Tag Archives: south-korea

Asia’s Response To The Federal Reserve: Finding Value In Frontier And Emerging Markets

Summary The increasingly strong USD and China’s currency devaluation in August have resulted in substantial FX losses for a large number of countries in Asia. However, the extremely high level of growth and future potential in Asia can offset this risk in certain cases. As the Fed may increase interest rates soon, investment in Asia should be a strategic approach of investing in countries with high growth and a strong performing currency. This article presents Vietnam, Pakistan, India, and the Philippines as superior options for investors. As my research primarily focuses on international companies, examining the inherent FX risk is one of the most crucial aspects for considering investment. FX risks are justifiable if there is a strong growth trend in the given country, and most importantly if valuation is low. China’s devaluation in August created a global FX nightmare, and put pressure on the FED to consider the global implications of hiking interest rates. Each country’s response to this devaluation provides a clear example of the varying strengths of each currency, and this factor, coupled with the country’s macroeconomic potential, provides enough for investors to discern how to find good value in global equity. A flurry of conservative value based opportunities has emerged in global equity in Asia, for investors who are willing to take a long term horizon. Despite the Fed receiving global pressure not to hike interest rates, it appears that the Fed will not be deterred from hiking interest rates . Therefore, FX risk is one of the most relevant factors to consider at the moment, as markets in Asia may become gloomy soon. Despite this threat, good value can certainly be found in Asia at the moment, and a sell off would create a flurry of value based investment opportunities. Finding Growth While Avoiding FX Risks The performance of countries’ currencies this year, especially in response to China’s devaluation this August, provides an excellent means for investors to assess where good value can be found in Asia. Countries that have already displayed slowed economic growth, and have had substantial FX losses, should certainly be avoided. Malaysia presents the largest area of concern, due to the poor performance of the country’s currency and the increasing political risk . The iShares MSCI Malaysia ETF (NYSEARCA: EWM ) has had a YTD decline of 22.67% Slowed growth in Thailand, and the poor performance of its currency and stock market, also make Thailand a destination that can be considered less superior. The iShares MSCI Thailand ETF (NYSEARCA: THD ) has had a YTD decline of 14.14% . Based on an investigation of growth combined with exchange rate movements, I am most bullish about the upside potential of Vietnam, India, Pakistan, and the Philippines due to the combination of high economic growth and the acceptable performance of the country’s currencies. The high level of growth in these countries can be considered strong enough to offset the FX risk. In addition to high GDP growth, the trends of increased consumption in all of these countries can also be considered positive drivers: Vietnam Vietnam’s appeal for investment lies in a wide variety of factors, including its stock market’s high discount compared to other countries in Asia, high consumption and retail sales growth, high GDP growth, its high youth population, and high dividend yields for listed equity. Its P/E is approximately 12, yet a flurry of value based opportunities with single digit P/Es can be found in the country’s stock market. Vietnam’s economic growth is already substantial, yet its inclusion in the TPP can serve as an economic catalyst for the company’s GDP growth to reach 11% by 2025 . Vietnam’s low wages have caused it to have a new competitive advantage over China, resulting in a shift of manufacturing to Vietnam and a substantial increase in the country’s exports . Based on the existing trends of growth, coupled with the inevitable future growth of Vietnam’s economy, the country can certainly be considered a superior destination for value investing, as its soon to be status as an emerging market and the removal of the FOL may both serve as catalysts for higher valuation in the