Tag Archives: china

Inside The Crash In China ETFs

China was hot and soaring among all stock markets across the globe for the most of this year thanks to rounds of ultra-easing policies. In fact, China was leading the global markets, attaining the best performing country spot for the first half. But the incredible run was washed away over the past few weeks as concerns brew over the longevity of the stimulus-driven rally and the real health of the economy. Further, worries over lofty valuations raised a panic alarm among investors after a one-year stupendous rally. What Let the Dragon Out Several factors led to horrendous trading in China. First, more than 40% of the mainland China companies halted trading in their shares, locking in up $2.6 trillion worth of shares. This is touted to be the largest wave of trading halts in the history of the Chinese equity market. Additionally, the world’s second largest economy is faltering with slower growth in six years, credit crunch, a property market slump, weak domestic demand, lower industrial production, and lower factory output. Corporate profits are also lower than a year ago. Further, a slew of recent measures including fresh interest-rate cuts, stock purchases by state-directed funds, looser margin-financing rules, central bank pledge of liquidity support, and suspension of new listings are not helping in any way to boost investors’ confidence. Lastly, deepening Greece crisis and Grexit fears shook investors across the globe, a creating risk-off trading environment. The combination of factors led to a dragonish sell-off in the Chinese market. The Shanghai Composite Index plunged over 8% in today’s session, extending its steepest three-week decline since 1992. With this, the index tumbled 32% since its peak in June 12 and wiped out more than $3.5 trillion in market capitalization. On the other hand, Hong Kong’s Hang Seng Index plunged as much as 8.6% on the day, making the biggest drop since November 2008. ETF Impact Quite expectedly, the terrible trading has been felt in the Chinese ETF world too. Funds in this space also saw big losses over the past one month, putting an end to their winning streaks, and landing them in the bear territory. China ETFs Performance Market Vectors China SME-ChiNext ETF (NYSEARCA: CNXT ) -43.54% db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (NYSEARCA: ASHS ) -43.49% iShares MSCI China Small-Cap ETF (NYSEARCA: ECNS ) -29.14% Guggenheim China Small Cap ETF (NYSEARCA: HAO ) -25.24% First Trust China AlphaDEX Fund (NYSEARCA: FCA ) -17.27% SPDR S&P China ETF (NYSEARCA: GXC ) -16.38% iShares FTSE China ETF (NASDAQ: FCHI ) -16.14% iShares MSCI China Index Fund (NYSEARCA: MCHI ) -15.57% iShares China Large-Cap ETF (NYSEARCA: FXI ) -15.08% PowerShares Golden Dragon China Portfolio (NYSEARCA: PGJ ) -13.92% From the above table, it should be noted that steep declines were widespread among the Chinese ETFs. Interestingly, A-shares ETFs have been the worst performers of the Chinese rout, followed by small caps. Large-cap focused funds and the broad market funds too saw double-digit declines over the past four weeks. Further, ETFs targeting specific sectors like Global X China Industrials ETF (NYSEARCA: CHII ), Global X China Materials ETF (NYSEARCA: CHIM ), Guggenheim China Technology ETF (NYSEARCA: CQQQ ), Global X China Financials ETF (NYSEARCA: CHIX ) and Global X China Consumer ETF (NYSEARCA: CHIQ ) also bore the brunt, declining 27.46%, 25.26%, 21.25%, 16.32% and 13.71% respectively. What Lies Ahead? Given the steep decline in all the corners of Chinese space and huge numbers of trading halts, fears are largely building up in the space. Morgan Stanley ‘s head analyst of emerging markets and global macro economy views this as the biggest bubble in the last 20-30 years, while others are anticipating that China’s market turmoil might be a bigger issue than the Greece crisis. It is not only destabilizing the economy but could also have ripple effects in the global markets if it continues for long. However, the stepped-up measures taken by the government lately will soon start to pay off providing a boost to the stocks. In addition, easy cheap money flows in contrast to tightening policy in the U.S. will allow Chinese ETFs to resume their impressive ascent. Further, continued selling has made the Chinese stocks inexpensive at current levels. This is especially true given the Shanghai Composite Index and Hang Seng Index have a P/E ratio of 18.91 and 9.7, respectively, compared to 21.3 for the S&P 500 index. So investors should wait until the Chinese market bottoms out and then cash in on the opportunity of the beaten down prices with any of the above-mentioned ETFs having a favorable Zacks Rank of 2 (Buy) or 3 (Hold). Original Post

Will Iran Keep USO Down?

