Tag Archives: seeking

Are EM Stocks Finally Emerging?

It seems as if in every client meeting lately, I’m getting questions about emerging market (EM) stocks. Many investors are looking for that magic bottom and are wondering if it’s time to step back in, while others are wondering if we’ll see further declines due to commodity weakness and eventual Federal Reserve (Fed) tightening. These questions come as EM stocks have had a rollercoaster year , with valuations beaten up by concerns about China’s economy , slowing global growth and lower commodity prices , just to name a few of the headwinds facing developing markets. According to Bloomberg data, by the end of the third quarter, the MSCI Emerging Markets Index was down 15 percent year to date. However, since then, emerging markets have reversed course , with the index gaining roughly 5 percent since the last day of the third quarter, according to Bloomberg data as of November 9. Of course, this ride has been rocky as well, with the index rallying following news implying a Fed delay, like the weak September jobs report, and then losing steam in early November after upbeat October jobs data increased expectations of a December hike. So, is this the beginning of an EM rally? Or are the gains since the third quarter just a temporary bounce? I believe it’s too early to call a recovery. A look at what has caused the volatile advance helps to explain why. First, a little primer on what typically happens to EM investments when a Fed rate rise is imminent. When markets believe the Fed will raise rates in the short term, investors generally add exposure to U.S. assets as they search for higher returns and potentially stronger currencies, rather than explore EM investments and their generally higher risk. In contrast, when Fed action is delayed, as has been the case this fall, flows have generally gone in the opposite direction, based on Bloomberg data. Investors increase risk exposure for potential return, adding exposure to EM equities and other risky assets. This is what seems to be the catalyst for the fourth-quarter EM rally. Unfortunately, as EM data accessible via Bloomberg testify, it hasn’t been driven by signs of economic improvement, firming inflation or rising earnings. Rather, it’s been primarily a reaction to the Fed’s delay in September, and the belief that the Fed would not raise rates until 2016. But when investors believe the Fed will, in fact, raise rates sooner than that, they may very well reduce their EM exposure. We saw this in early November, when a positive labor market report caused investors’ expectations of the probability of a Fed hike in December to rise from 56 percent on November 5 to roughly 70 percent the following day as measured by the pricing of federal funds futures, according to Bloomberg. EM stocks sold off on the news, with the index down roughly 4 percent since November 5, based on Bloomberg data as of November 9. Whether a Fed rate rise comes before December 31 or not, it’s likely to come eventually. In addition, many EMs are forecasted to continue to experience weak economic growth and geopolitical issues. So while EM valuations are relatively cheap, they may remain cheap for some time, and could even get cheaper from here. So what does this mean for portfolios? With valuations cheaper than they have been in over a decade, patient long-term investors may want to consider slowly building back benchmark buy-and-hold positions . But while broad exposure to the asset class can help diversify risk, it’s also important to remember that EM stocks aren’t a homogenous asset class. In our latest Investment Directions monthly market commentary , my investment strategist colleagues and I highlight select EM countries where we see potential opportunities right now, including South Korea. Exchange traded funds such as the iShares core MSCI Emerging Markets ETF (NYSEARCA: IEMG ) and the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ) can provide exposure to broad emerging markets, while exchange traded funds such as the iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ) can provide access to South Korea. This post originally appeared on the BlackRock Blog.

Japan In Technical Recession: Time To Buy ETFs On The Cheap?

