Tag Archives: asian

Q4 Outlook For Oil And Gas ETFs

Crude Oil The free fall in oil prices have made energy the most talked-about sector of the entire market in 2015, apart from the fact that its performance has been the worst. Year-to-date, The Energy Select Sector SPDR ETF (NYSEARCA: XLE ) has posted a loss of 20%. On the other hand, the broad-based Dow Jones Industrial Average and the S&P 500 index shed just 8% and 5%, respectively, over the same period. As of now, crude prices are trading just above the key psychological level of $40-a-barrel after hitting a new 6-1/2 year low of $37.75 recently. This, despite a short spike that saw the commodity scale a year-high of $61.43 per barrel in June. (Read: 4 Ways to Short the Energy Sector with ETFs ) Oil is facing the heat on several fronts. Perhaps, the most important of them pertains to the mounting worries about China’s crude demand. In particular, the Asian giant’s currency devaluation has stoked speculation about soft economic growth in the world’s No. 2 energy consumer. What’s more, in the absence of production cuts from OPEC, the effects of booming shale supplies in North America and a stagnant European economy, not much upside is expected in oil prices in the near term. Moreover, a stronger dollar has made the greenback-priced crude more expensive for investors holding foreign currency. The Iranian nuclear framework agreement, which has the potential to release more of the commodity in the already oversupplied market, has put the final nail in the coffin. As it is, with inventories near the highest level during this time of the year in 80 years at least, crude is very well stocked. On top of that, OPEC members (like Saudi Arabia) have made it clear time and again that they are more intent on preserving market share rather than attempting to arrest the price decline through production cuts. Therefore, the commodity is likely to maintain its low trajectory throughout 2015. (Read: Still Believe in Goldman’s $20 Oil, Go Short with These ETFs ) This has forced the oil companies and associated service providers to make deep cost cuts by reducing their workforce. Oilfield services behemoths like Halliburton Co. (NYSE: HAL ), Schlumberger Ltd. (NYSE: SLB ) and Weatherford International plc (NYSE: WFT ) were the first to respond to the worsening situation, announcing substantial redundancies earlier in the year. Of late, they have been joined by integrated majors including Royal Dutch Shell plc (NYSE: RDS.A ) and Chevron Corp. (NYSE: CVX ). In the medium-to-long term, while global oil demand will be driven by China – which continues to be the main catalyst to liquids consumption growth despite the current slowdown – this will be more than offset by sluggish growth prospects exhibited by Asian and the European economies. In our view, crude prices in the next few months are likely to exhibit a sideways-to-bearish trend, mostly trading in the $40-$50 per barrel range. As North American supply remains strong and demand looks underwhelming, we are likely to experience a pressure in the price of a barrel of oil. Natural Gas Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of ‘shale gas’ – natural gas trapped within dense sedimentary rock formations or shale formations – has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer. With the advent of hydraulic fracturing (or “fracking”) – a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals – shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves. As a result, once faced with a looming deficit, natural gas is now available in abundance. Statistically speaking, the current storage level – at 3.261 trillion cubic feet (Tcf) – is up 473 Bcf (17%) from last year and is 127 Bcf (4%) above the five-year average. Expectedly, this has taken a toll on prices. Natural gas peaked at about $13.50 per million British thermal units (MMBtu) in 2008 but fell to sub-$2 level in 2012 – the lowest in a decade. Though it has recovered somewhat, at around $2.70 now, the commodity is still way off the heights reached seven years back. In fact, natural gas been trading range bound over the last couple of quarters with investors looking for direction. It has been stuck between $2.50 and $3 per MMBtu over the past 5 months. In response to continued weak natural gas prices, major U.S. producers like Chesapeake Energy Corp. (NYSE: CHK ), Cabot Oil & Gas Corp. (NYSE: COG ) and Range Resources Corp. (NYSE: RRC ) have all taken significant cost-cutting measures, including a reduction in their capital expenditure budgets for the year. With production from the major shale plays remaining strong and the commodity’s demand failing to keep pace with this supply surge, natural gas prices have been held back. Even the summer cooling demand has been of little help. What’s more, with improved drilling productivity offsetting the historic decline in rig count, and expectations of tepid heating demand with the imminent arrival of soft late-summer temperature, we do not expect gas prices to rally anytime soon. Playing the Sector Through ETFs Considering the turbulent market dynamics of the energy industry, the safer way to play the volatile yet rewarding sector is through ETFs. In particular, we would advocate tapping the energy scene by targeting the exploration and production (E&P) group. This sub-sector serves as a pretty good proxy for oil/gas price fluctuations and can act as an excellent investment medium for those who wish to take a long-term exposure within the energy sector. While all oil/gas-related stocks stand to move with fluctuating commodity prices, companies in the E&P sector tend to be the most important, as their product’s values are directly dependent on oil/gas prices. (See all Energy ETFs here ) SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) Launched in June 19, 2006, XOP is an ETF that seeks investment results corresponding to the S&P Oil & Gas Exploration & Production Select Industry Index. This is an equal-weighted fund consisting of 73 stocks of companies that finds and produces oil and gas, with the top holdings being HollyFrontier Corp. (NYSE: HFC ), Tesoro Corp. (NYSE: TSO ) and PBF Energy Inc. (NYSE: PBF ). The fund’s expense ratio is 0.35% and pays out a dividend yield of 1.98%. XOP has about $1,472.9 million in assets under management as of Sep 10, 2015. iShares Dow Jones US Oil & Gas Exploration & Production ETF (NYSEARCA: IEO ) This fund began in May 1, 2006 and is based on a free-float adjusted market capitalization-weighted index of 74 stocks focused on exploration and production. The top three holdings are ConocoPhillips (NYSE: COP ), Phillips 66 (NYSE: PSX ) and EOG Resources Inc. (NYSE: EOG ). It charges 0.45% in expense ratio, while the yield is 1.77% as of now. IEO has managed to attract $403.5 million in assets under management till Sep 10, 2015. PowerShares Dynamic Energy Exploration and Production (NYSEARCA: PXE ) PXE, launched in Oct. 26, 2005, follows the Energy Exploration & Production Intellidex Index. Comprising of stocks of energy exploration and production companies, PXE is made up of 30 securities. Top holdings include Phillips 66, Valero Energy Corp. (NYSE: VLO ) and Marathon Petroleum Corp. (NYSE: MPC ). The fund’s expense ratio is 0.64% and the dividend yield is 2.20%, while it has got $92.9 million in assets under management as of Sep 10, 2015. Original Post