stock market in the future. Investors can take advantage of Vietnam’s high discount and growth by investing in VinaCapital Vietnam Opportunity Fund ( OTCPK:VCVOF ) or Vietnam Holding Ltd. ( OTC:VNMHF ). Pakistan Pakistan’s stock market index gain of 13.86% necessitates a closer look at the value associated with investing in this country, as its stock market was one of the best performing stock markets in Asia. Most impressive is the fact that low valuation can still be found in a wide number of companies on the Karachi Stock Exchange, and the Global X MSCI Pakistan ETF’s (NYSEARCA: PAK ) P/E is currently only 8 . Terrorism in Pakistan has not been able to deter the rapid and consistent ascent of the country’s stock market , and it is further edifying to note that there has been a 70% decrease in terrorism over the past 9 months. High levels of growth can be found in strategic industries, such as the construction industry, and particularly in the cement industry, which experienced growth of nearly 57% in the past year . FDI into Pakistan has increased substantially in the past years, and China has recently signed agreements for $28 billion of investment in Pakistan, which will be part of $45 billion economic corridor. Although Pakistan is a very contrarian suggestion, its relatively superior performance in Asia certainly merits it as a relevant suggestion. The Philippines While the Philippines high growth and future potential cannot be denied, the relatively higher valuation of its stock market makes it a less superior choice, as compared to Vietnam and Pakistan. The P/E for the iShares MSCI Philippines ETF (NYSEARCA: EPHE ) is currently 18 . The fund primarily invests in the financial services, consumer products, and real estate industry, which is a strategic approach considering the high levels of growth in consumption and the real estate industry. The real estate industry is perhaps one of the most strategic areas for investment in the Philippines, as its growth is heavily being driven by business process outsourcing, increased retail centers, tourism, and the emergence of townships outside of Manila. The ETF’s performance has not been terrible, with a YTD loss of only 7.3% , and a large portion of the fund’s holdings have low liquidity or high valuation. Therefore, the best approach to investing in the Philippines is through this ETF, while I would respectfully suggest the relative superiority of Vietnam and Pakistan. India India is another excellent option for investors to consider, as its economic growth surpassed the growth of Vietnam, The Philippines, and Pakistan. The country’s currency has been gradually improving, and a 4.74% loss of its currency is not strong enough to offset the appeal of investing in India. The high GDP growth, consumer spending growth, and retail sales growth is being heavily driven by the country’s demographics, as it contains the world’s largest youth population . In previous articles, I have suggested the Market Vectors Small Cap ETF (NYSEARCA: SCIF ) and EGShares India Small Cap ETF (NYSEARCA: SCIN ) as superior investment vehicles, due to the ETF’s strong earnings growth and relatively lower valuation. The average P/E for both of these ETF’s is 11.5, which can certainly be considered a strategic approach to India’s economic growth. One strategic industry in India to consider is India’s biotechnology industry, which is projected to grow by 30% annually until 2025. Investors can access the growth of India’s biotechnology by investing in Dr. Reddy’s Laboratories (NYSE: RDY ). As one of the highest growing countries in Asia, with extremely favorable demographics, a value based approach to India certainly has its merits. India is a country that will be able to stand strong amidst market volatility in Asia. Conclusion The Fed’s decision to potentially hike interest rates in December does present a relevant short term threat to markets in Asia. While a sell-off would certainly be negative for markets in Asia, it could also be seen as force that would create a flurry of value based investment opportunities in Asia. There will certainly be dark areas in Asia in the near future, yet the markets of Vietnam, Pakistan, the Philippines, and India can certainly be considered bright spots in Asia. 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.

