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4 Energy Mutual Funds To Buy As Oil Prices Move North

For a considerable period of time, the energy sector was plagued by an abundant supply of oil. While major oil producing nations pumped oil, demand moved south on global economic sluggishness. However, disruptions in oil suppliers, including Nigeria and Canada, were more than welcome by the beleaguered energy sector. U.S. shale output is also likely to decline in June says the U.S. Energy Information Administration (EIA). These factors collectively helped U.S. crude price to reach a seven-month high on Tuesday and the Goldman Sachs Group, Inc. (NYSE: GS ) to have a bullish outlook. The banking behemoth went a step further saying that it expects crude demand to improve this year, which will further reduce the demand-supply disparity. Given these positive trends, investing in energy mutual funds won’t be a bad proposition. Nigerian Saboteurs, Canadian Wildfires Supply outages in Nigeria along with wildfires in Canada continue to boost oil prices. In Nigeria, attacks by a militant group called Delta Avengers on oil installations led to shut down in production. Nigeria reduced its crude production to 1.69 million barrels per day (bpd), hitting its lowest level in 22 years. The group has recently bombed an offshore platform owned by Chevron Corporation (NYSE: CVX ). Among the other attacks, this group targeted a series of refineries and an export terminal. The Alberta region in Canada has, on the other hand, been under fire for two weeks now that is threatening major oil sands production facilities. According to the Conference Board of Canada, these facilities are estimated to produce 1.2 million barrels a day, which almost comprise $1 billion in economic activity. Investors are also keeping an eye on other oil producing nations such as Venezuela and China. Venezuela is in the grip of a serious economic crisis. The country is currently operating under a “constitutional state of emergency,” thanks to its high inflation rate and shortages in food and power. Meanwhile, China witnessed crude output of 4.04 million bpd in April this year, reflecting a 5.6% decline from the year-ago level. Goldman Projects Deficit in Oil Market Supply shortages mostly in Nigeria and Canada prompted Goldman Sachs to say that the oil market is facing a deficit in crude production. Goldman reversed its bearish bet and raised its oil price forecast for this year to $51 a barrel. A few months ago, Goldman projected that oil prices would remain around $20 per barrel following crude oversupply. Goldman also said that “the oil market has gone from nearing storage saturation to being in deficit much earlier than” it anticipated. U.S. Shale Oil Output Declines According to the monthly report from the EIA, output from seven major U.S. shale plays is likely to fall by 113,000 bpd to 4.85 million bpd in June. The profitability of shale drillers has been seriously affected, leading to such a projection. At the Eagle Ford shale play in South Texas, oil output is expected to witness the highest drop, down 58,000 barrels in June. The Bakken Shale play, which stretches from Canada into North Dakota and Montana, will experience the second largest decline in output, a projected fall of 28,000 bpd, the report mentioned. Top 4 Energy Mutual Funds to Invest In Oversupply of oil has always been a major concern for energy companies. But, as mentioned above, supply side disruptions have helped oil prices gain momentum. Demand, on the other hand, is expected to gain traction. Goldman projects 2016 worldwide crude demand to improve by 1.4 million bpd, which is higher than its prior expectation. This will further bridge the gap between supply and demand. Banking on these bullish trends, it will be judicious to invest in mutual funds that have considerable exposure to the energy sector. We have selected four such energy mutual funds that have given impressive year-to-date returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer a minimum initial investment within $2,500 and carry a low expense ratio. Funds have been selected over stocks, since funds reduce transaction costs for investors. Funds also diversify the portfolio without the numerous commission charges that stocks need to bear. Fidelity Advisor Energy Fund A (MUTF: FANAX ) invests a major portion of its assets in securities of companies engaged in the energy field, including the conventional areas of oil, gas, electricity and coal. FANAX’s year-to-date return is 12.5%. Annual expense ratio of 1.11% is lower than the category average of 1.47%. FANAX has a Zacks Mutual Fund Rank #2. Guinness Atkinson Global Energy Fund (MUTF: GAGEX ) invests the majority of its assets in equity securities of both U.S. and non-U.S. companies engaged in the production, exploration or discovery, or distribution of energy. GAGEX’s year-to-date return is 12.1%. Annual expense ratio of 1.41% is lower than the category average of 1.47%. GAGEX has a Zacks Mutual Fund Rank #2. Vanguard Energy Fund (MUTF: VGENX ) invests a large portion of its assets in the common stocks of companies involved in activities in the energy industry, such as the exploration, production and transmission of energy or energy fuels. VGENX’s year-to-date return is 16.4%. Annual expense ratio of 0.37% is lower than the category average of 1.47%. VGENX has a Zacks Mutual Fund Rank #1. Fidelity Select Energy Service Portfolio (MUTF: FSESX ) invests a major portion of its assets in securities of companies engaged in the energy service field, including those that provide services and equipment to the conventional areas of oil, gas, electricity, and coal. FSESX’s year-to-date return is 5.1%. Annual expense ratio of 0.81% is lower than the category average of 1.47%. FSESX has a Zacks Mutual Fund Rank #2. Original Post