Emerging Markets ETFs: It’s Not All About The Dollar

Conventional wisdom has dictated that a large part of the problems being faced by emerging markets stocks and exchange traded funds are attributable to the strong U.S. dollar. The strong dollar suppresses commodities prices, a vital revenue driver for scores of developing governments from Moscow to Sao Paulo. California-based Research Affiliates is the index provider for scores of well-known smart beta ETFs, including the PowerShares FTSE RAFI Emerging Markets Portfolio. By Todd Shriber, ETF Professor Conventional wisdom has dictated that a large part of the problems being faced by emerging markets stocks and exchange traded funds are attributable to the strong U.S. dollar. On the surface, the reasoning makes sense. Over the past year, the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) , the two largest emerging markets ETFs by assets, are off an average of 24.8 percent while the PowerShares DB US Dollar Index Bullish Fund (NYSEARCA: UUP ) , the U.S. Dollar Index tracking ETF, is higher by 11.6 percent. The strong dollar suppresses commodities prices, a vital revenue driver for scores of developing governments from Moscow to Sao Paulo. Making matters worse is the perceived impact of the mighty greenback on dollar-denominated emerging markets debt . According to a recent note by Research Affiliates : According to a popular story, the strength of the U.S. dollar and the expected interest rate hikes by the Fed could trigger a new wave of troubles for emerging economies. ‘If history is any guide,’ writes Xie (2015), ’emerging markets are headed for trouble as the dollar strengthens.’ Because of currency mismatches on their balance sheets, weak commodity prices, and deteriorating market sentiment, emerging market economies should be at risk of reenacting the Asian and Russian crises, perhaps on a larger scale. Smart Beta ETF California-based Research Affiliates is the index provider for scores of well-known smart beta ETFs, including the PowerShares FTSE RAFI Emerging Markets Portfolio (NYSEARCA: PXH ) . PXH has not been immune to the downdraft that has slammed emerging markets ETFs as the fund has tumbled 34.8 percent over the past year. On the other hand, PXH offers significant leadership potential if, and admittedly it is a big “if,” emerging markets equities earnestly rebound. Consider that if the Federal Reserve raises interest rates, another factor widely cited as a problem for developing economies, it may not be all bad news for emerging markets stocks. Notes Research Affiliates: Yet higher interest rates can be good news if they signal stronger economic performance. Solid growth rates tend to be associated with higher interest rates-this is the meaning of a real shock-and the rest of the world can benefit from strong U.S. growth. Indeed, the United States is still the world’s largest economy, and an improvement in U.S. economic performance should pave the way for expansion at the global level. PXH’s underlying index selects the ETF’s nearly 340 holdings based on book value, cash flow, sales and dividends. The dividend emphasis leads to a trailing 12-month yield of 3.33 percent, or 86 basis points higher than the comparable metric on the MSCI Emerging Markets Index. With a price-to-earnings ratio of just under 11.5, the $326.5 million PXH jibes with the notion that emerging markets equities are currently inexpensive, though that is partly attributable to slack earnings growth throughout developing economies. Part of the silver lining revolves around the fact that developing economies are not as vulnerable to financial shocks today as they were in the 1990s. Notes Research Affiliates: We can start by noting that some emerging central banks have actually cut their benchmark rates over the last year or so (e.g., Mexico, Thailand, Chile, South Korea, Poland, and Hungary). This is a noteworthy change with respect to the past, when these banks would typically increase interest rates in order to defend their currency from a sharp depreciation. Instead, nowadays these banks are fighting falling rates of inflation and production growth and, as in the developed markets, they tend to do so by easing liquidity conditions. Hence, weaker currencies should be seen as being part of their broader policy goals, somewhat as they are in Japan and the Eurozone. Asian countries combine for half of PXH’s weight while the ETF allocates over 21 percent of its weight to Brazil and Mexico, Latin America’s two largest economies . Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.

