Tag Archives: china

Don’t Ride The Roller Coaster, Bet On It

With global markets (esp. EM) stumbling, the upcoming FOMC meeting, political instability worldwide, and weak US domestic data, it may be time to bet on an increase in volatility. September through December are going to be some of the most volatile months in the year. Several options for investors: ETFs/ETNs that track volatility, such as TVIX, VXX, UVXY, derivative strategies, or going bearish/long-term on stocks. What a summer it’s been and September is only half-way over. Just overnight (as of Sept. 14th, 2015), Asian markets dipped again on poor economic data, with the mainland Shanghai Composite (SHCOMP) ending on -2.67% (at one point, nearly falling under 3k) and the Nikkei Index falling under 18k at -1.63%. Unfortunately, for international investors, this is not news . With the stock market crash that started in June and the subsequent desperate attempts by the Chinese authorities to prevent the crisis from getting any worse, everyone can at least agree on one thing: the ‘Asian century’ is faltering (for the brief three decades that it lasted) and the annual 8% GDP growth figures are a thing of the past. And considering China’s is a pseudo-market system run by an aging regime that grew up out of the throes of Mao’s Great Leap Forward and Cultural Revolution, recent events should come as a surprise to no one. From the real estate sector to the financials sector, China has been one giant bubble bound to burst. Below is the SHCOMP 1yr with Jean-Paul Rodrigue’s ‘phases of a bubble’ superimposed. (Source: Bloomberg Business) As to be expected, capital investment has been pouring out of China as illustrated below. And China’s isn’t the only market international investors need to be worried about. All of the emerging markets, especially the BRICS, are going to be very volatile. Between Brazil’s immense debt and failing presidency or Russia’s falling ruble and dependence on oil , emerging markets are going to be in quite a lot of pain in the coming months, especially since central banks are running out of options as most have already exhausted their QE (quantitative easing) measures. (Source: JPMorgan) (Source: Reuters & NASDAQ) Speaking of central banks, on September 16th-17th, the Feds will finally meet, in what was probably one of the anticipated and over-analyzed FOMC meetings in recent times, to discuss the results of their votes on a Fed rate hike. As grossly aggrandized as the possibility of a rate hike has been, it is an important element to consider, especially since EM countries gobbled up so much dollar-denominated debt back when it was cheap. Not only that, but the private-sector credit to GDP gaps in EM countries is growing fast; China’s alone is off 25.4% from its long-term trend, the highest of any major country, with Turkey and Brazil following close behind with 16.6% and 15.7%, respectively, far above the recommended ratio of less than 10%. A rate hike, which the CME Group predicts is a 75% probability for the upcoming meeting, is going to add to the enormous strain that the financial sectors of these countries will face. All of these factors piling up seem to spell doom-and-gloom for the rest of the world, but what of the U.S.? Well, to the excitement of the Fed, employment data, which was a serious concern during the 2008 financial crisis, is looking more and more positive month after month. As of August, the official unemployment rate fell to 5.1%, with some officials celebrating the return to ‘full unemployment’ levels . However, despite all the jubilation, productivity and actual GDP growth is still lagging way behind. Macroeconomic expert Chris Varvares estimates that “capital-equipment, software and buildings-per worker has grown just 0.3% a year so far this decade, by far the worst in at least 40 years.” Thus, real wages are also stagnant, as the yearly change rate is still hovering around 0-2% . With less cash to spend and winter months approaching, American consumers are not going to be rushing to get in line for Wal-Mart’s Black Friday sales, they’re going to be running to the banks to deposit and save. Great news for the banks, but bad news for consumption which drives the American economy. So, with the general consensus being that emerging markets will suffer greatly in the short-term at least, and that American consumer confidence and demand will slow as well, what does that mean for the average investor? Volatility. To determine volatility is to simply measure the size of changes in a security’s value over time, e.g. a higher volatility means larger fluctuations in a stock’s price in a short timespan. Volatility means different things to different people, that is, central bankers, for example, work to keep volatility at a minimum as part of their Dual Mandate to keep the prices of goods and services stable. However, speculators willing to take the risks involved can profit greatly from volatility…in the same way someone betting at the horse races can profit greatly betting on a lame horse, if you have the magic of foresight and/or are very lucky. But in all seriousness, certain investors can benefit in taking a smart position in indices which track volatility. (Source: Bank of International Settlements) (Source: Yahoo Finance) One such index tracker is the VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ: TVIX ) which tracks two times the daily performance of the S&P’s 500 VIX Short-Term Futures Index. The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ) and the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) are more bearish options with lesser expense ratios (0.89% and 0.95% v.s. TVIX’s 1.65%) and there are even more options, such as inverse VIX ETFs (which are essentially the opposite, i.e. betting on stability). Now , before you get your contrarian pitchforks out, there are some points that I will concede. I think Dan Moskowitz of Investopedia puts it best – “the only way to win playing TVIX is by having impeccable timing.” Going long TVIX is a sure-fire way to lose money as common sense dictates high volatility is not a permanent condition. Even further, on the contrarian side of things, TVIX has depreciated 99.97% since its 2010 debut, 77.92% over the past year! Clearly, it is a very risky game to play, yes (but so is the lottery and that’s a multi-billion dollar industry). However , the timing is perfect now. With all the recent domestic political turmoil across the world, emerging markets crashing, and the Fed signaling a tightening of monetary policy, I cannot see, save for a miracle from the Feds, the markets getting by unscathed without a few twists and turns. And speculators would seem to agree with this. According to the CTFC (Commodity Futures Trading Commission), as of Sept. 1st, speculators achieved an all-time record of net long VIX futures contracts, with 32,239 contracts added, double the previous record set in early February and the largest ever bet on a rise in the VIX. This is very significant; even the contrarians who would immediately disregard it and go bullish on stocks in spite have to admit that. (Source: J. Lyons Fund Management Inc.) For the average investor out there (such as myself) staying long on stocks and bonds, sticking to ETFs, or cashing out may be some of the best options available to avoid getting strung along for the ride as the markets reel and spiral. But for you aspiring speculators, hedge fund managers, or simple millionaires, this might be a very profitable time to be betting on increased volatility. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Where In The World To Look For Opportunities