The Japanese economy is now officially in a technical recession having shrunk 0.2% sequentially in Q3 followed by a 0.3% contraction in Q2. On an annualized basis, GDP fell 0.8% in Q3 trailed by a 0.7% (which was in fact a revised up figure) decline in the second quarter. Economists had expected a 0.2% annualized and 0.1% sequential drop for the third quarter. Per Bloomberg, lower capital expenditure by Japanese companies that resulted in soft business investment and lower inventories in the wake of global growth worries led to this miss. Though the economy is expected to step up in the ongoing quarter as companies are likely to increase output on declining ‘ stockpiles in warehouses ‘, the weak GDP numbers also led to talks about further policy easing. Views that the economy ” might have hit the bottom” in Q3 is widespread now and most people are wagering on a more beefed-up fiscal and monetary policy. Even if the Japanese corporate profile looks steady, sluggish capital spending is now a big hindrance. As per analysts, the soft global and domestic economic backdrop is restraining them from investing aggressively. Not at all. Japanese companies under Nikkei 225 delivered record earnings recently but valuations have swollen only 2.3% from the end of last year, per Bloomberg . About 55% companies under the broader Topix index beat analysts’ estimates this season. Consumer prices in Japan halted year on year in September 2015, falling from a 0.2% rise in August. Inflation in Japan has now fallen back to the level never seen since May 2013 . This boosted hopes for further monetary easing. The BOJ has now delayed the deadline for achieving an inflation target of 2% by six months. If this was not enough, after a stellar run by the ongoing QE stimulus, Japanese equity ETFs are still attractively valued. The popular Japanese ETF iShares MSCI Japan (NYSEARCA: EWJ ) trades at a P/E of 13 times at the currency level. This calls for scope for more returns out of the Japan-based ETFs. However, since yen has devalued considerably thanks to the prevailing easy money policy and the Fed is preparing for a policy tightening, a currency-hedged ETF approach is desirable in Japan investing. Though the economy Minister of Japan recently commented that “at this point the government is still not considering ‘pure’ fiscal stimulus” and that the outcome of wage negotiations for fiscal year 2016 will be a more significant growth driver than fiscal stimulus, there is a clear indication that the economy will gather steam by either one way or the other. WisdomTree Japan Hedged Equity Fund (NYSEARCA: DXJ ) DXJ looks to offer investors a way to gain exposure to the Japanese shares devoid of currency risks. This is a liquid choice in the space with 7,000,000 shares in average trading volume a day. The large-cap oriented fund has a huge asset base of $17.2 billion and charges 48 bps in fees. Toyota Motor (NYSE: TM ) (4.80%), Mitsubishi ( OTCPK:MMTOF ) (4.76%) and Japan Tobacco ( OTCPK:JAPAF ) (4.34%) take the top three spots of the fund while consumer discretionary (24.6%) and industrials (23.2%) are top two sectors. The fund was up 6.5% in the last one month (as of November 16, 2015) and has a Zacks ETF Rank #2 with a Medium risk outlook. Japan Hedged Dividend Growth Fund (NYSEARCA: JHDG ) The ETF follows the WisdomTree Japan Hedged Dividend Growth Index. The fund consists of about 248 companies. The $25.3-million fund measures the performance of dividend-paying common stocks with growth characteristics selected from the WisdomTree DEFA Index while at the same time neutralizing exposure to fluctuations between the yen and the U.S. dollar. Consumer discretionary rules the fund with about 25% exposure. Industrials (23%), IT (13.8%), consumer staples (10.6%) and telecom (10%) also get double-digit weight each. NTT DoCoMo Inc (NYSE: DCM ) (5.5%), Japan Tobacco (4.59%) and Toyota Motor (4.4%) round out the top three spots of the ETF. JHDG charges 43 bps in fees and was up 6% in the last one month. WisdomTree Japan Hedged SmallCap Equity Fund (NASDAQ: DXJS ) DXJS offers exposure to the Japanese small cap stocks while at the same time provides hedge against any fall in the Japanese yen. This is easily done by tracking the WisdomTree Japan Hedged SmallCap Equity Index. The fund has accumulated $196.5 million in its asset base and charges 58 bps in fees per year from investors. Volume is moderate as it exchanges 80,000 shares in hand per day on average. The product holds 618 stocks in its basket with none accounting for more than 0.95% of assets. Industrials and consumer discretionary take the top two spots with around 24% share each, while materials, financial and information technology round off the top five. The ETF gained 4.9% in the last one month and has a Zacks ETF Rank #2. Original Post

