Tag Archives: european

Stable Belgium Can Give A Decent Profit

Summary EWK, an ETF based on Belgian shares, has significant relative strength. There are no serious threats to the Belgian economy. Government crisis and bankruptcies in the banking sector are in the distant past. The iShares MSCI Belgium Capped ETF (NYSEARCA: EWK ), based on the shares of Belgian companies, ranks extremely high in the ETF World Matrix with Cash list, edited by investment company Dorsey Wright. To gauge whether this extremely interesting ETF’s ranking is justified, it’s worth looking at what exactly the situation in the Belgium economy is like. First, we should explain how the ranking is done. Dorsey Wright compares selected ETFs with each other (one each for each). There are 34 ETFs that are ranked. The main factor is relative strength of each fund. Relative strength tells us how much the price of the company (or of the fund) grows in comparison to other companies (funds). The relative strength indicator, in conjunction with fundamental analysis is quite effective. Why? On the stock exchange, there is a principle of inertia: a company (or fund) that is growing strongly is hard to stop. Below, you can see top of the World ETF Matrix with Cash ranking order. EWK is in third position. The Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ) is ranked first and the iShares Dow Jones U.S. ETF (NYSEARCA: IYY ) is second. (click to enlarge) Source: Dorsey Wright So, let’s take a glance at the fundamental situation in Belgium. The Political Situation The political situation in Belgium is now stable. Charles Michel has been at the helm of the government since 11th October, 2014. The Kingdom of Belgium is a federal parliamentary democracy under a constitutional monarchy. It is divided into 3 regions: Brussels – the Capital Region, the Flemish Region and the Walloon Region. Since 1993, there are three levels of government (federal, regional, and linguistic community). In 2012, the sixth state reform transferred additional competencies from the federal state to the regions and linguistic communities. It is worth recalling that a few years ago, Belgium was without a viable government due to a political deadlock between the Flemish and Walloons . This political crisis had paralyzed the country’s political apparatus from June 2010 till December 2011 (for 589 days, Belgium was without a federal government). In this period, the 20 biggest companies index, BEL20, went down 23%, and the 10-year bond yield went up from 3,097 to 5,910 (91%). Euronext Brussels BEL20 Index (BEL20) vs. BELGIUM 10-Year Bond Yield (10BEY.B) Source: Stooq The European Parliament is based in Brussels. For this reason, the city is often witness to protests. Economy and Finances Belgium is a small but highly urbanized and industrialized country. Poor in natural resources, it imports raw materials in great quantity and processes them largely for export. Exports account for around two-thirds of Belgium’s GDP. Almost 75% of its foreign trade is with other European Union countries, so the country is highly exposed to business tendencies in the EU. Belgium is the world’s most congested country, with drivers losing 51 hours a year , on average, to traffic jams (in Brussels, 74 hours). The cost of traffic jams in Belgium is 10.58 euros per hour , according to Leuven transport researcher Sven Maerivoet. Efficient mobility is a big problem for society of Belgium, and traffic jams are causing real harm to the economy. From Q2 2013, Belgium’s GDP growth rate is stable, but rather poor (0-0.5%). In Q2 2015, the country’s economy expanded 0.4% over the previous quarter. The indicator almost perfectly reproduces what is happening in the EU economy (please look at the chart below). The unemployment rate is projected to decrease from a ten-year high of 8.5% last year to 8.1% in 2016 as job creation in the private sector picks up – according to European Commission data. We can name it a “slow-moving recovery”. GDP growth rate: Belgium vs. the EU (click to enlarge) Source: Trading Economics What are the weaknesses of Belgium’ economy according to the European Commission’s “Country Report Belgium 2015” ? Chronic underutilisation of labour, with a low aggregate employment rate A high overall tax burden Competition in several key service sectors remains low One of the most interesting facts about Belgium’s labour market is presented at the chart below. Labour costs in