Dolls And Dogs: Our List Of Emerging Markets To Invest In (And To Avoid)

With one-third of 2016 already behind us, we review the major stock market indices in frontier and emerging countries. Where were the returns strongest – and more importantly, what are the best ways for investors to get involved? After a long period in the darkness, investors in emerging markets have lately had reason to perk up. Contrast that with last year, when global equity investors had few places to hide. US markets barely broke even in nominal terms, and even incurred a small loss when factoring for inflation. Pain was evident in other developed markets, as major European indices also ended the year lower. Yet these lackluster performances paled in comparison to the bloodbath in emerging markets. Note the comparisons below, as displayed with the most liquid ETFs that track each relevant index: Ticker Name 2015 Performance (%) SPY SPDR S&P 500 ETF Trust 0.02% VGK Vanguard FTSE Europe ETF -4.83% EEM iShares MSCI Emerging Markets Indx ETF -18.01% FM iShares MSCI Frontier Markets 100 ETF -19.19% Data calculated as of market close on 5 May 2016 The opening days of 2016 saw that malaise transform into outright fear, as January proved to be one of the most brutal months in recent memory. US Fed Chairwoman Yellen’s decision to raise US rates at the end of December (an ill-advised tactic, as I wrote back in October) sparked a rush for the exits of stock exchanges around the globe. US and European markets lost nearly 10% of their value, while the carnage in major emerging and frontier indices was even worse. Click to enlarge Source: Money.net There is an old market adage: “As goes January, so goes the market.” Yet an interesting trend has played out since that Fed-inspired selloff. Most major indices traded lower in February, then moved higher and are now positive for the year. (Of course, the exception to this rule is Europe, which is grappling with a most likely insurmountable heap of problems – most of them self-inflicted). But most of the emerging and frontier markets rallied from their mid-January lows and have never looked back. In fact, despite a fierce selloff this week in the emerging markets (note: nearly 25% of EEM’s holdings are in Chinese equities, where many large institutions cut their holdings this week), both of these indices have outperformed those tracking the US and Europe. So what is driving these gains? Unfortunately, it isn’t economic growth, as few countries expect to produce higher growth rates in the current year. Instead, investors seem to be rotating back into emerging market currencies which have been heavily sold in recent months. Remember last year when the ‘smart money’ was forecasting an unprecedented dollar bull market as the Fed began to raise rates? Take a look at this chart for the PowerShares DB USD Bull ETF (NYSEARCA: UUP ) (an ETF that seeks to track the Dollar Index): Click to enlarge Source: Money.net Here’s a question for the technical traders out there: If this chart were for a stock, would you want to own it? (Hint for non-traders: No). Investors have begun to realize that the Fed has painted itself into a corner, with no conceivable way to follow up their rate-raising rhetoric with action. Consequently, emerging market currencies have been on a tear as investors move back into bonds issued by developing countries in an increasingly desperate search for yield: Click to enlarge Source: Money.net Of course, much of this growth can be attributed to ‘bottom-fishing’. This year’s winners are the same countries where investors sold off every asset class a year ago. Factors that contributed to the selloff were quite serious – Western sanctions (Russia), unprecedented corruption and scandal (Brazil), and presidential incompetence (South Africa); and the fear was compounded by a commodities bear market in reaction to waning demand from China. It is quite possible – likely, even – that emerging markets investors are in the midst of a bear market rally. There certainly are few macro fundamentals that can spark excitement – in any market. Nevertheless, as another old adage goes, “There’s always a bull market somewhere” – an old saw that has stuck with me ever since I watched the Sri Lankan stock index increase over 125% in 2009, while the rest of the world was self-immolating. With that in mind, let’s take a look at the five best – and five worst – equity market indices in the emerging and frontier market spectrum so far this year. We track all indices that are included within the MSCI country classification list for frontier and/or emerging markets. We’ll also take a look at ETFs or ADRs that are a generally accepted way for investors to get direct access via one of the US stock exchanges. As you can see, Latin America is dominating the field: The Five Best Country MSCI Classification Primary Index YTD Peru Emerging S&P/BVL Lima General Index 34.68% Brazil Emerging Ibovespa Sao Paulo Brazil 19.19% Argentina Frontier Buenos Aires SE Merval Index 14.33% Morocco Frontier Casablanca MASI All Shares Index 13.71% Colombia Emerging Colombia COLCAP Index 11.91% Source: Bloomberg Peru: Amidst an ongoing presidential election, the Lima Index went near-vertical in early April after the reigning leftist candidate failed to secure enough votes to qualify for a runoff. Best equity plays: iShares MSCI All Peru Capped ETF (NYSE: EPU ). For ADRs, Southern Copper (NYSE: SCCO ) is a US-listed copper miner that generates 43% of its revenues in Peru. Brazil: No tangible bull case here, other than it has been oversold amidst the worst recession in a century and the unprecedented Petrobras (NYSE: PBR ) scandal. A slight bump in depressed oil prices have