Iran’s potential nuclear deal could bring up its output in the coming years. Will this deal have a long-term impact on oil market and the price of USO? U.S. oil production keeps rising despite low rig count. The potential nuclear deal between Iran and the West, which could lift the sanctions on the country, has contributed to the decline in the price of The United States Oil ETF, LP (NYSEARCA: USO ) – the oil ETF lost over 6% on Monday and over 10% in the past month. Moreover, the weakness in China, high volatility in the foreign exchange markets over the Greek debt crisis and low oil rig counts in the U.S. also provided additional downward pressure on USO. But is Iran likely to have such a strong impact on the price of USO over the coming years? Despite the sharp rise in volatility in the oil market, the price of USO hasn’t deviated by much from the price of oil in the past couple of months – the roll decay due to the Contango wasn’t harsh. If the futures oil market keeps a low Contango or even move to backwardation, this could behoove USO investors. But the main problem remains on whether oil prices were to bounce back from its recent plunge. One factor to consider is the role of Iran in the oil market. As the EIA showed , Iran’s ability to resume its pre-sanctions oil output on the conditions of the oil fields and infrastructure – it could take time and investment to bring these fields online. Nonetheless, the potential impact of Iran’s higher output could result in low oil prices by $5 to $15 next year. These projections could be a bit too harsh considering the market conditions are harder to increase production and OPEC already exceeds its current quota. Also, the country is likely to face challenges and a more competitive oil market environment. Some of these challenges include rising oil yield of U.S. oil producers, slower growth in demand for oil in China, growing share of Saudi Arabia from OPEC’s total output, and stronger competition from Russia, which heavily relies on oil revenue and continues to face a weak currency. The market conditions have also cut down the oil exports (in U.S. dollar) of OPEC in general and Iran in particular in the past year. As I have already pointed out in the past, and based on OPEC statistical bulletin , in 2014, OPEC’s revenue from petroleum exports have gone down to $964 billion – a 12.6% fall, year on year. For Iran the revenue from output also declined, mainly between 2012 and 2013 on account of its sanctions. (click to enlarge) Source of data taken from OPEC So the potential end of the sanctions on Iran could bring back up the country’s oil revenue, even though, as presented above, the fall in revenue of OPEC also suggests it will be harder to increase oil exports in the current market conditions. Currently, Iran produces around 2.8 million barrels per day. Back in 2011, before the sanction, the country was able to produce roughly 3.6 million bbl/day – 28% higher than in 2015. Last year, it produced 3.1 million bbl per day of which only 1.1 million bbl/day were exported or 35% of total output. Over the next couple of years, assuming the sanctions are lifted, Iran could increase its total output by 700,000 bbl/day, according to the EIA . Considering the country’s energy demand keeps rising, the county is likely to partly use this added output towards its own energy needs. In the meantime, the output in the U.S. hasn’t contracted, despite the fall in rig counts in the past few months. Oil producers have also reduced their capex for 2015 and in some cases for 2016. But for now, the output hasn’t contracted and the EIA still projects the annual output will remain around 9.4 million bbl per day – only 2% lower than the current output level. (click to enlarge) Source of data taken from EIA and Baker Hughes Looking forward, the EIA estimates production will fall further in 2016 to 9.3 million bbl per day. The fall in output in the coming months could also bring back up oil prices or at the very least ease the downward pressure on oil prices. Even though Iran’s role in the oil market is very important and could have an adverse impact on the price of oil and USO, its impact could actually be less prominent considering the current market conditions and the country’s energy demands. (For more please see: ” USO Investors – Beware of The Contango! “) 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.