Is It Safe To Return To Emerging Market Investments?

Emerging market investments across asset classes have suffered a brutal combination of collapsing commodity prices and a strong US dollar this year. Is the bottom near, and where might investors look for bright spots? 2015 has been a lackluster year for US and European markets, but their performance is still leagues better than what emerging market investors have struggled through. The MSCI Emerging Markets Index is down over 17% year to date, and emerging market bonds are down nearly 2% so far in 2015. Most tellingly, emerging market currencies have been the worst hit, down more than 20% over the last twelve months, which has in part fueled the collapse of other emerging market asset classes. Brazil’s real, for instance, is down 30% year to date. (click to enlarge) Source: Bloomberg and Global Risk Insights The causes for the destructive trend are not difficult to spot: commodities (led by oil) have fallen to multi-year lows, investors have hit the panic button on Chinese growth, and the US Federal Reserve has signaled an impending rate hike. As if that tally of obstacles was not enough, two of the major attractions to emerging market investments have been diminished as of late: high growth and low correlation with developed markets. The euphoria-fueled growth rates of emerging markets, especially those of the BRICS countries, are gone. The optimism of investors flooding into these markets for newly middle class consumers and market-oriented structural reforms may have instead been a thin veneer over high commodity prices piqued by Chinese infrastructure spending. (click to enlarge) Source: Bloomberg and Global Risk Insights While this growth was seen as a secular trend that could act as a hedge against the cyclicality of developed markets – particularly surrounding the financial crisis – the focus on zero-interest rate policies and quantitative easing by the US Federal Reserve, Bank of England, and European Central Bank have brought investment cycles of developed and emerging markets in line with one another. 2013 and 2014’s taper tantrums are the most memorable examples of this: investors walking back down the risk ladder in anticipation of Fed tightening are moving away from emerging markets as well as developed market equities. When the sell-off slows, emerging markets will once again be an attractive opportunity The trends that have led to the emerging market sell-off are not permanent, and when these dark clouds lift, more investors will see promising returns. More importantly, some regions have been unfairly maligned during the sell-off. So is the time right for investors looking to diversify, and if so, where do they turn? Of course, consistently timing the market’s peaks and troughs is a fool’s errand , but there is one date on the horizon that will keep capital flows in emerging markets in a tenuous place: the Fed’s first rate hike . Once that has passed, especially given the Fed’s guidance that the rate hike cycle will be slow and designed to sustain financial market stability as much as possible, the brighter markets that have been unfairly grouped with less promising markets should begin to shine again. There are some reasons to believe the future is looking brighter across emerging market regions and asset classes. Currency market observers are beginning to believe that some emerging market currencies are becoming fairly valued again, after being overvalued throughout most of the QE era. Those that are still unattractive are those with enough dependence on China to spook investors. As momentum falls away from these trades, earnings and yields (in dollar-terms) will stabilize. Speaking of yields, the transition to local currency denominated debt in emerging markets has cleared up much of the uncertainty that fueled the 1997 Asian financial crisis: unwise pegs to the US dollar and dollar-denominated debt. Even as investors dump emerging market debt as yields fall due to recent currency movement, the likelihood of default is lower than it historically has been . “Two dreaded Cs” The headwinds of China and commodity prices remain a major point of differentiation across regions. Regions with low exposure to those two dreaded Cs will look like fundamentally better investments, at least until uncertainty over those areas persist. If the world is witnessing a secular shift in Chinese growth, that could be a period of several years. The trade linkages of emerging market economies is more important than ever in this context. Of the several emerging markets that are net commodity importers with low exposure to China, a few are notable: India and Poland. Indian GDP grew 7% last quarter (albeit partly because of a change in methodology that brings it in line with international norms), placing the country in a unique place with international investors: after Prime Minister Modi failed to live up to the unrealistic expectations for reform that were created during the early days after his election, it lost its place as an emerging market darling. However, in the current emerging market paradigm, India will continue to benefit from low commodity prices and has an economy that is largely based on domestic goods and services, insulating its business sectors from international uncertainty. While the other namesakes of the BRICS group crumble, each for its own idiosyncratic reason, India looks to be the only one on the upswing. Poland exhibits similarly low exposure to the dreaded Cs. It sits in a unique trade situation as a major manufacturer for the EU market , especially of automobiles, and an increasingly important member of the EU. Even as Europe has struggled to find growth, Poland has not. Now that the industrial and consumer spending prospects for most of Europe look their best since 2008, Poland stands to benefit. Underlining that potential is Poland’s strong democratic system and its low exposure to China. While volatility and indiscriminate fear across emerging market asset classes are still high in light of global macro trends, especially the Fed’s rate hike, there is an opportunity to differentiate between markets that will continue to fall victim to these trends, and those that will not. The wholesale euphoria of the last decade’s emerging market investments does not look to be on its way back soon, but the push towards higher growth and market-enhancing reforms still marches on for several key actors.