Tag Archives: economy

Indonesia Slashes Rates Again: ETFs In Focus

Indonesia’s central bank cut its benchmark interest rate for the second time this year in its efforts to improve sluggish economic growth. Bank Indonesia (BI) slashed its benchmark interest rate by 25 basis points to 7%. BI had undertaken a similar sized cut in January after keeping rates unchanged for the last 10 months of 2015. The recent rate cut was largely expected as the majority of economists surveyed by Reuters had predicted that BI would cut the key rate by 25 basis points. In its efforts to ease the economy, BI not only lowered interest rates but also reduced the reserve requirement on rupiah deposits by 1 percentage point to 6.5%, effective from March 16. This move is expected to boost liquidity by more than $2.5 billion (34 trillion rupiah). These measures from the Indonesian central bank come closely on the heels of the U.S. Federal Reserve taking a dovish stance with hopes of further rate hikes fading. The Indonesian bank stated that its measures to ease monetary policy are aimed at achieving solid macroeconomic stability with reduced inflationary pressure against a backdrop of uncertain global markets. It further pointed out that it will continue to work with the government to control inflation, stimulate domestic economic growth and bring about structural reforms. The Indonesian president, Joko Widodo, popularly known as “Jokowi” has been quite vocal about his wish to see interest rates fall further to spur growth. As per a Bloomberg report, Indonesia’s economy expanded just 4.79% last year, the lowest since 2009. This year, with inflation under control, the overall sentiment is that the rates could be slashed further. In 2016, BI expects inflation to be around the mid-point of its target range of 3% to 5%. Apart from Indonesia, several other countries are also following the strategy of monetary easing, which generally comes in the form of an interest rate cut, to boost growth. Earlier this year, Bank of Japan’s (BOJ) move to impose a negative interest rate for the first time surprised the markets. The BOJ Governor Haruhiko even stated that there will be no limit to efforts for easing monetary policy. The central bank may further expand asset purchases if required. Other Asian countries including Taiwan and Bangladesh have cut rates. Meanwhile, the European Central Bank (ECB) has also hinted on further policy easing in its March 2016 meeting. Investor sentiment towards Indonesia has improved following its liberalization developments by easing restrictions on foreign investment in several industries including films, restaurants and healthcare earlier this month. Jokowi’s move to deregulate the traditionally protectionist economy should help in accelerating growth and making the Indonesian business environment more conducive for new investment. A Closer Look at 3 Indonesian ETFs In the light of these developments, we highlight three ETFs – the iShares MSCI Indonesia ETF (NYSEARCA: EIDO ) , the Market Vectors Indonesia Index ETF (NYSEARCA: IDX ) and the Market Vectors Indonesia Small-Cap ETF (NYSEARCA: IDXJ ) – that have gained 6.2%, 7.2% and 6.2%, respectively, in the last 10 days. All three have a Zacks ETF Rank of 3 or a ‘Hold’ rating with a High risk outlook. EIDO This is the most popular ETF tracking the Indonesian market with AUM of $344.3 million and average daily volume of almost 756,000 shares. The fund tracks the MSCI Indonesia Investable Market Index, holding 86 securities in its basket while charging 62 bps in annual fees from investors. The product is somewhat concentrated in both sectors and securities. The top five firms account for almost half of total assets, while from a sector point of view, financials dominates the fund’s assets with 38% share. The fund has a heavy tilt towards large-cap stocks at 84%. IDX This ETF follows the Market Vectors Indonesia Index, holding a basket of about 45 companies that are based or do most of their business in Indonesia. The product puts about 54.6% of total assets in the top 10 holdings, suggesting moderate concentration. Large caps are pretty prevalent, as these make up 83% of assets. With respect to sector holdings, financials again takes the largest share at 34.9%, followed by consumer staples (18%) and consumer discretionary (14.4%). The product has amassed $98.1 million in its asset base while it trades in volumes of around 89,000 shares. It charges 58 bps in fees per year from investors. IDXJ Unlike the other two, this is a small-cap centric fund. It is unpopular and less liquid having AUM of $5.3 million and average daily volume of about 2,000 shares. The fund tracks the Market Vectors Indonesia Small Cap Index and charges 61 bps in annual fees. Holding 29 stocks, the product does a decent job of spreading out as the top 10 securities hold about 62% weight. However, it is a bit concentrated from a sector outlook, as financials takes the top spot at 42.1% while industrials and energy round off the next two positions at 23% and 14.7%, respectively. Original Post

