Tag Archives: income

The BRICs To Consider Now

Once considered the darlings of the emerging market world, the BRICs have faced economic and political challenges lately. However, certain BRICs still offer opportunities for investors. BlackRock’s Terry Simpson explains. artpixelgraphy_studio / Shutterstock Many BlackRock fund managers have raised their emerging market (EM) allocations lately, and we’ve warmed up in general to the asset class after a long underweight . EM valuations overall, as measured by the MSCI Emerging Markets Index, look cheap, and we see value for long-term investors. A Fed on hold and a weaker dollar are good news for the asset class (see the chart below), and there are signs of progress on structural reforms in certain EM countries. Click to enlarge Which BRIC country do you like best? Join in. You may be wondering, however, what we think of the so-called BRIC countries in particular – otherwise known as Brazil, Russia, India, and China – especially given the recent political scandal and slowing growth headlines surrounding some of these countries. Despite the economic and political challenges facing these one-time darlings of the EM world, we still see long-term opportunities within the BRIC universe. We like Brazil The words impeachment, corruption, bribery, and recession are all too synonymous with Brazil these days. And perhaps with justification, Brazilian gross domestic product (( GDP )), on the decline since 2010, finally entered negative territory in 2015 at -3.0 percent. Economists expect to again see negative economic activity in Brazil this year, with growth at -3.4 percent, according to Bloomberg data. Local inflation remains high, forcing the Brazilian central bank to leave its policy rate unchanged since July 2015. With so much bad news emanating from Brazil, one might ask what’s there to like about this BRIC? We believe Brazil offers value, as there’s potential for a significant turnaround story. Much of the bad news about Brazil appears already priced into the market. Brazilian equities, as measured by the MSCI Brazil Index, are 20 percent cheaper than their 2014 highs on a price to book basis. This means we could see Brazilian stocks move higher if confidence in the market is restored. We think sentiment toward Brazil has just begun to turn, as many long-term investors remain on the sidelines. In addition, lower real wages and declining labor costs are making the country more attractive for foreign business when measured against regional Latin American peers. However, an investor confidence recovery ultimately will rest on whether we’ll see real political change and reforms. We’re neutral toward Russia Undoubtedly, Russia is the BRIC member with the most to gain from recovering oil prices. Russia reaped the benefits of the oil price boom starting in the early 2000s, averaging 7.1 percent GDP for the six years ending in 2008. Last year, oil revenue accounted for 45 percent of Russian government revenue, according to an analysis of data accessible via Bloomberg. But Russia’s economy has suffered more recently, following declining oil prices and economic sanctions imposed by the U.S. and Eurozone. The country entered a recession in 2015 and is expected to produce negative growth again in 2016, based on consensus forecasts available via Bloomberg. A flexible currency has allowed Russia to quickly adjust to economic difficulties, and Russian markets are receiving inflows following rebounding oil prices. However, we need to see sustained economic momentum and a more sustainable long-term economic growth model not so dependent on oil. Thus, in the context of an EM portfolio, we advocate remaining neutral this BRIC. We favor India India is a bright spot within the BRICs and stands out in a world where economic growth is sparse. In 2014 and 2015, the country expanded at 6.9 percent and 7.3 percent, respectively. According to the IMF, India’s 2016 GDP is forecasted to grow at 7.5 percent. Yet even with this rosy economic picture, India’s market performance has waned since reaching a post-crisis peak in January 2015, weighed down by a rising U.S. dollar and slow progress on fiscal reforms. Looking forward, we are encouraged that the Indian government has committed to keeping the fiscal deficit in check. Furthermore, the government is expected to spend 0.3 percent of GDP on public infrastructure that should support growth. As such, we’re likely to see fiscal and monetary policy makers working in unison to spur growth. This, combined with a reasonable valuation for the S&P BSE Sensex Index, bodes well for Indian stocks into 2017. We like China Sentiment toward China began deteriorating in August of 2015, with the domestic stock market crash and less transparent currency management . Long-term issues remain, and the country’s reforms have slowed due to cyclical pressures. However, the reforms that have been implemented are ones that are supportive to growth. In addition, the Fed’s delay has eased pressure on China, and we’re encouraged by the slowing of capital outflows from the country. Finally, Chinese stocks (measured by the Shanghai Stock Exchange Composite Index) have trailed their Brazilian counterparts (measured by the Ibovespa Index) and moved in lock step with Russian equities (represented by the MICEX Index) since late January, based on Bloomberg data, and their low valuations are poised to potentially rise in a risk-on environment. Looking forward, we could see Chinese multiples increase as investors regain confidence in the country’s outlook. Within China, we prefer the offshore market vs. the domestic market, as well as domestic sectors and companies that could benefit from expected Chinese structural reform. The main takeaway from all of this: Investors should be cognizant that EM is no longer a homogenous asset class, and each market faces its own challenges. Even within the BRICs, there is growing heterogeneity across countries. This post , originally appeared on the BlackRock Blog