the country are indirectly linked to productivity developments. Productivity and Wage Evolution (2009 = 100) It is no wonder that Belgium falls lower and lower on the index of economic freedom. Belgium – Index of Economic Freedom in 2015, Score: 68.8 (100 represents the maximum freedom) Source: Knoema What is worrying is that the country’s ability to make future payments on its debt is decreasing. Government debt as a percent of GDP (106.50% in 2014) is skyrocketing from 2008 and is higher than the EU average (92%). But what’s interesting is, it’s still below Belgium’s average level from years 1980-2014 (108.96%). Government Debt-to-GDP: Belgium vs. the EU (click to enlarge) Source: Trading Economics Public finances in Belgium are in a condition that is characteristic of those in almost all EU countries: poor, but stable. The country can only dream of having a budgetary surplus. (click to enlarge) We need to put a question mark on the 2015 budget. The Federal state budget deficit plan for 2015 was 8.50 bln EUR . As the end of July, it was 8.33 bln EUR. Yes, the budget deficit is seasonal (tax revenues are notably higher in the second half of the year than in the first half), but it seems that the first half of the year was a bit too wasteful. We should remember also that foreign investors own a majority of Belgium’s treasury certificates and linear bonds. This dependence makes the country very susceptible to a loss of market confidence. And what about ratings? Fitch Ratings : Rating AA affirmed, outlook negative (24/07/2015) S&P : Rating AA affirmed, outlook stable (17/07/2015) Moody’s : Rating Aa3 affirmed, outlook changed from negative to stable (07/03/2014) DBRS : Rating AA (high) confirmed, stable trend (13/03/2015) Japanese Credit Rating Agency : Rating AAA affirmed, outlook stable (01/07/2014) Rating and Investment Information, Inc . : Rating AA+ affirmed, outlook stable (31/08/2015) The Banking Sector In the years 2008-11, Belgium was struggling with a banking sector crisis, which revealed the incompetence of EU regulators and ratings agencies. In October 2011, the country nationalized big bank Dexia ( OTC:DXBGF ), which had passed stress tests year earlier. What’s the situation right now? KBC Bank ( OTCPK:KBCSF ) has repaid 7 bln EUR of federal loans, and it’s in good condition. Dexia is not an active bank. Fortis was rebranded as Ageas ( OTC:AGESF ), and is now an insurer (without toxic assets). What is interesting is that in the next three years, a great consolidation is expected in the Belgian banking sector – according to Ernst & Young’s “European Banking Barometer – 2015” presentation . According to the same report, Belgian bankers expect stabilization in the economy and in the banking market. The Real Estate Market If we look at the chart below, the bubble appears to be growing… (click to enlarge) … but property price levels remain moderate compared to those in other EU member states. Average price/m² of a 120 m² apartment located in the capital (in EUR) (BE – Belgium) Source: Global Property Guide Remember, of course, that in the charts above, we see the effects of extreme easing of monetary conditions in EU. Summary The political situation in Belgium is stable. The economy is in a slow recovery. Federal state finances are not in good shape, but where are they so (speaking about the EU)? The banking sector is recovering. Belgium does not stand out like on the plus side, but there are no serious threats for this country either. The investment mood has been very good, despite China’s fundamental problems. In fact, there are a few good reasons to invest in European equities . For example, quantitative easing provides support to consumption and money supply in the eurozone. Result? Better growth. Those who are already invested in the European and Belgian markets could patiently wait for further developments. For investors who like medium amounts of risk, invest in ETFs with exposure to Belgium. How to invest in the country There are some ETFs with exposure to stocks listed in Belgium. EWK has the largest exposure. 5 ETFs with the largest exposure to Belgium (click to enlarge) Source: ETFdb.com And here we have the most economical solutions: 5 cheapest ETFs with exposure to Belgium (click to enlarge) Source: ETFdb.com You may ask: Where is EWK in this ranking? Well, it’s in the 11th position, with ER = 0.47%. Not so bad. 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.

