Tag Archives: south-korea

New Factor-Based Emerging Market ETF From IShares

With the Fed on the verge of raising rates after almost a decade, emerging markets (EM) are presently running high risks. Investors are hurriedly dumping emerging market products on apprehensions of the end of the cheap-money era in the U.S. Higher interest rates in the U.S. would fade the appeal for high-yield lure for the emerging market equities. Plus, emerging economies’ growth is slowing with the biggest market, China, suffering from a long-drawn-out slowdown. The economies are mostly commodity heavy and are thus extremely susceptible to the prolonged commodity market slump. All these make fund issuers very careful and selective when it comes to launching a new EM ETF. In that vein, iShares recently rolled out the iShares FactorSelect MSCI Emerging ETF (BATS: EMGF ) . Let’s elaborate the product. EMGF in Focus The fund seeks to offer exposure to the developing world via large and mid-cap companies. To screen stocks, the underlying index targets some key criteria including ‘inexpensive stocks, financially healthy firms, trending stocks and relatively low market cap companies’ per the issuer . Quality of the stock is measured by ‘higher return on equity, earnings consistency and lower debt to equity ratio’ and cheaper valuations are determined by lower P/E and P/B ratios, per iShares. This focus results in a portfolio holding a basket of 156 well-diversified companies. India ETF, the iShares MSCI India ETF (BATS: INDA ) (7.18%), KT&G Corp. ( OTC:KTCIF ) (2.46%) and CITIC Ltd. ( OTCPK:CTPCY ) (2.37%) are the top three holdings. However, as far as sector allocation is concerned, the fund has a tilt towards Financials, which occupies about 23.67% of weight followed by Information Technology (15.45%) and Consumer Discretionary (12.78%). Two other sectors, Consumer Staples and Industrials also have a double-digit weight. Considering country-wise allocation, China takes the top spot having 29.75% allocation while South Korea (15.54%), South Africa (12.06%) and Taiwan (10.07%) also have double-digit exposure. The fund charges 70 basis points in fees. How Does it Fit in a Portfolio? For investors still having faith in the emerging market growth story, this fund can be a good choice. As such, smart-beta investing seems necessary for emerging markets at this point of time when the U.S. economy is about to see the end of the easy-money policy. Emerging markets across the board had a great time in previous years on incessant inflows from cheap money and the stocks surged. But as soon as the policy tightening takes place in the U.S., only high quality picks will likely gain investor attention. Moreover, the fund is well diversified as far as individual stocks are concerned. However, investors should note that the product is a bit concentrated from both a sector and country perspective, though expenses are reasonable. ETF Competition The emerging market equities space is primarily dominated by two large players – the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) – managing an asset base of $33.8 billion and $20.8 billion, respectively. However, both of them are market-cap oriented ETFs and thus do not pose a threat to the newbie. The emerging market funds that could act as competitors to the newly launched iShares’ ETF are the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (NYSEARCA: GEM ) , the PowerShares FTSE RAFI Emerging Markets Portfolio ETF (NYSEARCA: PXH ) , the FlexShares Morningstar Emerging Markets Factor Tilt Index ETF (NYSEARCA: TLTE ) , the PowerShares DWA Emerging Markets Momentum Portfolio ETF (NYSEARCA: PIE ) and the iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSEARCA: EEMV ) . All these are running on smart-beta indexing or some unique approach rather than just revolving around market capitalization. Original Post

Which Markets Currently Offer Value And Which Are Best To Avoid?