also contributed. Look for a further rally if the Senate pushes out lame-duck president Rousseff later this month. Best equity plays: iShares MSCI Brazil Capped ETF (NYSE: EWZ ). Honestly, there’s not much to love here. Argentina: We currently receive more enquiries about Argentina than any other frontier market, except Iran. This is a definite value play – after years of financial isolation, the country just closed its first bond offering in over a decade and is about to proceed with its first IPO. As we’ve written previously , though, it pays to be cautious here. Best equity plays: Global X MSCI Argentina ETF (NYSE: ARGT ). Some interesting ADRs include integrated oil company YPF (NYSE: YPF ), Banco Macro SA (NYSE: BMA ) and Grupo Financiero Galicia (NASDAQ: GGAL ). Morocco: The tiny Casablanca Stock Exchange’s All-Shares Index has been on a tear over the past two weeks. Positive sentiment is building in the North African country after Bank of China announced it would base most of its African operations there. Best equity plays: Not easy for US investors. No Moroccan companies carry ADRs; the closest proxy is the WisdomTree Middle East Dividend ETF (NYSE: GULF ) which currently has a 13% weighting in Morocco. Its largest holding is Maroc Telecom ( OTC:MAOTF ), at 10% of total weighting. Colombia: Coming off a very bad year in 2015, underpinned by the one-two punch of high inflation and lower commodity prices. Higher prices for oil have helped to ease investors back into the Bogota Stock Exchange, while US real estate investors are beginning to discover opportunities here. Best equity plays: Global X MSCI Colombia ETF (NYSE: GXG ); ADRs include Bancolombia SA (NYSE: CIB ) and Ecopetrol SA (NYSE: EC ). And finally, let’s take a look at the worst-performing frontier and emerging markets so far this year. Remember that volatility is generally higher in emerging markets, and particularly in frontier markets. Today’s dog could be tomorrow’s darling, and vice versa: The Five (Actually Four) Worst Country MSCI Classification Primary Index YTD Ukraine Frontier Ukraine PFTS Index -8.85% Ghana Frontier Ghana SE Composite Index -9.44% Nigeria Frontier Nigerian SE All Share Index -10.75% China Emerging Shanghai SE Composite Index -17.68% China Emerging Shenzhen SE Composite Index -18.94% Source: Bloomberg Most of the names on this list are widely expected, as we show here: Ukraine: No explanation needed. Rampant inflation, non-existent economy, and did I mention a low-intensity conflict on its eastern flank? I’ve been hearing about opportunities on the ground for the truly adventurous, but that’s about it. Ghana: Weak currency, coupled with rising inflation. The Ghanaian economy has begun to show symptoms of ‘Dutch disease’ as government revenues move to support recent oil discoveries while leaving other industries to rot. Nigeria: Take the Ghana explanation mentioned above, and ramp up the intensity by 10x. The current president is resisting calls to devalue the currency, the naira. China: This is the proverbial ‘elephant in the room’ – not just for emerging markets, but globally. Stocks in the world’s second-largest economy have sold off aggressively this year amidst speculation of looming corporate bond defaults and concerns over economic growth. Continued weakness here may begin to spill over into the global economy. In conclusion, a prudent investment strategy with regard to emerging and frontier markets might include the following: Consider weighting more heavily toward EM and particularly selected FM as dollar weakness continues to push assets into these markets. Region, and even country, selection remains important. Keep an eye on Latin America – but beware the siren song of the bear market rally. Keep an eye on the data. Much of the recent gains have been driven by value investors picking up oversold assets. Without clear indicators of actual economic growth, this rally may be short-lived. 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. I have no business relationship with any company whose stock is mentioned in this article. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

NGE: Invest In Nigeria’s Economic Revival

I am going to be a bit provocative and suggest that low oil prices is good for the world especially for the oil producers. When we look across the board at the largest global oil producers from Russia to Saudi Arabia, Iran, Venezuela, Nigeria and Brazil. It becomes clear that abundant oil or high oil prices is neither a blessing nor a benefit to the populace of these nations. These nations have been characterised by mismanagement and corrupt usage of funds and it is only now that we have had an extended season of low oil prices that we are now hearing and seeing serious structural, economic and constitutional reforms to wean these nations from almost complete reliance on oil revenues. Nigeria’s Reforms Out of all these nations, the one that excites me the most is Nigeria for a number of reasons. Firstly, nations like Saudi Arabia, Russia and the South Americans have a number of regional and internal political challenges that I believe will act as a drag on their ability to take decisive measures to reorient their economy. On the other hand, despite the matter of Boko Haram, Nigeria is as a whole politically stable and united under one democratically elected leader and administration. This is important because the oil markets are extremely volatile and wild moves there can wreak havoc on a nation’s balance sheet within a short time and the ability to make fast and decisive decisions are very critical to success in the endeavour to shield and wean a nation from dependence on oil or commodities revenues. This is what the Nigerian President Mr. Buhari has begun to do with the banning of