Tag Archives: economy

A Bigger Brick In The Wall Of Worries

I have my list of concerns for the economy and the markets: Unexpected Global Macroeconomic Surprises, including more from China Student Loans, Agricultural Loans, Auto Loans – too much Exchange Traded Products – the tail is wagging the dog in some places, and ETPs are very liquid, but at a cost of reducing liquidity to the rest of the market Low risk margins – valuations for equity and debt are high-ish Demographics – mostly negative as populations across the globe age Wages in the “developed world” are getting pushed to the levels of the “developing world,” largely due to the influence of information technology. Also, technology is temporarily displacing people from current careers. But now I have one more: 7) Nonfinancial corporations, once the best part of the debt markets, are beginning to get overlevered . This is worth watching. It seems like there isn’t that much advantage to corporate borrowing now – the arbitrage of borrowing to buy back stock seems thin, as does borrowing to buy up competitors. That doesn’t mean it is not being done – people imitate the recent past as a useful shortcut to avoid thinking. Momentum carries markets beyond equilibrium as a result. If the Federal Reserve stimulates by duping getting economic actors to accelerate current growth by taking on more debt, it has worked here. Now where is leverage low? Across the board, debt levels aren’t far from where they were in 2008: (click to enlarge) Graph credit: Evergreen GaveKal As such, I’m not sure where we go from here, but I would suggest the following: Start lightening up on bonds and stocks that would concern you if it were difficult to get financing. How well would they do if they had to self-finance for three years? With so much debt, monetary policy should remain ineffective . Don’t expect them to move soon or aggressively. Fiscal policy will remain riven by disagreements, and hamstrung by rising entitlement spending. Long Treasuries don’t look bad with inflation so low. Leave a little liquidity on the side in case of a negative surprise. When everyone else has high debt levels, it is time to reduce leverage. Better safe than sorry. This isn’t saying that the equity markets can’t go higher from here, that corporate issuance can’t grow, or that corporate spreads can’t tighten. This is saying that in 2004-2006, a lot of the troubles that were going to come were already baked into the cake. Consider your current positions carefully, and develop your plan for your future portfolio defense. Disclosure: None

