Tag Archives: economy

Introducing A New Roller Coaster: Brazil

Brazil’s economy has been on a drop due to significant and near fully priced in risks. Short sellers should be cautious for a rebound in commodity prices and an expanding middle class in this region. For broad exposure to the Brazil economy investors can buy EWZ while it trades at a discount to historic valuation. Let’s discuss Brazil. While their soccer team has been a top performer notching more world cup titles than any other country, unfortunately their equity prices have been consistently inconsistent. (click to enlarge) Brazil has been an easy money short-sell due to the market conditions including lower commodity prices, a weakening currency, high inflation, political instability, and minimal forecasted GDP growth. Examine the chart below, commodity prices based on this ETF are trading at half their value as compared to last year. (click to enlarge) The country’s currency continues to weaken, and the GDP growth has been moving in the wrong direction. The 5 year average GDP growth has been 3.2% and the 10 year average is slightly above at 3.4% according to Worldbank . For the next four years, the GDP growth is estimated to be an average of only 0.5%. While the current P/E based on historic growth of this region is promising, if you trust future estimates, the outlook remains bleak. Another risk which isn’t necessarily a new risk, is political corruption . The Petrobas scandal which was a state-owned oil company has essentially put the president at risk of impeachment. While inflation is a risk for Brazil overall, it may not be a huge concern for investors in iShares MSCI Brazil Capped (NYSEARCA: EWZ ). In fact, value stocks can be a good hedge against inflation (especially as compared to growth stocks). Looking at the equity style box accessed from Morningstar , you’ll notice this fund is value weighted. As prices in Brazil continue to fall, yields may become more attractive to investors. Continuing to drill into the Brazil ETF EWZ, a bullish story begins to unravel. For the fund itself, if you take the P/E divided by the long-term earnings % it creates a PEG of 0.88. This type of PEG is hard to find for a major country like Brazil. If you take the PEG ratio of the fund as compared to the historic or future GDP figure, however, you will be disappointed. The bull story here is that the P/E is attractive, commodity prices in the country’s abundant resources may rebound, the young population and expanding middle class may fuel growth GDP growth over consensus estimates, and the political environment may stabilize. I believe the short sellers should proceed with caution at this price level. If equity prices continue to fall the risk versus reward is going to be look quite lucrative in this region of the world. Digging deeper you will see below the five most heavily weighted stocks in the fund EWZ. This is a list I created which is why the quick descriptions are not in great detail. This is meant to provide a better picture of what an investor really is buying when they own this ETF. In these top five stocks which make up 36% of the total fund weight, you will notice the style is mostly consumer defensive and financial services. If the score 1 meant long and 10 indicated being short, I would sit at about a 4 today. Only slightly on the bullish argument at this price level. This country is one that I will be watching closely, and will add funds to if any of the bullish opportunities unravel. For now, I will be looking to enter a small amount of capital as I sit back and enjoy a nice yield with a good beverage . If you agree with the bear argument, I’ve already picked out a fund for you. My advice is to keep a close eye on Brazil because once the economy shows signs of light, equity prices will lift rapidly. (click to enlarge) Since July 1, 2000 this is the performance of Brazil as compared to the S&P 500. Brazil is clearly a roller-coaster ride, one that it does not pay to sit on forever. Get in when assets are cheap, and sell when they trade at a premium. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EWZ over 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.

Are Low-Yielding Bonds Still A Good Stock Market Hedge?

One thing that’s stood out during the most recent stock market turmoil is that bonds aren’t performing all that well either. US Treasury Bonds are up just 3.5% since stocks peaked and the aggregate bond index is up less than 1%. The concern here is that ultra-low yielding bonds can’t decline sustainably below 0% and are therefore unlikely to provide much downside protection in the future, whereas environments like the 2008 financial crisis and before offered investors far more protection because yields were higher. There’s some sad math behind the reality of falling bond yields [ insert sad trombone] . As yields approach the 0% mark they produce less and less potential upside. Here’s a general guideline for how much protection you’ll get from 10-year yields falling by 50% from 6% all the way down to 0.19%: As your yield gets cut in half so too does your upside protection. In other words, low yielding bonds become a worse and worse hedge as the yields decline. And herein lies the problem of a diversified portfolio. Investors who are used to a portfolio like the 60/40 of the 80s, 90s and 00s are in for a nasty surprise. Their 60% stock slice is now generating even more “permanent loss” risk than ever. And their bond slice is acting more and more like a true cash component. This puts the traditional 60/40 investor in a bind. They’re going to have to start deviating from 60/40 if they want to generate the same type of nominal and risk-adjusted returns because there is simply no way their bond component can protect them to the same degree that it once did. In fact, if rates become more positively skewed in the years ahead, the bond piece might contribute more “permanent loss” risk in the near term than many of these investors are hoping for. This doesn’t mean that bonds can’t still be a good hedge for stocks, but it does mean that diversified investors are likely to increasingly deviate from 60/40 as they realize that this allocation doesn’t offer the same types of returns that it did in a high and falling interest rate environment. Share this article with a colleague

Should You Buy Canada ETFs On The Cheap?

Bearing testimony to global growth worries, the developed economy of Canada slipped into a technical recession in the first half of this year. It was not entirely unexpected, though, given the prolonged pain in oil prices. But the drop-off was the steepest since the Great Recession which rings a panic alarm for those interested in Canada investing. Canada’s economy shrank 0.5% in Q2 (annually) hit by lower energy prices and business investment. Prior to this, the economy had retreated 0.8% in Q1. Canada is among the world’s top 10 oil producers. This data is self-explanatory of the economic underperformance. Is It All Dark About the Economy? All is not unwell with the Canadian economy as GDP growth in June, or the last month of the second quarter, was 0.5% which was the largest monthly advance in the Canadian economy in over a year. Notably, June saw a considerable rise in almost each sector. A subtle bounce in oil prices was basically the savior. Apart from the energy sector lull, the Canadian economy expanded in the second quarter, bolstered by increased consumer spending. A few economists expect a sharp snap-back in the second half of the year and forecast growth of 2.5% by the end of 2015 (per the economist Brian DePratto). Investors should note that though the fresh round of global growth worries induced by China weigh more heavily on oil prices, several analysts projected a recovery, though choppy, in oil prices in recent times. Many are of the opinion that oil prices are close to hitting the bottom and may be due for some way up in the coming days. Plus, the nation’s job picture is quite stable and the inflation rate touched a seven-month high in July. Housing market too is no less than decently growing. Stronger export competitiveness due to the falling Canadian currency relative to the greenback and the increasing purchasing power of the U.S. consumers are other upsides for the Canadian economy. So, things are tied between possibilities and perils with oil prices playing a crucial role in deciding the fate of the Canadian economy going forward. Due to the above-mentioned bullish attributes, several investors can take advantage of the cheaper valuation of the Canadian stocks and the related ETFs. ETF Options The largest ETF on Canada is the iShares MSCI Canada ETF (NYSEARCA: EWC ), which is off 18.4% so far this year. The fund has a Zacks ETF Rank #3 (Hold) and might open up intriguing opportunities for the future, if analysts’ affirmative predictions come true. The Guggenheim Canadian Energy Income ETF (NYSEARCA: ENY ), being an energy-oriented ETF, shed the most this year. ENY was down over 32% in the year-to-date frame but added over 3% in the last five days (as of September 2, 2015) on the August-end global oil price recovery. Small-caps are other interesting options to play any rebound in the Canadian economy. Small-cap ETF, the IQ Canada Small Cap ETF (NYSEARCA: CNDA ), is down about 27% this year. However, CNDA has a Zacks ETF Rank #4 (Sell). Original Post