Tag Archives: history

Ride The Wave

So much has happened and so much to talk about. We could talk about the seemingly globally coordinated easing from central banks around the globe. Central banks easing policy in the last two weeks have included Norway, Sweden, the Bank Of Japan (BOJ), the European Central Bank (ECB), the Chinese central bank and of course our own recent dovish statement from the US Federal Reserve,. We could talk about how that has led to a weaker US Dollar which in turn has helped oil, precious metal and emerging markets stage a turnaround in fortunes. Or perhaps we should discuss how Central bank maneuvers have helped US markets regain all of the ground they had lost so far in 2016. We could talk about all this but here is what we think would be most useful right now. The key to making money in these markets lies in Investor Psychology. How we understand it and our own emotions when it comes to investing our money is the key to success. Here are two charts that can help you be more successful in understanding how emotions play a role in your investing process. Courtesy of CNBC, the first chart shows two 12% rallies in the last 7 months. The second is a chart of investor psychology. After our second 12% rally in 7 months you should ask yourself, where are you on this chart? Are you relieved? Optimistic? Thrilled? Sell risk when prices are rising and buy risk when prices are falling. Understanding and keeping your emotions in check is the key to making money in markets like these. Ride the wave. Be fearful when others are greedy and greedy when others are fearful. – Warren Buffett If the Dow Jones holds its gains for the next two weeks we will have seen the biggest quarterly comeback in stock markets since 1933. We don’t have to remind you that the 1933 rally took place smack in the middle of the Great Depression. Risks are rising after our second 12% rally in months. It is going to be hard to move higher from here but don’t bet against continued central bank largess. The stock market is up 12% in 26 trading days. Not bad. But it does remind us of a blog post from back in October of 2015. October 2015 will go down as the best performing month for the S&P 500 in four years. I think that we all enjoyed the ride back up in October. The S&P 500 rallied 8.3% and followed through with more gains today to get the S&P 500 into the plus column for 2015. Those gains would be nice gains for an entire year – never mind a month! Whenever we get to thinking how much we have gained we cannot help but to contemplate the downside. We must always be on guard to temper our greed/ego just as much as we would concentrate on opportunity when fear strikes. As a reminder the S&P 500 closed October of 2015 at 2080. It would be 10% lower by January of 2016. Central bank policy in Europe and the US is having the same effect. Earnings estimates are heading lower while stocks ride higher. Not a great recipe for success. Risk is rising. We cannot predict with 100% accuracy every move in the market but what we can do is try and profit by tactically allocating and hedging our portfolio in times of market stress to take advantage of market volatility. Investing is not a game of perfection but of managing the risk inside one’s portfolio. We do not jump in and jump out of the market wholesale. By divesting ourselves of overpriced assets and availing ourselves of opportunities when prices are low allows us to take advantage of the long term benefits that the math of compounding brings.