Below Zero: Negative Yields, Negative Rates And The Price Of Baked Beans

The Japanese did it. The Europeans did it. Even the educated Swedes did it. So will the Fed ever lower interest rates below zero? Markets fell out of bed last week on fears the Fed might shift from a Zero-Interest Rate Policy (“ZIRP”) that alleviated the pain of the financial crisis to a Negative Interest Rate Policy (“NIRP”) to keep the monetary stimulus to the economy alive. Why does it matter The “feasibility study” being undertaken at this stage is a long way from a policy announcement, but would indicate a very different interest rate path to December’s announcement. This volte face alone would query the Fed’s credibility. Add to that the known unknown of how markets might operate in this Through the Looking Glass world where you pay to lend money to the lender of last resort, and some basic assumptions around the supply of, and return on, capital have to be adapted. How does it “work”? The short answer is: we’ll see. In theory, by charging financial institutions to sit on surplus cash, they are forced to put that cash to work, for example lending to corporates to keep their wheels turning. In this way, negative rates act as a stimulus to the velocity of money, rather than the quantum of money supply. What are the issues? Issue number one is that it turns the fundamental relationship between providers and users of capital on its head. Aside from that are the legal and technical issues around how NIRP can be implemented in any jurisdiction. But, as we have seen so far – where there’s a will there’s a way. The sector most vulnerable is the banking sector as negative interest rates wreak havoc on Net Interest Margins – the spread between banks’ borrowing and lending rates that is the cornerstone of their profitability. Hence the rather brutal round of price discovery that took place in the banking sector as a response to this new known unknown. From negative yields to negative rates Short-term real yields on government debt (i.e. nominal yields, adjusted for inflation) went negative in 2008 during the financial crisis. Short-term nominal yields on government bonds, issued by, for example, the US and Germany, have dipped in and out of negative territory thereafter, as a safety/fear trade signaling that those investors would rather pay governments to guarantee a return OF their capital, than demand corporates to promise a return ON their capital. So economically speaking, negative yields are not new. But what is new is that negative interest rates are being adopted as a central bank policy. How have markets reacted? Markets hates grappling with new concepts where there is no empirical data from the past on which to make hypotheses. Hence the “shock” increase in risk premia despite the ostensible further lowering of the cost of capital. Renewed interest in gold is the natural reflex for those scratching their head as monetary policy grows “curiouser and curiouser”. What next? Central b anks are adding NIRP to the armory of “unorthodox” levers at their disposal to achieve orthodox aims. To what extent this new weapon is deployed will depend on the underlying development in fundamentals around growth, jobless rates and inflation targeting. Those targets set the course to which monetary policy will steer. Whether the new policy levers have more efficacy than the old remains to be seen. Baked beans, anyone? The UK’s baked bean price war of the mid 1990s, provides a parallel to the topsy turvey economics of negative pricing. To gain and retain customer market share, the big three British supermarkets slashed baked bean prices to around 10p a tin. Tesco’s then broke ranks and slashed prices further to 3p a tin (subject to max 4 cans per customer per day). Not to be outdone by its bigger rivals, Chris Sanders of Sanders supermarket in Lympsham, Weston Super Mare made history by selling baked beans for MINUS Two Pence (subject to max 1 can per customer per day). Janet Yellen – you now know whom to call. While it didn’t alter the fundamentals of the retail sector, it did mark the end of an irrational era of skewed economics. For the optimists out there, perhaps NIRP heralds the same? Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Japan ETFs To Tap On Renewed Stimulus Hopes

