seek better risk-reward potential to initiate a position. Preserving the money in this case is far greater concern. Nevertheless, any small speculative bet at this point is definitely warranted. I urge market participants to be more cautious when putting money to work at this time of the year. Best of luck to all investors!

Creating A Rock Solid Growth Orientated Model Portfolio Of Stocks And Equity Funds

Summary Buy monopoly like businesses with a wide moat. Buy quality companies, ideally with a low debt, low PE and high growth. Buy where there is a strong tailwind (macro theme). When creating an equity portfolio I like to screen stocks and funds according to a eight point checklist. I give most emphasis to the first few points on the list, and where possible try to buy monopolistic stocks at reasonable valuations. 8 point Checklist 1) Monopoly or duopoly (“wide moat”) 2) Quality – liquid, reoccurring & stable earnings, low debt 3) Growth – revenue, earnings 4) Value – low PE 5) Dividends 6) High net profit margin 7) Growing sector or region 8) Strong macro theme, or demographics, low household debt I will briefly discuss each of the above points. 1) Monopoly or duopoly (“wide moat”) A stock that has a high market share in their industry, ideally with high barrier to entry (“wide moat”). These stocks have pricing power and usually strong profit margins, and growing businesses. Some examples would be; Stock exchanges Intercontinental Exchange (NYSE: ICE ), Hong Kong Exchange & Clearing House ( OTCPK:HKXCF ) (HKSE), London Stock Exchange (NYSE: LSE ) are three of the largest global stock and derivatives exchanges. Intercontinental Exchange (owner of the NYSE) has more than one-third of the world’s cash equities volume. Globally there are millions of investors, brokerages, and fund managers, all sending a large portion of their trading business into just a few stock exchanges. Just remember that in bear markets stock exchanges do poorly. Internet search engines Alphabet Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) and Baidu (NASDAQ: BIDU ) dominate this area and are monopolies. Both have such strong brand recognition that it would be hard for competitors to break in to this area. Both are currently reasonably priced (given their growth and monopoly positions), with Alphabet Google PE of 34 and Baidu PE of 35. Google C non voting stock has recently announced a $5b buyback , and Baidu announced a $1b stock buyback in July. Large Aircraft manufacturers Boeing (NYSE: BA ) and Airbus ( OTCPK:EADSY ) dominate the large aircraft market and have orders booked out years in advance. Smaller players such as Embraer (NYSE: ERJ ) or Bombardier ( OTCQX:BDRBF ), and China’s relatively new entrant Commercial Aircraft Corp of China (COMAC) may well pose some competition in the near future. Chip designers/licensees Arm Holdings (ARMF) has an estimated ~85% market share of the chip design business. It is expected to do well as the next big thing (the Internet of Things (NASDAQ: IOTS )), takes off. It trades on a PE of 34. Another top chip designer to consider would be Skyworks Solutions (NASDAQ: SWKS ) currently on a PE of 18.6. Its stock price is $79, with an analyst target of $113. 2) Quality – liquid, stable, re-occurring earnings, low debt Ideally invest in companies will good stock market liquidity, stable earnings, and ideally reoccurring and growing earnings. A quality company will have a good track record of being well managed, and a strong brand name and reputation such as Apple (NASDAQ: AAPL ). Typically the banks are great for reoccurring earnings provided their loan books are growing. Many IT companies such as Microsoft (NASDAQ: MSFT ) collect reoccurring earnings each time they release an upgrade. Finally, check that the debt to total capital ratio is low – preferably well below 50%. For example Google’s is only 4.31% . Also look for a high Net Tangible Assets (NTA), or Book Value. 3) Growth – revenue, earnings Ideally find companies that have both growing revenue and Earnings Per Share ((NYSEARCA: EPS )). This way you know they are increasing sales and increasing profit. 4) Value – low PE I prefer to buy at PEs at or below 10 and sell at PEs at or above 20. I break this rule only if companies or funds have exceptional growth outlook or are a monopoly or market dominator. 5) Dividends I view dividends as a nice bonus and a sign the company has good cash flow. Off course the payout ratio should not be too high, so the dividends are sustainable and grow year after year. Be wary of companies that pay a high dividend but cannot sustain it due to EPS falling or weak. 6) High net profit margin Often the companies with low or fixed expenses, low head count, and smart business models, and/or strong pricing power (monopolies) have the highest net profit margins. These companies can be real cash cows. Many of the earlier mentioned companies in the monopoly section are examples of this. 7) Growing sector or region It is much easier to swim with the tide than against it. Try to chose a sector or region that is growing strongly. Right now that would be US technology. The iShares US Technology ETF (NYSEARCA: IYW ) is an easy and safe way to play this. Another strong sector is the real estate funds such as iShares US Real Estate ETF (NYSEARCA: IYR ). real estate does well when interest rates are low or falling. 8) Strong macro theme, or demographics, low household debt My articles on this can be read here. Demographics and Urbanization , The rising Asian middle class , Chinese electric vehicles about to boom , and Take your PIIC – Philippines, Indonesia, India and China . Finally, the table below give an example of the eight point checklist at work. Intercontinental Exchange HKSE GOOGL BIDU Price as of 3 Nov 2015 US $261 HK $199 US $721 US $195 Monopoly/Duopoly Yes Yes Yes Yes Quality Yes – but high debt Yes Yes Yes Growth in EPS Yes – 19.4% Yes -56.8% Low- 5.92% No- minus1.9% Value – low PE No – 23.8 No – 29.8 No – 34.59 No -35.68 Dividend yield 1.1% 3.0% 0.0% 0.0% Net profit margin Good – 35.9% 59.2% 21.2% 20.79 Growth sector Yes – medium Yes Yes Yes Macro theme Energy & stock trading, IPOs China & HK stock trading Global Internet Search, IoTs China Internet Search, IoTs TOTAL 6.5/8 7/8 6/8 5/8 NB: Intercontinental Exchange got a half point for quality due to its slightly higher debt levels of 20.72% debt to total assets. I would be interested to hear from readers if they know of any stocks that score 8/8 on the above checklist. Thank you for reading. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.