Active Risk Parity Returns For The First Quarter

March was a good month for our risk parity portfolios. The Active Risk Parity Portfolio With 7% Volatility Target returned 1.5% for the month, putting its total returns at a little over 2% year to date. These returns are slightly higher than those of the S&P 500 year to date, but we also missed the massive drawdowns in January and early February. Slow and steady wins the race. Charles Sizemore is the principal of Sizemore Capita l, a wealth management firm in Dallas, Texas. Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

Dumb Alpha: Sell In May And Go Away?

By Joachim Klement, CFA Every April, I am asked by clients and fellow investment professionals alike if the old adage, “Sell in May and go away,” still holds true? One of the key advantages of the ideas I present in the Dumb Alpha series is that they allow portfolio managers to rapidly improve their work-life balance. Since I am a naturally lazy person, I am constantly looking for ways to reduce my workload without my boss – or my clients – noticing. The sell-in-May effect, also known as the Halloween indicator , is one of the most well-known calendar effects. It holds that investors can outperform a simple buy-and-hold strategy by selling stocks at the beginning of May and buying them back at the beginning of November. If this were true, I could dramatically improve my work-life balance by going on a six-month vacation in May, just to come back in November and work for six months until the following spring. When I proposed this idea to my boss, he wasn’t very keen on it, arguing that, in largely efficient markets, this effect should not exist after transaction costs are taken into account. In other words, it should surely be arbitraged away by professional investors once widely known. I decided to dig in and look at the scientific evidence. After all, what is a weekend of extra research if one can expect to gain a half year off if proven right? It is indeed correct that many calendar effects do not survive increased scrutiny. Examples like the turn-of-the-month effect or the day-and-night effect require quite a lot of trading in a portfolio. If trading costs are reasonably high, many of these effects become unprofitable. Similarly, some other well-known calendar effects, like the January effect , disappeared once they were described in literature and exploited by professional investors. One of the first rigorous analyses of the sell-in-May effect was done by Sven Bouman and Ben Jacobsen , who looked at 37 international stock markets from January 1970 to August 1998. They found that the sell-in-May effect was present in 36 out of 37 countries and was statistically significant in 20 of them. The effect is not small, either. In the United States, Bouman and Jacobsen document a return in the November-to-April time frame that is 11 percentage points higher than in the May-to-October time frame; for the United Kingdom, the return difference is 24 percentage points – and can be traced back to the year 1694! So the sell-in-May effect has been around for a very long time, and, as it requires only two trades per year, it persists even after trading costs. Efficient market advocates were quick to reply. Edwin Maberly and Raylene Pierce pointed out that the sell-in-May effect disappears in the US stock market once the months of October 1987 and August 1998 are excluded from the data. Could it be that the effect was caused by just two months of awful performance? If the returns were that lumpy, surely it wouldn’t be possible to exploit them, because most investors would have lost their jobs or given up long before the next event materialized. In 2013, three researchers published what I consider the final verdict on the matter in the Financial Analysts Journal . Testing the sell-in-May effect with out-of-sample data from November 1998 through April 2012, they found that in the 14 years since the publication of Bouman and Jacobsen’s original analysis, the indicator did not disappear. In fact, on average, across the 37 markets studied, the out-performance in the winter months was still about 10 percentage points higher than in the summer months. They also found that the effect does not come in lumps. It exists in three out of four years and does not depend on specific industries, countries, or months. It seems clear that the effect is both real and persistent. What causes it is totally unknown, although several hypotheses have been proposed, tested, and rejected. Here we have a Dumb Alpha generator that defies logic and explanation. But, as a mentor of mine used to say, “Truth is what works” – and, even though the underlying causes of the effect are unknown, it does seem like a true investment anomaly. Now, I think I need to have a chat with my boss about my next vacation. Disclaimer: Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.