Pakistan: The Growth Story Continues

In this article, I will apprise investors about the recent developments in Pakistan having a material impact on the price on the Pakistan ETF (NYSEARCA: PAK ). I recommend readers to read this article in tandem with my previous articles: Pakistan: An Undiscovered Land of Opportunities and Pakistan: Impending Growth Story. Pakistan is an oil importing country that is immensely benefiting from the recent plunge in oil prices. It has been a blessing for its economy in the following ways: CPI (Consumer price index), which is being calculated monthly by Pakistan Bureau of Statistics , has been on the downward trajectory, increasing the purchasing power of ordinary Pakistanis. In addition to that, in line with the decline in inflation number (which is one of the primary indicator SBP considers), State Bank of Pakistan (SBP) slashed the interest rate to a historical low of 6.5%. However, due to lower base effect the CPI numbers have started going up but within the range of moderate inflation. I believe interest rates would remain constant in the upcoming MPS (Monetary Policy Statement). Nonetheless, I foresee 50bps increase in the fourth quarter of the current year. Click to enlarge Prices of petroleum products in Pakistan have not gone down in sync with international crude oil price. This is because the oil and gas sector is heavily regulated by the government of Pakistan, which has levied high indirect tax in order to increase its indirect sources of revenue, bridging a gap of fiscal deficit. Narrowing fiscal deficit is one of the prime conditions of IMF as Pakistan is in IMF program since 2008 due to its incessant and growing current account deficits. Now the situation has improved as Pakistan’s current account deficit has narrowed by 23% , with shrinking fiscal deficit cloaking in at 1.7% of GDP as compared to 2.4% in the same period last year signaling improvement in the chronic structural problem of Pakistan’s economy. Other developments include: a) Approval of the much-awaited five-year Auto policy . This policy would bode well primarily due to phased reduction in duties by 5%-2% for existing players in the market coupled with tax incentives for new investments by existing and new brands in the market. Automobile companies constitute ~3.2% of the PAK ETF. b) Cement sector is rallying with bullish sentiments propelled by strong local demand and margin accretion due to increased construction activity and lower input prices respectively. Moreover, although the FIPI (Foreign Indirect portfolio investment) is negative year to date but cements are attracting foreign indirect portfolio investments with a positive contribution of USD 18.3 mn month to date. Cement companies constitute 14% of the PAK ETF. The following graph depicts sector-wise foreign portfolio investment of the month of February 2016. c) Recent rally in oil prices has reinvigorated the interests of investors in the Oil and Gas sector; this week oil and gas index outperformed the benchmark index. In recent weeks, the OGTI index surged by 2.5% against 1.26% increase in KSE-100. In conclusion, I would again reiterate that PAK is an investment opportunity that is high risk and high return but better for the diversification of your portfolio along with other regional ETFs. 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Factor-Based ETFs Provide Increased Stability, Returns

During a volatile market climate where ETFs are especially getting hit hard, an increased utilization of factor-based investing has the opportunity to provide more stable and higher returns. Factor-based investing allows investors to increase exposure to certain factors, including size, value, quality and momentum. Last year, MSCI introduced a variety of multi-factor indexes that offer investors a better strategy that could be just right for this market environment. These indices cover US, World, Emerging Markets, and more. Click to enlarge The 1 year return of the MSCI US Momentum Index (NYSEARCA: MTUM ) distinctly outperformed iShares Russell 1000 Value ETF: Click to enlarge (Source: Bloomberg) A Focus on Momentum Momentum-based investing has proven to be a successful strategy in a volatile market climate, as seen with AQR’s posted returns in their liquid alternative funds. Such a strategy can provide returns in a downed market as well because the strategy works both ways. A hedge fund can short a portfolio of negative momentum securities and vice versa. For MSCI with their new diversified multi-factor indices, it’s all about choosing the right exposure to multiple factors, not just momentum. They’re targeting four main factors (listed above), including momentum. The MSCI USA Momentum Index didn’t perform well in the past year (-8.04%), but the MSCI diversified multi-factor indices have seen much better returns. MSCI is able to increase or decrease their exposure to certain factors that they see as favorable or unfavorable. Such optimization is extremely strategic as risk level of the underlying index is maintained. These multi-factor indices aren’t brand new strategies, either. The MSCI World Diversified Index returned an annualized 9.8% over a 16-year period during backtests, which is double the return of the regular MSCI World Index. The main methodology is to increase factor exposures to achieve higher historical returns. Which Factor is the Best? With the recent sell-off and market environment that is arguably a mess, what is the right factor to increase exposure to? With the MSCI World DMF index, which has one tilt towards value, there was a positive exposure to earnings yield even in this market. There is no one best factor, which is the point of these indices. A combination of multiple positive exposures with tilts towards different factors (momentum, size, value, quality, leverage, etc.) is what has made these MSCI products produce better returns than the run-of-the-mill ETFs. For example, the MSCI World DMF Index had positive exposure to stocks of lightly levered companies, lower residual volatility and smaller size: (SOURCE: MSCI ) The above described strategies for ETFs is something investors should make note of as clearly alternative strategies are needed in this market situation. Consistent optimization of diversified multi-factor products, like those of MSCI’s, are not completely immune to risk, but have now proven to have broken away from the poor performance of regular ETFs in the past year. Factor-based investing is very optimal for this market is a very forward-thinking investing strategy. 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.