Why Diversification Is An Important Tool Of Managing Risk

Summary Even the famous investors sometimes get it wrong. Pershing Square and Herbalife and Valeant Pharmaceuticals. Greenlight Capital and CONSOL Energy. Casablanca and Cliffs Natural Resources. Icahn Capital and Chesapeake Energy and Transocean. Introduction Diversifying an investment portfolio is more than just buying stocks in unrelated industries. It can also mean portioning a portfolio between multiple asset types such as equities, bonds, real estate, currencies, etc. And then, there is another layer of diversifying within each asset type. Bonds can be diversified many ways: government versus corporate, investment grade versus high yield (otherwise known as junk), Treasuries versus municipals, and domestic versus foreign. On top of that, investors need to consider holding a variety of maturities that will meet income needs today and in the future. Think of laddering the bond portion of a portfolio as a key element to be considered. The point of this article is to encourage investors to consider diversifying to reduce the risk inherent in holding too large a percentage of any on assets. The secondary theme is that every investor needs to do some due diligence on their own to satisfy themselves that each investment made is appropriate for that investor. Some investors like to follow the investing decisions of high-profile investors that have successful track records. But even then, diversifying against risk is important. Even the famous investors sometimes get it wrong Some of the best-known and most knowledgeable investors can be wrong or way too early. Sometimes even the smartest investors outsmart themselves by taking a large position that they believe in and holding onto it well beyond a reasonable period of loss, unwilling to admit a mistake. It can be a matter of pride and ego. Those are terrible reasons to hold onto an investment. Here are a few examples of mistakes made recently by some high-profile investors in the hedge fund arena. Pershing Square ( OTCPK:PSHZF ) and Herbalife (NYSE: HLF ) and Valeant Pharmaceuticals (NYSE: VRX ) Pershing Square is led by Bill Ackman and has recorded some excellent returns in the past. Lately, though, things have not been going Mr. Ackman’s way. I wrote an article about another multi-level marketing (MLM) company and got slammed by some of Ackman’s disciples. Here is an example comment: “Do you even own a passport? BTW they are not but are receptive to good skin care products. MLM is scrutinized in China. Have you ever studied Amway and AVP? When the Ackman atom bomb burns HLF to ashes NUS USANA and the likes will be part of the inferno.” – LeMarJackson. The article was written in May 2014. HLF’s shares have not fully recovered from the public frontal assaults by Ackman, but the shares also have not tumbled. In the end, the Pershing Square hedge fund investors (and Mr. Ackman) have lost money; a lot of money being short in a concentrated bet. Valeant has also been a losing position for Ackman. Thus far, Pershing Square has lost about $2 billion on this one investment alone according to this Wall Street Journal article. That one investment accounted for nearly 20 percent of the fund’s assets at one point, and the stock fell in value by 65 percent. These are just two examples of why we need to keep our emotions out of our investment decision-making process, why we need to diversify our holdings, so that we do not risk losing too much on any one position, and why we all need to do some research to confirm the investment thesis of those whose leads we like to follow. Greenlight Capital (NASDAQ: GLRE ) and CONSOL Energy (NYSE: CNX ) Greenlight Capital is managed by David Einhorn, another admired billionaire hedge fund investor. He has also been right a lot, and made his investors a lot of money (but probably not as much as himself). According to this article from money.cnn.com, Greenlight Capital is down about 12 percent this year, primarily due to investments in energy. One of his large position, CNX, is down about 65 percent this year. Just another reason not to follow blindly and to not concentrate too much into one position. The effects can be devastating. Casablanca and Cliffs Natural Resources (NYSE: CLF ) Another activist investor who had done a lot of homework was Donald Drapkin, a former protégé of Ron Perelman and head of Casablanca. Casablanca purchased about 5.2 percent of CLF’s shares outstanding for an average price of about $25 per share. The plan was to oust senior management and replace the CEO with a veteran who had managed turnarounds before, cut costs and close unprofitable mines to improve margins. CLF’s stock now trades at about $2.34 per share. That is a loss of more than 90 percent so far. I am glad I did not follow Casablanca into this mess. Icahn Capital (NASDAQ: IEP ) and Chesapeake Energy (NYSE: CHK ) and Transocean (NYSE: RIG ) Carl Icahn has a net worth of over $20 billion the last time I checked. So, he must be doing something right. He also has a long enough time horizon and the wherewithal to withstand temporary setbacks. He has made significant investments in the energy sector. He may be right in the end, but so far, some of his large positions in that sector are sucking wind. CHK is down almost 70 percent this year while RIG is down only 21 percent since January 1st, but off more than 43 percent in the last 12 months. IEP is down in value over 24 percent since the beginning of the year. It has made some good investments that partially offset the blunders. This is the case with all of the above investors/funds. They did a lot of homework/analysis before making these investment, and still got it wrong. Conclusion Diversification may have saved the respective bacon of these outstanding investors keeping them alive to fight/invest another day. We may not all be able to avoid making mistakes over our investing lifetimes, but we can take precautions to minimize the risk when we are wrong. For those who might be interested, I published a series on Seeking Alpha recently that explains ” How I Created My Own Portfolio Over A Lifetime ” by that same name. I take a rather unique approach to investing that those who have already stumbled onto the series seemed to really like. Likewise, I also use an approach to hedging that is different but keeps costs low. It is not for everyone, but so far my experience has proven very favorable. I have captured gains of 600 to over 2,700 percent on some positions to help defray the cost and protect my core holding through the recent turbulence. As always, I welcome comments and will try to address any concerns or questions either in the comments section or in a future article as soon as I can. The great thing about Seeking Alpha is that we can agree to disagree and, through respectful discussion, learn from each other’s experience and knowledge.