large amounts of imports and restriction of the use of dollars in Nigeria thus making it increasingly expensive to do dollar transactions abroad. While these actions in the short term has caused significant disruptions and distortions like the extortionate prices that dollars is currently being sold on the black market, in the medium and long term, many will agree that these actions are the best for the economy. These actions will benefit the economy for three reasons, it will discourage the importation of substandard and dangerous products that are endangering the health and safety of the local population, it will help to stimulate local production which over time will be instrumental for the diversification of the local economy. Finally, it will help to counteract and counter balance the low prices of oil because as oil is traded in dollars, the fall in oil prices means less dollars to import products and also as the level of imports falls and local production increases, it softens the blow of low oil prices. All of these actions will have the combined effect of increasing the price of the naira itself, stabilize the CBN’s dollar reserve accounts, reduce inflation over time and also interest rates can then be reduced to manageable rates. Further, the net effects of this will also make local naira denominated bonds more attractive over the medium to long term. Secondly, they are very much focused on the matter of corruption and have taken several measures to streamline government accounts and increase transparency into how governmental funds are used. As far as I am aware, these are unprecedented steps even for developed economies. Despite this, the administration has come under significant pressure to change their focus back to Nigeria’s other economic challenges without understanding that by simply curtailing and cutting out corruption, the Nigerian economy will begin to experience more stability and success. Local Equity Markets Growth In light of all of the foregoing, in going back to my original thesis, what really excites me about all of these measures is the effect it will have on the local equity markets. Click to enlarge The chart above compares the Brent Crude Benchmark with the Nigerian Stock Market Index and it is self-evident that the correlation between the price of crude oil and the returns from the NSE were much linked. I am gradually coming around to the realization that oil prices will remain depressed for at least another year for various reasons. Firstly, it is clear that the depressed price of global crude oil is a supply problem and not a demand problem especially in the short and medium term. We know this because crude oil demand increased by 1.5 to 1.8 million barrels per day which is a 5 years high yet the price remained depressed. No one can really price or adequately measure when oil prices will increase or supply will reduce based on two factors, one factor is the ongoing saga of shale oil production in North America where it seems that industry consolidation is taking place. It will take about a year for the dust to settle and only then can we know with any certainty where short and medium term prices will be heading. The second major factor is Iran. They continue to be unpredictable and the market is correctly pricing in significant outputs of crude oil from Iran into the price per barrel. What this means is that things will get worse than better but this will be a positive for a nation like Nigeria particularly considering its current reform trajectory. It is my belief that over the next 12 months, we will see a gradual delinking in the chart above whereby oil prices continue to fall perhaps to 20-25 but at the same time, the NSE begins to gain ground as the constituent companies begin to do better under new economic conditions. This is true because if one looks at the listed companies of the NSE, it becomes clear that most of these companies are well placed to do well as this drive to increase local production, consumption and demand consolidates. The chart above is indicative of this divergence within the markets and we can see Dangote Cement, Flour Mills of Nigeria and Oando which is a leading indigenous oil company. As one can see that while they were all nearly at the same place in May 2015, Oando continues to weaken while the other two are gradually strengthening. These two represent construction, agriculture and food production, three sectors that we should see significant growth within the next 12 months as the national policies begin to take root. This final chart is the Global X Nigeria Index ETF NGE which invests at least 80% of its total assets in the securities of the Underlying Index which is designed to reflect broad based equity market performance in Nigeria. This is an ETF that has hit the bottom and has significant upside potential over the next 12 months. Here we can also see that the growth is tentative but increasingly established. This trend of divergence is one that we are seeing across the board whereby as commodities markets weaken, stock prices appreciate especially when the local economy is supported by government policies. To highlight this point, I have added two South American favorites of mine. In the first one, I compared the Brazilian stock market index to the crude oil prices and in the second, I compared the Argentinean stock market to the feeder cattle prices. Click to enlarge Click to enlarge In conclusion, it is my belief that rather than being a negative, low commodities prices can be a stimulant to help commodities dependent nations diversify their economy and thus creating profitable investment opportunities for investors in local production, manufacturing and services companies. 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.