Asia-Pacific ETFs To Watch On A Surprise Rebound

The Asian stock market rallied offering some respite to investors suffering from the global economic slowdown triggered by uneasiness in China. Thanks largely go to the optimistic remarks made by the Japanese Prime Minister Shinzo Abe and China’s Ministry of Finance regarding strong stimulus measures that would stir up their economies. Abe revealed plans to cut the corporate tax rate in 2016 by at least 3.3 percentage points to attract investors into the country. This led the Nikkei index at the Tokyo Stock Exchange to rise 7.7% in the afternoon trading session on Wednesday, the biggest one-day gain since October 2008. Notably, the index shed 2.4% in the previous trading session. China’s Ministry of Finance also boosted investor confidence after it promised to reform the tax system, step up investor spending and utilize the public-private-partnership model to support economic growth. Soon after this announcement, the Shanghai Composite Index rose 2.3% while Hong Kong’s Hang Seng Index moved up 4.1% Wednesday. This extended the continued rebound from Tuesday, when both the Shanghai and Hong Kong indexes gained 2.9% and 3.3%, respectively. The rebound in the Asian market was also supported by a strong rally in the Wall Street and European indexes Tuesday. The U.S. markets recovered from its second-worst week of the year with Dow Jones, S&P 500 and Nasdaq moving up 2.4%, 2.5% and 2.8%, respectively. Meanwhile, Germany’s benchmark DAX index ended up 1.6% higher and London’s FTSE 100 index closed 1.2% higher, driven by promising import and export data from Germany. The top U.S. equities ETFs, SPDR S&P 500 ETF (NYSEARCA: SPY ), Dow Jones Industrial Average ETF (NYSEARCA: DIA ) and PowerShares QQQ Trust (NASDAQ: QQQ ), deserve special mention as they’ve captured the rebound in the global market. Tuesday, SPY, DIA and QQQ gained a respective 2.5%, 2.4% and 2.8% after losing 1.6%, 1.6% and 1.2%, respectively, in the previous trading session. Some of the Asia-Pacific ETFs that can continue its rally from Tuesday riding on the recent upbeat data are iShares MSCI Taiwan (NYSEARCA: EWT ), iShares MSCI South Korea Capped (NYSEARCA: EWY ), Vanguard FTSE Pacific ETF (NYSEARCA: VPL ) and iShares MSCI All Country Asia ex Japan (NASDAQ: AAXJ ). Tuesday, EWT gained 3.2%, EWY rose 2.5%, VPL went up 2.9% and AAXJ moved up 4%, after posting losses in the prior session. All these ETFs have a decent Zacks Rank of 3 or ‘Hold’ rating with a Medium risk outlook. Despite the gains, investors should be a little cautious about the rebound in the global markets given the underlying weakness in China. The U.S. Federal Reserve’s move regarding short-term interest rates in its next week’s meeting also poses questions regarding the overall health of the market. Original Post

Is It Safe To Return To Emerging Market Investments?