Summary Analysis of world equity indices can give an idea as to which equity markets provide good investment opportunities and which are best to avoid. Currently, investors should be very alert about investments, particularly on British, Brazilian, Canadian, Mexican and Russian stock exchanges. On the other hand, Chinese H-Shares, South Korean and Vietnamese equities have the capacity for a positive surprise. However, the indisputably best investment opportunity seems to lie in Japan as Abenomics is in full swing. As globalization and new technologies evolve, differences between individual countries are inevitably diminishing. Greater interconnectedness causes local risks to easily spread around the globe and short-term profit opportunities to be quickly seized. However, investors can still find long-term economic moats if they fully understand the underlying timeless principles of equity investing. First of all, they have to realize that the progress of the fundamental value of an investment is strongly correlated with earnings of that investment in the long run. Therefore, investors should focus their attention in this direction and not get fooled by any incidental events. Second, it absolutely crucial to know by heart Warren Buffett’s famous mantra: ,,Price is what you pay, value is what you get.” And third, be aware that proper diversification is a must, otherwise you may face a nervous breakdown in this rapidly changing world. Recently, in light of growing economic and geopolitical tensions, I have been thinking about the geographical allocation of my portfolio. In order to complement broadly discussed issues in financial media, I decided to identify which markets currently offer generally good investment opportunities based on valuation multiples, return on equity and earnings growth analysis of major world equity indices. Price-To-Earnings Looking at the comparison of current PE ratios below, we quickly spot Russian MICEX and several Asian indices among the lower multiples on the left side of the chart and Mexican Mexbol, Brazilian Bovespa and British FTSE on the right side of the chart with higher multiples. Even though PE ratio is widely used valuation metric, it has limitations and hence should be taken with caution. Current Enterprise Value To Trailing Twelve Months EBITDA Especially in the cases of Russia and China, PE indicators may be very misleading since we have heard that the recent Chinese stock frenzy was largely fueled by borrowed money. As a better valuation indicator can then serve EV/EBITDA ratio as it adequately accounts for the level of leverage. Compared to the previous chart, we can clearly observe the shift of Chinese A-Shares index Shanghai Composite to the expensive zone of the chart. Nevertheless, notice that Chinese H-Shares index Hang Seng remained on the relatively cheap side of the chart. Price-To-Book P/B is another popular financial ratio used to gauge market valuation of a stock. However, some assets may be not worth buying even when they trade below their book value. Although Russian equities are boasting with extremely low valuation multiples, they are cheap for good reason. The stiffness of the local business environment and the risk of losing the whole investment due to eventual nationalization of assets are simply too high. Return On Common Equity Moreover, Russian equities together with Brazilian, Canadian and British have the lowest Return on Equity in the given sample. ROE is an important profitability measure and a critical weapon in many value investors’ arsenals. In 1972, Buffett implied that he desires a rate of return on equity of at least 14%. Nine years later, he identified the average rate of return on equity of American companies at 11%. To the last day of October this year, ROE of the S&P 500 totaled 12.5%. 3 Years Earnings CAGR Because of the strong relationship between earnings and market prices in the long-term, one should also assess earnings growth. The following chart captures earnings growth (in %) for the most recent 3 continuous years, ending on the last trading day of October 2015. As you can see, profitability of Russian, Brazilian, British, Canadian and Mexican companies suffered significant losses in recent years, while several Asian indices led the earnings growth. Undoubtedly the most notable rise in earnings was recorded in Japan as the yen heavily depreciated during the given period. Japanese economic miracle 2.0? The fact that the Japanese economy is slowly heating up after long period of deflationary pressures has already been noticed by several renowned economic journals . In order to spur the yet fragile economic recovery, Japan’s Prime Minister Shinzo Abe last week rolled out additional fiscal stimulus. Whether we will witness the second ‘Japanese economic miracle’ can be hardly predicted, but for now, it is quite obvious that Abenomics has considerably changed the course of the third largest world economy. Furthermore, most of Abe’s reforms greatly emphasize the importance of corporate efficiency with a particular focus on ROE. This could help Japanese shares move even higher in the upcoming years. The Bottom Line Probably the best way how to invest in a country’s equity market is through some ETF. The most liquid ETFs with exposure to Japan’s equity market are the iShares MSCI Japan ETF (NYSEARCA: EWJ ) and Japan Hedged Equity Fund (NYSEARCA: DXJ ). Based on the comparison charts above, Chinese H-Shares seem to be surprisingly a good value play even despite the concerns about a slowdown of the Chinese economy. Favorite ETFs consisting of securities listed on the Hong Kong stock exchange include the iShares China Large-Cap ETF (NYSEARCA: FXI ), iShares MSCI China Index Fund (NYSEARCA: MCHI ), SPDR S&P China ETF (NYSEARCA: GXC ) and Guggenheim China Small Cap ETF (NYSEARCA: HAO ). South Korean equities also do not look bad and could be substantially boosted by potential monetary response of local central bank as I wrote about earlier this year . ETFs that could eventually thrive are the iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ), Deutsche X-trackers MSCI South Korea Hedged Equity ETF (NYSEARCA: DBKO ) and the WisdomTree Korea Hedged Equity ETF (NASDAQ: DXKW ). However, not all country ETFs suitably track broad equity indices’ fundamentals. For example, the only ETF providing sole exposure to the Vietnamese equity market – Market Vectors Vietnam ETF (NYSEARCA: VNM ) – mismatches the returns of the national stock market index Vietnam Ho Chi Minh Stock Index (VN Index) by a great deal. Hence, thorough analysis of specific investment instrument should never be neglected as it can easily hamper your original investment objective. With respect to high valuations and weak profitability, the most popular ETFs that should be shorted or avoided by long-only investors are the iShares MSCI United Kingdom ETF (NYSEARCA: EWU ), iShares MSCI Canada ETF (NYSEARCA: EWC ), iShares MSCI Mexico Capped ETF (NYSEARCA: EWW ), Market Vectors Russia ETF (NYSEARCA: RSX ) and iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ). Note: All presented figures in the charts were exported from Bloomberg Terminal as of 10/30/2015.