After logging in the biggest weekly drop of 11% in more than seven years on a rising yen, fears of a global slowdown and the sell-off in banks, the Japanese stocks bounced back strongly at the start of this week. Notably, the Nikkei 225 index jumped 7.2% in Monday’s trading session, representing the biggest daily gain since September, and extended gains of nearly 0.2% in today’s trading session. With this gain, the index has reversed the bearish trend it saw last week. Impressive two-day gains came on the back of bargain hunting and hopes for further stimulus from the central banks in Europe and Japan. In particular, renewed contraction in the Japanese economy brought back the need for more easing measures to stimulate the economy. Additionally, the yen has weakened from the highest level of ¥110.98 reached last week against the greenback that will benefit exporters and the manufacturing industry. This is because Japan is primarily an export-oriented economy, and a weaker currency makes its exports more competitive. More Stimulus in the Cards The economy contracted 1.4% year over year in the final quarter of 2016, worse than the Wall Street expectation of a 1.2% contraction. A drop in consumer spending, weak exports and lower private consumption continued to weigh on the growth of the world’s third-largest economy. The persistent slump in Japan’s biggest trading partner – China – added to the woes. The slowdown is the major setback for Prime Minister Shinzo Abe and his reform policy, Abenomics, which is aimed at pulling the country out of deflationary pressure and putting it back on the growth trajectory. Sluggish growth has raised speculation over additional fiscal stimulus by the central bank. Earlier this month, Bank of Japan (BoJ) adopted measures similar to the European Central Bank (ECB) by pushing interest rates to the negative territory. Additionally, the central bank maintained its bond buying program of 80 trillion yen ($675 billion) per year and invested in exchange-traded funds and real estate investment trusts. Now, an analyst at J.P. Morgan expects BoJ to cut interest rates further to minus 0.5% from the current minus 0.1% anytime soon, plus increase its Japanese government-bond purchases. Further, many economists expect Japanese growth to rebound in the coming months. As per the survey by the Japan Center for Economic Research, 38 analysts project that the economy would expand by an average of 1.4% in the first quarter, which would mark the best growth in five quarters. Given this, Japanese ETFs are poised for a rebound, especially in the session right after the Presidents’ Day holiday in the U.S. As a result, investors could tap the current opportune moment by investing in Japan ETFs. ETFs in Focus Currently, there are several Japanese equity ETFs trading on the U.S. market. While there are a handful that are relatively specialized, either tracking small-cap benchmarks or dividend-focused indexes, the most encouraging funds right now are the ones that are not confined to one segment, but provide exposure to the broad Japanese equity market. Below, we have highlighted some of them that could fetch substantial returns in the coming days on the expectation of additional stimulus. Of these, the ultra-popular fund is the iShares MSCI Japan ETF (NYSEARCA: EWJ ), with a total asset base of $17.7 billion. This fund tracks the MSCI Japan Index and holds 318 stocks in its basket. Though it is slightly skewed toward the top firm – Toyota Motor (NYSE: TM ) – at 5.8%, other firms do not account for more than 2.12% of assets. It trades in heavy volume of 50.3 million shares per day and charges 47 bps in annual fees. Another fund that provides a similar broad exposure to the Japanese stock market is the Precidian MAXIS Nikkei 225 Index ETF (NYSEARCA: NKY ). This fund does not have the same level of AUM or volume as EWJ, having nearly $41.6 million in assets and exchanging 40,000 shares a day. But it follows a much more widely known index – the Nikkei 225. Here, Fast Retailing ( OTCPK:FRCOF , OTCPK:FRCOY ) makes the top firm with 8.4% share, while other securities hold less than 4.3% share in the portfolio. The ETF has a slightly higher annual fee of 50 bps. Investors should note that both EWJ and NKY are large-cap centric funds with minor allocations to mid and small caps, and having consumer discretionary and industrials as the top two sectors. The products also have a Zacks Rank of 3 or “Hold” rating. Apart from these, Japan hedged funds – the WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ), the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEARCA: DBJP ) and the iShares Currency Hedged MSCI Japan ETF (NYSEARCA: HEWJ ) – seem excellent picks. These ETFs offer exposure to the broad Japanese stock market, while at the same time provide a hedge against any fall in the Japanese yen. The trio has a Zacks ETF Rank of 2 or “Buy” rating, suggesting that they will outperform the markets in the coming months. Risk-aggressive investors seeking to make big profits from the bullish sentiments in a very short period could go long on either of the three leveraged products, namely the ProShares Ultra MSCI Japan ETF (NYSEARCA: EZJ ), the Direxion Daily MSCI Japan Currency Hedged Bull 2x Shares ETF (NYSEARCA: HEGJ ) and the Direxion Daily Japan Bull 3X Shares ETF (NYSEARCA: JPNL ) – available in the space. EZJ provides two times (2x, or 200%) leveraged exposure to the daily performance of the MSCI Japan Index, while JPNL creates a triple (3x, or 300%) leveraged long position in the same index. Meanwhile, HEGJ seeks two times leveraged exposure to the MSCI Japan US Dollar Hedged Index. Original Post