Emerging market investments across asset classes have suffered a brutal combination of collapsing commodity prices and a strong US dollar this year. Is the bottom near, and where might investors look for bright spots? 2015 has been a lackluster year for US and European markets, but their performance is still leagues better than what emerging market investors have struggled through. The MSCI Emerging Markets Index is down over 17% year to date, and emerging market bonds are down nearly 2% so far in 2015. Most tellingly, emerging market currencies have been the worst hit, down more than 20% over the last twelve months, which has in part fueled the collapse of other emerging market asset classes. Brazil’s real, for instance, is down 30% year to date. (click to enlarge) Source: Bloomberg and Global Risk Insights The causes for the destructive trend are not difficult to spot: commodities (led by oil) have fallen to multi-year lows, investors have hit the panic button on Chinese growth, and the US Federal Reserve has signaled an impending rate hike. As if that tally of obstacles was not enough, two of the major attractions to emerging market investments have been diminished as of late: high growth and low correlation with developed markets. The euphoria-fueled growth rates of emerging markets, especially those of the BRICS countries, are gone. The optimism of investors flooding into these markets for newly middle class consumers and market-oriented structural reforms may have instead been a thin veneer over high commodity prices piqued by Chinese infrastructure spending. (click to enlarge) Source: Bloomberg and Global Risk Insights While this growth was seen as a secular trend that could act as a hedge against the cyclicality of developed markets – particularly surrounding the financial crisis – the focus on zero-interest rate policies and quantitative easing by the US Federal Reserve, Bank of England, and European Central Bank have brought investment cycles of developed and emerging markets in line with one another. 2013 and 2014’s taper tantrums are the most memorable examples of this: investors walking back down the risk ladder in anticipation of Fed tightening are moving away from emerging markets as well as developed market equities. When the sell-off slows, emerging markets will once again be an attractive opportunity The trends that have led to the emerging market sell-off are not permanent, and when these dark clouds lift, more investors will see promising returns. More importantly, some regions have been unfairly maligned during the sell-off. So is the time right for investors looking to diversify, and if so, where do they turn? Of course, consistently timing the market’s peaks and troughs is a fool’s errand , but there is one date on the horizon that will keep capital flows in emerging markets in a tenuous place: the Fed’s first rate hike . Once that has passed, especially given the Fed’s guidance that the rate hike cycle will be slow and designed to sustain financial market stability as much as possible, the brighter markets that have been unfairly grouped with less promising markets should begin to shine again. There are some reasons to believe the future is looking brighter across emerging market regions and asset classes. Currency market observers are beginning to believe that some emerging market currencies are becoming fairly valued again, after being overvalued throughout most of the QE era. Those that are still unattractive are those with enough dependence on China to spook investors. As momentum falls away from these trades, earnings and yields (in dollar-terms) will stabilize. Speaking of yields, the transition to local currency denominated debt in emerging markets has cleared up much of the uncertainty that fueled the 1997 Asian financial crisis: unwise pegs to the US dollar and dollar-denominated debt. Even as investors dump emerging market debt as yields fall due to recent currency movement, the likelihood of default is lower than it historically has been . “Two dreaded Cs” The headwinds of China and commodity prices remain a major point of differentiation across regions. Regions with low exposure to those two dreaded Cs will look like fundamentally better investments, at least until uncertainty over those areas persist. If the world is witnessing a secular shift in Chinese growth, that could be a period of several years. The trade linkages of emerging market economies is more important than ever in this context. Of the several emerging markets that are net commodity importers with low exposure to China, a few are notable: India and Poland. Indian GDP grew 7% last quarter (albeit partly because of a change in methodology that brings it in line with international norms), placing the country in a unique place with international investors: after Prime Minister Modi failed to live up to the unrealistic expectations for reform that were created during the early days after his election, it lost its place as an emerging market darling. However, in the current emerging market paradigm, India will continue to benefit from low commodity prices and has an economy that is largely based on domestic goods and services, insulating its business sectors from international uncertainty. While the other namesakes of the BRICS group crumble, each for its own idiosyncratic reason, India looks to be the only one on the upswing. Poland exhibits similarly low exposure to the dreaded Cs. It sits in a unique trade situation as a major manufacturer for the EU market , especially of automobiles, and an increasingly important member of the EU. Even as Europe has struggled to find growth, Poland has not. Now that the industrial and consumer spending prospects for most of Europe look their best since 2008, Poland stands to benefit. Underlining that potential is Poland’s strong democratic system and its low exposure to China. While volatility and indiscriminate fear across emerging market asset classes are still high in light of global macro trends, especially the Fed’s rate hike, there is an opportunity to differentiate between markets that will continue to fall victim to these trends, and those that will not. The wholesale euphoria of the last decade’s emerging market investments does not look to be on its way back soon, but the push towards higher growth and market-enhancing reforms still marches on for several key actors.