While Russ believes the outlook for U.S. stocks may be muted, he sees opportunities in other parts of the world, particularly in Asia. Kisan / Shutterstock After weeks of struggling, global stocks stabilized last week. However, market volatility remains elevated. Looking at realized returns over the past month accessible via Bloomberg data, annualized volatility on the S&P 500 Index is above 30 percent, triple its early August level. Looking forward, the bumpy ride in the U.S. is likely to continue , given the persistence of several factors, including a pending interest rate hike by the Federal Reserve (Fed) and expensive U.S. stock valuations. Without the tailwind of easier money, U.S. equities will need to get by on earnings growth, of which there hasn’t been much lately, rather than monetary policy-induced multiple expansion. But while the outlook for U.S. stocks may be muted, I do see potential opportunities in other parts of the world, as I write in my new weekly commentary, “ More Volatility on U.S. Horizon Has Sights Turning to Asia .” In particular, Asian stocks, both in Japan and in emerging markets (EMs), look attractive right now relative to other regions. Two Potential Opportunities in Asia Japan Last week, Japanese stocks, as measured by the Nikkei 225 stock index, enjoyed their biggest one-day advance since 2008 . Investors were encouraged by Prime Minister Abe’s pledge to further lower the corporate tax rate. Although implementation of the so-called “third arrow” of Abe’s reforms has been mixed, Japanese corporate profitability continues to improve. The return-on-equity ( ROE ) for Toyko Stock Price Index (MUTF: TOPIX ) stocks was 8.6 percent in August, up roughly a half point from a year ago, as data accessible via Bloomberg shows. As such, investors may want to consider Japanese equities . Emerging Asia I also see potential opportunities in Asia’s emerging markets, despite my more cautious stance toward the broader emerging market asset class . Many Asian emerging markets, including the Chinese market listed in Hong Kong, have sold off in concert with China, leaving their valuations once again cheap. In addition, with most countries in emerging Asia running a current account surplus and possessing sizable foreign currency reserves , I believe emerging Asia could be better positioned to withstand a Fed tightening cycle than other emerging markets. This dynamic has been evident in the relative resilience of emerging market currencies, an important determinant of overall return for dollar-based investors. With a few notable exceptions, namely currencies in Malaysia and Indonesia, the currencies in most Asian emerging markets are holding up relatively well against the dollar, as Bloomberg data show. Even in China, despite all the hand wringing over the recent devaluation, the yuan is down less than 3 percent against the dollar this year, according to Bloomberg data. In contrast, as the data show, currencies in Russia, Columbia, Turkey and Brazil have plunged this year. Finally, many investors assume that commodities and emerging markets go hand-in-hand . In fact, most of the countries in Asia, including China and India, are large commodity importers. They benefit when commodity prices decline. This is in contrast to the situation in places like Brazil, a large exporter of raw materials. Last week Standard & Poor’s downgraded Brazil’s sovereign rating back to junk status. Admittedly, other factors—notably a major political scandal and deteriorating fiscal picture— also played a part . The bottom line: For all of the reasons mentioned above, I see pockets of value in Asia, both in Japan and in the region’s emerging markets. This post originally appeared on the BlackRock Blog

Which Low Volatility ETFs Will Protect Your Portfolio?

