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Stock Picking Or Index Investing: Comparing Average And Median Price To Cash Flow Ratios Globally

Summary When looking at country level stock market valuation ratios, it is always useful to look both at median and average statistics. Wide valuation dispersion allows stock pickers to find relative value plays within a country index. Narrow valuation dispersion tends to top-line calls on the overall country index. When looking at country level stock market valuation ratios, it is always useful to look both at median and average statistics. If you only look at average statistics, the resulting valuation ratios can sometimes be very skewed . When several companies are dramatically re-rated lower it drags down the average ratio statistics and can make an entire countries stock market look a lot cheaper than it actually is. A good example of this can been seen when looking at MSCI Brazil. The average price to cash flow ratio for MSCI Brazil is just 4.6x. If an investor just looks at this than one might think that market looks as cheap as it has at any point since 2009. However, the median price to cash flow ratio is still 8.6x which is right in the range that valuation ratios have been since mid-2012. Therefore, there most be a wide dispersion of valuations among individual stocks for investors to choose from. On the other hand, you have a situation like MSCI Hong Kong where the spread between average and median valuations is just 14 basis points. With average and median valuations so close, most likely there isn’t a lot of variation among valuation levels among individual stocks within the country index. In the charts below, we are going to group various country indexes into two baskets: large valuation spreads and small valuation spreads. (click to enlarge) (click to enlarge) Large Spreads – Potential For Individual Security Analysis (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Small Spreads – Index Investing May Make More Sense (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Its tough to make an investment decision purely on valuation spreads. However, there are a couple of investment conclusions that I think we can make. First, when the spread between average and median valuations is large this means most likely that there is a wide dispersion of valuation levels among individual stocks within a country index. This would seem like an environment for stock pickers to be able to find opportunities to apply individual security analysis to unearth stock ideas. Second, when the spread between average and median valuation is small than it would seem that it would be tougher to find very many individual security ideas, at least from a relative valuation stand point, and investors would be better off buying or selling the entire country index (or ETF). Relevant Tickers: MCHI , EDEN , EWG , EWQ , EWH , EWJ , EWW , EWM , EPHE , EWS , ERUS , EWP , EZA , EWD , TUR , ICOL , EWA , EWC The original posting of this article can be found here . All data was created by the author and sourced from Gavekal Capital, MSCI and FactSet.

Have The Volatilty ETFs Turned A Corner?

Summary Trying to play US equity volatility has been really tough for retail investors in recent years. Over the past four years VIXY and VXX are both down over 58%. Volatility has increased in other areas of the capital markets which is a positive sign long-volatility ETFs. Trying to play pure volatility as a retail investor is tough. Not only can you not invest directly in the widely watched VIX, but ETFs that attempt to track the VIX end up with a substantial tracking error. This occurs because volatility ETFs such as the ProShares Vix Short-Term Futures ETF (NYSEARCA: VIXY ) track an index made up of VIX futures. When future prices are in contango (as is usually the case for VIX futures), this creates a negative roll yield that eats away at the ETFs price. Over the past four years, VIXY is down 58.6%. The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ), which tracks the same index as VIXY, is down 58.5%. Out of 1081 ETFs that have at least four years of trading history, VIXY and VXX have had the 6th and 7th worst performance over the past four years, respectively. With that nasty backdrop the silver lining is that for the first time in quite a while there are indications that pure play volatility investments could begin to pay off. In general, greater volatility in one segment of the capital markets tends to lead to overall greater levels of volatility in all segments of the capital markets. For example. a month ago junk bond spreads widened out to multi-year highs and look to be on the verge of making new highs very soon. As the chart below shows, greater volatility in the bond market tends to coincide with greater volatility in the equity markets. (click to enlarge) (click to enlarge) Volatility among major currency pairs has also been substantially higher in 2015 than the majority of the last several years. FX volatility has been pointing to increased equity volatility for quite some time. Equity volatility in other parts of the world is on the rise. The VDAX, which is similar to the VIX but for the German equity market, broke out to a multi-year high a month ago. Macro risks around the world are on the rise. The Citi Macro Risk Index “measures risk aversion in global financial markets”. It tracks various CDS spreads, credit spreads, swap spreads and implied volatility across FX, equity and swap rates. As this index rises, the perceived amount of risk in the global financial system increases. After falling for most of the year, this index is sharply higher over the past six weeks. Finally, on a relative point and figure basis, both the VIXY and VXX have recently broken though a firm resistance line that has been in place for four years and they both seem to have been in a basing formation for about the past 18 months. If this base can hold than there is a tremendous amount of potential upside for VIXY and VXX. VXX relative point and figure chart VIXY relative point and figure chart The original posting of this article can be found here . All data was created by the author and sourced from Gavekal Capital, MSCI and FactSet.