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.

I Own SCHF And Plan To Buy More; Here Is My Reasoning

Summary My international allocation is currently underweight, but I expect stronger performance in international markets moving forward. The Federal Reserve is pursuing a policy of raising short term rates even though the United States has higher 10 year treasury rates than many developed countries. The top holdings in SCHF have materially lower interest rates than the United States. I expect the expansionary policies to result in stronger growth of GDP and earnings which should lead to higher valuations. The Schwab International Equity ETF (NYSEARCA: SCHF ) is one of my top choices for international diversification. The fund provides exposure to developed international markets with great diversification in the holdings. There are 1226 individual holdings in the fund and yet the expense ratio is only .08%. My criteria for picking top international funds are fairly. The top allocations are Japan and the United Kingdom which combine to be about 40% of the holdings. While I like to see some additional diversification, I can handle that by simply adding a couple other international ETFs to fill out the position. I’m already long on SCHF, but the position is only a very small part of my portfolio. I intend to change that over the winter as I want to shift my portfolio to have a larger allocation towards international equity at the cost of domestic equity. My preferred strategy for making these allocations is generally to leave active limit orders to buy more shares. If the market turns down in a hard way, that means I’ll find myself in before it gets very low. I counter that problem by allocating more cash away from my checking account and into my brokerage account whenever I’m seeing new 1 year lows. Why I want International Since I’m currently underweight on international, it would be reasonable to assume that I simply want to reach a more balanced allocation. However, my desire to raise the international allocation is based off a belief that international equity should be in position for some solid performance. As an mREIT analyst, watching the yield curves is a major part of my research. I’m also keeping an eye on actions by the Federal Reserve and some of the economic indicators. It is my opinion that the Federal Reserve is intent on raising short term rates even if raising the rates runs contrary to their dual mandate. They wish to remain relevant, but their constant talk of raising rates has only created uncertainty. Central Banks Around the World If investors look at central bank policies abroad, they are doing the exact opposite of the Federal Reserve. They are pushing to lower interest rates as far as possible. Some countries are already using NIRP, which is “Negative Interest Rate Policy”. For decades there has been a simple economic understanding that it is impossible to get investors to lock in negative nominal interest rates. It was also believed that investors would not accept negative real interest rates, but the yield on TIPS (treasury inflation protected securities) has clearly proven that negative real interest rates were readily accepted. In negative interest rate policy we see that negative rates can occur as well. The theory that rates could not turn negative was based off the idea that the owners of cash could simply stuff it in their mattress rather than accepting a negative rate. The banks have learned that stuffing billions into the mattress is not viable. There is a cost to protect cash. Because there is a cost, it is possible for the negative interest rates to be the cheapest option available. Resulting Yields Because central banks have taken very different policies in both their talk and their actions, the interest rates around the world are materially different. To demonstrate, I’d like to present charts showing the 10 year treasury yields in several countries. (click to enlarge) The rate on a 10 year treasury bond for the United States is 2.27%. The top two allocations in SCHF were Japan has a 10 year yield of .30% and the United Kingdom which has a yield of 2.01%. To make it simpler to see the relevant rates for the countries that are represented in SCHF’s portfolio, I built the following chart. The heaviest allocations are on the left and the smaller allocations are on the right. This list is not exhaustive, but it provides the top several countries: (click to enlarge) To put that in perspective, Australia is the only foreign country in the top 10 allocations for SCHF that has a materially higher 10 year rate than the United States. South Korea’s 10 year rate was very slightly higher, but the difference was small enough that it could easily flip back and forth in a day. Interpretation The Federal Reserve is intent on raising short term rates and their desire to raise short term rates combined with a positive employment report about a week ago resulted in domestic treasury rates moving significantly higher. The Federal Reserve has not even acted yet, but already our yields are materially higher than most developed markets. To be fair, there are many emerging markets with higher treasury yields. How many investors do you know that consider the United States to be an emerging market rather than a developed one? In my opinion, these other developed countries represent the best comparison of peers. Because I believe the central banks in international markets are doing a better job of handling economic policy, I believe those economies have an advantage for establishing stronger performance moving forward. I believe the expansionary policies will result in a faster growth rate of GDP and higher sales for companies in those locations should translate to stronger earnings and higher valuations. Conclusion SCHF is a diversified low fee index fund for gaining exposure to developed international markets. The top allocations in the fund are to countries that are showing materially lower treasury yields than the United States. The expansionary policies in those countries provide a tailwind to growth that should drive up their GDP. When those economies are expanding, I expect the strength in sales to lead to stronger earnings and higher valuations. Therefore, I will aim to increase my international allocations over the next few months. I may place some limit orders over the weekend to begin the process of acquiring more shares.