3 Southeast Asian Country ETFs Surging In October

The economic slowdown in China may be appalling for the Southeast Asian economies, but there is a flip side to it that actually spells opportunity. Years ago, leading manufacturing companies across the world had turned to China as a production base in order to take advantage of low-cost facilities and inexpensive labor. However, the trend seems to be changing at a fast pace due to the economic turmoil in the world’s second largest economy (read: Asia-Pacific ETFs to Watch on a Surprise Rebound ). Due to the massive growth that China has experienced in the past, its wages and manufacturing costs have grown sharply. Further, the country’s huge population base and rising disposable income of middle class have slowly turned the economy from production-based to consumer-based. It is for these reasons that international companies are becoming more inclined toward taking their labor-intensive manufacturing projects to Southeast Asian nations due to lower labor costs and their ability to handle sophisticated production on a large scale. With this, the companies will be able to cater to an increasing consumer base in China as well as to conventional markets such as Europe and the U.S. The industrial relocation is expected to result in huge foreign direct investment (“FDI”) inflow into these emerging economies. Asian Development Bank expects Southeast Asia to record a GDP growth of 4.6% in 2015 and 5.1% in 2016. This compares with a GDP growth of 2.7% in 2015 and 2.8% in 2016 for the U.S., and 1.5% in 2015 and 1.8% in 2016 for the Eurozone, per forecast of World Bank . Based on these strong economic fundamentals and recent developments, we turn our focus to three Southeast Asian country ETFs that have experienced double-digit gains since the beginning of this month (read: 4 Safe Ways to Invest in Emerging Market ETFs ). iShares MSCI Indonesia ETF (NYSEARCA: EIDO ) Indonesia is struggling with weakening demand from China and low prices of commodities such as palm oil and coal. However, a set of stimulus packages announced by its President Joko Widodo recently is expected to spur growth in this largest Southeast Asian economy. The stimulus measures range from cutting energy prices for companies and giving insurance to farmers against crop failures to giving access to subsidized loans to salaried workers for small business enterprises. Before this, the government has already tried to revive the economy by easing permit processing and stabilizing a weak rupiah. The government aims to achieve a GDP growth of 7% in 2017 through enhanced infrastructure spending and accelerated FDI inflow compared to its six-year low GDP growth of 4.7% for the first quarter of the year. EIDO tracks the MSCI Indonesia Investable Market Index, measuring the performance of Indonesian-listed equity securities in the top 99% by market capitalization. The fund is heavily biased towards financials, accounting for nearly 40% of its assets. It has gathered about $298 million in assets and trades in an average volume of 687,000 shares. The ETF charges 62 bps in investor fees per year and was up more than 25% since the beginning of this month (till October 13, 2015). It carries a Zacks ETF Rank #3 (Hold) with a High risk outlook. Notably, two other Indonesian ETFs also recorded double-digit gains (more than 20%) in the same time frame. They include the Market Vectors Indonesia Index ETF (NYSEARCA: IDX ) and the Market Vectors Indonesia Small Cap ETF (NYSEARCA: IDXJ ) . iShares MSCI Malaysia ETF (NYSEARCA: EWM ) Malaysia is another Southeast Asian economy falling prey to the commodity rout and slowdown in China (its largest trading partner). However, the recent trading data from the country spurred investors’ interest. According to data released by the Ministry of International Trade and Industry, the country’s trade surplus increased to 10.2 billion ringgit ($2.4 billion) in August from 2.4 billion ringgit ($0.6 billion) a month earlier. Exports rose 4.1% year over year while imports fell 6.1% from the year-ago level. Despite the China slowdown, exports to the country soared 32.4% year over year. Meanwhile, exports to the U.S. and the European Union escalated 12% and 13.5% year over year, respectively. The surge in exports can be attributed to its weakening currency. According to Datuk Seri Abdul Wahid Omar , Minister in the Prime Minister’s Department, Malaysia has compensated the loss in oil and gas revenues from the slumping crude oil prices to some extent by implementing the Good and Services Tax in April. Further, its debt level (currently 54% of GDP) is expected to decline given the rising investments from the private sector. EWM follows the MSCI Malaysia Index, which is highly focused on the country’s financials, industrials and consumer staples sectors. The fund has garnered roughly $320 million in assets and trades in a hefty volume of 1.7 million shares per day. It charges 49 bps in annual fees and was up 19.1% so far this month. The fund carries a Zacks ETF Rank #3 with a Medium risk outlook Market Vectors Vietnam ETF (NYSEARCA: VNM ) Vietnam’s economy has been benefiting from low energy costs and very low inflation. Last month, inflation dipped to zero for the first time ever, as per General Statistics Office. Inexpensive labor and devaluation of the Vietnamese dong for the third time in a year by the country’s central bank have also been boosting the country’s exports and attracting foreign investments. The recently enacted Trans-Pacific Partnership (TPP) deal is further expected to boost export demand for Vietnamese goods. Bloomberg data showed that the country’s exports went up 9.6% year over year to $120.7 billion in the first nine months of the year. In the same period, pledged foreign investment soared 53.4% while disbursed foreign investment rose 8.4% from the year-ago levels. According to Asian Development Bank, Vietnam is likely to record the fastest growth in 2015 among the five major Southeast Asian countries tracked by the bank. The growth would be driven by burgeoning private spending, rising exports and increasing flow of FDI. VNM tracks the Market Vectors Vietnam Index, measuring the performance of stocks listed in the Vietnamese stock index, which generates at least 50% of its revenues from within the local economy. The ETF’s holdings are mostly from the financial sector (44%). The fund has amassed nearly $467 million in assets and trades in a volume of 457,000 shares per day. It charges 76 bps in fees and has returned about 13.3% since the beginning of October. The fund carries a Zacks ETF Rank #4 (Sell) with a High risk outlook. Link to the original post on Zacks.com

The Strongest European ETF Will Surprise You

Summary Ireland’s markets stands out in tepid Eurozone markets. A closer look at the Ireland ETF. Outperformance in Ireland compared to other Eurozone equities. Buoyed by impressive economic growth, the iShares MSCI Ireland Capped ETF (NYSEArca: EIRL ) has climbed 13.5% year-to-date, good for one of the best performances among single-country exchange traded funds tracking Eurozone nations. However, there is more to the story when it comes the steadiness of EIRL and the Irish economy. In the first quarter, the Irish economy expanded by an upwardly revised 5.2% in 2014, its best performance since 2007, and the country’s economy is now larger than at the height of its so-called Celtic Tiger boom. Ireland’s central bank pointed to support from domestic demand as robust retail sales and an improved labor market bolstered the economy . Often seen as the steadiest hand of the five PIIGS ETFs, is up 22.2% over the past year. “A big reason the country has done so well is that it applied austerity in quick and dramatic fashion by cutting spending and raising taxes. This, along with a weak euro which helped bolster exports, has Ireland’s government predicting gross domestic product growth of 6 percent this year, matching last year’s pace. In addition, the country’s unemployment rate has dropped, from 15 percent in 2012 to 9.7 percent today ,” reports Eric Balchunas for Bloomberg . The $163.3 million EIRL holds 24 stocks with the materials and consumer staples sectors combining for half the ETF’s weight. The ETF is top heavy as CRH Plc occupies almost 21% of EIRL’s weight on its own. EIRL’s top five holdings combine for over 54% of the fund’s weight. “Ireland’s performance over the past four years stands in stark contrast to its peripheral peers in the euro zone. Portuguese stocks are down about 12 percent, equities in Italy are up 32 percent, and Spain’s are up 15 percent. Unsurprisingly, debt-ridden Greece has been the worst performer, down 33 percent since the debt crisis,” according to Bloomberg. iShares MSCI Ireland Capped ETF (click to enlarge) Share this article with a colleague