Stock markets world-wide have been in turmoil over the past few weeks. While panic selling was initially triggered by currency devaluation in China, anemic global growth and uncertainty related to rate hike by the Fed, have added to investors’ concerns. Low-volatility ETFs are designed for investors who want exposure to stocks but do not want to take on too much risk. These products have become extremely popular over the past few years since historical performance revealed that low-risk stocks have rewarded investors with higher return than high-risk stocks as well as the broader markets over long-term, in all the markets studied. This outperformance suggested that that investors actually misprice risk. Did these low-volatility ETFs deliver on their promises during the past month, which by some measures, has been the one of the most volatile on record. Now may be a good time to revisit these products and see whether they deserve a place in investors’ portfolios. And, while a number of products are available to investors, there are significant differences in their strategies and investors should understand them properly before investing. There are more than 30 low- and minimum-volatility ETFs available to investors, focused on different styles (large/mid/small cap), geographical regions (U.S./Developed/Emerging/Europe/Japan) and strategies (low/minimum volatility/volatility weighted/risk weighted etc.). In this article, we focus on the two ultra-popular U.S. large cap low volatility ETFs – the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) and the PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) . Here’s a snap shot of these two ETFs and the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). Yield Expense Ratio Beta Standard Deviation (Annualized)* 1 Month Return 1 Year Return Upside Capture Ratio (3 Y)** Downside Capture Ratio (3 Y)** USMV 1.96% 0.15% 0.78 10.44% -5.99% 6.27% 84.38 71.72 SPLV 2.50% 0.25% 0.80 11.55% -6.45% 4.71% 80.25 72.81 SPY 2.10% 0.09% 1.00 12.37% -6.93% -0.10% 99.75 100.76 *Calculated from daily price returns for the past 3 years **Source: Morningstar Approach to Managing Volatility SPLV holds 100 stocks from the S&P 500 Index with lowest realized volatility over the past 12 months, which means SPLV takes into account volatility of individual stocks to arrive at the low- volatility portfolio. The index is rebalanced quarterly. USMV holds 163 stocks that, in the aggregate, have lower volatility than the broader U.S. stock market. The underlying index uses Barra Optimizer to build a portfolio with the lowest absolute volatility, taking into account, variances of individual stocks as well as covariance of all stocks, with a certain set of constraints. In simple words, this ETF uses correlations between stocks in addition to volatility of individual stocks in arriving at the portfolio. The index is rebalanced semi-annually. Performance Did low volatility ETFs provide some comfort to the portfolio during wild market swings? It seems that they did deliver on their promises. During the one month period ended September 11, when the market was very unstable in the wake of China growth concerns, low volatility ETFs fell less than the broader market. And over the past one year, when the broader market returns were almost flat, both these ETFs had much better performance. Further, both the ETFs had lower volatility compared to the broader market. Looking at risk and returns, USMV had better performance compared with SPLV. One of the reasons is USMV’s significantly higher allocation to Healthcare-which has been the best performing sector among all S&P sectors over the past few years. Over the past three years, USMV and SPLV had upside capture ratios of 84.38% and 80.25% and downside capture ratios of 71.72% and 72.81% respectively. These ratios show how much these ETFs gained and lost compared to the S&P 500 index, during periods of market strength and weakness. So, when the market was rallying, USMV was able to capture 84.38% of the upside but when the market went downhill, its losses were limited to 71.72% of the broader market’s decline. In simpler words, with low volatility strategies investors sacrifice some upside but protect themselves from a lot of downside. Preparing for Higher Rates While the Fed has been priming the markets for its first rate hike in almost a decade, it now appears that they may keep the monetary policy unchanged this week, in view of ongoing turmoil in global markets. Investors, however, should be prepared for higher rates now since with improving labor markets, the Fed may not hold off a rate hike for a long time. They should keep an eye on their allocations to rate sensitive sectors. Locking at the interest rate sensitivity of the two products, both are currently largely focused on sectors that tend to perform well in rising rates environments and have rather low exposure to Utilities and Telecom sectors that are quite rate sensitive. SPLV has 35% of assets invested in Financials, 15% in Industrials and 11% in Healthcare. However, SPLV’s 22% allocation to Consumer Staples may hurt its performance when rates rise. USMV has invested 20% of its asset base in Healthcare, 18% in Financials and 15% in Information Technology sectors. For investors concerned about rising rates, PowerShares recently launched the PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (NYSEARCA: XRLV ) , which is worth a look. This ETF holds 100 stocks from the S&P 500 index with low volatility characteristics, and removes stocks that historically have performed poorly in rising interest rate environments. The Bottom-Line Looking at the two ultra popular ETFs in the space, it appears that USMV has beaten SPLV, with higher returns and lower volatility. Further, USMV is cheaper than SPLV. Overall, both ETFs are effective tools for reducing overall portfolio risk and improving risk-adjusted performance over longer term. At the same time, investors should remember that these strategies underperform in strong bull markets. Link to the original post on Zacks.com