5 Broader Emerging Market ETFs Surging This Quarter

Emerging market investing has gone dour recently on slowing growth, a potential decline in foreign direct investment on a likely cease in cheap money inflows from the U.S. (post lift-off), a stronger greenback and slouching commodities. No doubt, this time around, emerging markets are more hardwearing to the Fed blows than they were in 2013 when taper talks resumed, but threats of underperformance still persist. Investors should note that several market researchers hinted at weak global growth for the coming years and cut their estimates. For example, the Organization for Economic Cooperation and Development (OECD) slashed global growth estimates twice in three months . The organization now projects that the global economy will expand 2.9% in 2015 and 3.3% in 2016, down from the prior guidance of 3.6% for both years. For the emerging markets, protracted slowdown in the largest region China has been a huge concern and its ripples in the other parts of the bloc are souring the sentiments over the region. Moreover, China accounts for a gigantic portion of the global commodity market. Thus, a long drawn out weakness in this economy has weighed heavily on commodities. This in turn dealt a blow to two other commodity-rich emerging markets, Brazil and Russia, which are now facing recessionary threats. IMF expects the Russian economy to contract 3.8% this year and 0.6% in the next, while Brazil’s economy is expected to shrink by 3% in 2015 and 1% in 2016. However, the OECD expects both the struggling economies to return to growth by 2017. Within the bunch, India seems to be a winner, though it has its share of problems in the form of political complexity and the resultant delay in application of pro-growth reforms by Prime Minister Narendra Modi. In such a backdrop, iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) has added about 6.6% so far this quarter (as of November 20, 2015) after the MSCI Emerging Market Index lost about 19% in Q3 – the largest quarterly retreat in four years – instigated by the Chinese market upheaval, per Bloomberg. But investors should note that not all emerging market ETFs have delivered lower than 10% gains so far this quarter. In fact, Chinese ETFs returned superbly after the stock market rout in Q3 when the market had a bloodbath. Several China ETFs, especially A-Shares ones, returned more than 20%. Several Latin American ETFs too have given stellar returns, some on political hopes while others on compelling valuation. However, since particular country-ETF investing looks risky in the present market backdrop, which might not sustain returns at any point of time on any single issue, below we highlight a handful of broader emerging market ETFs that have given impressive returns even in a tough operating environment. Broader market options appeared better picks as the strength of one economy often compensates the weakness of the other. Emerging Markets Internet & Ecommerce ETF (NYSEARCA: EMQQ ) – Up 23.5% The Internet and e-commerce industry is developing fast with the increased use of social networking sites and online trading as well as the growing adoption of smartphones and other mobile Internet devices. So, this product has more to do with technological expansion in the emerging markets rather than reflecting the slowing potential of those economies. In fact, EMQQ can succeed on the back of a fast-expanding middle class population of emerging nations. This $11.7-million ETF considers companies from Asia, Latin America, Africa and Eastern Europe. Country-wise, China takes the highest allocation in the fund. EMQQ charges 86 bps in fees and is up 23.5% so far in the fourth quarter (as of November 20, 2015). First Trust BICK Index ETF (NASDAQ: BICK ) – Up 16% This $8.3-million product considers securities from Brazil, India, Mainland China and South Korea. The recent rally in the Brazilian market following its Congress decision to cut on government expenditure to boost the waning economy favored the fund. The product charges 64 bps in fees. WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (NYSEARCA: XSOE ) – Up 14.3% The $2.2-million fund can entice investors having less faith in the state-owned emerging market companies, but still intending to tap the region’s growth story. According to the issuer, the MSCI emerging market index generated 80% less returns than the U.S. markets over the past five years and this was due to the anemic performance of the SOE. In terms of geographic exposure, China (23.5%), South Korea (16.5%) and Taiwan (10.9%) have a double-digit exposure each. The fund charges 58 bps in fees. Guggenheim BRIC ETF (NYSEARCA: EEB ) – Up 12.9% As the name suggests, the $90.6-million fund considers BRIC (Brazil, Russia, India and China) economies. It charges 64 bps in fees and is heavy on IT (up 25.44%), while energy (19.30%), financials (17.38%) and telecom (12.9%) round out the next three spots. SPDR MSCI Beyond BRIC ETF (NYSEARCA: EMBB ) – Up 11.6% The $2.5-million ETF put double-digit weight in South Korea, Taiwan, South Africa and Mexico. The fund has returned over 11.6% so far in Q4 (as of November 20, 2015). Original Post