Tag Archives: asian

Long/Short ETFs To Brave This Wild Market

What similarity between summer 2015 and winter 2016! The China-driven sell-off that crushed the global investing world last August-September suddenly starts chiming to start the new year. Basically, a wavering Chinese economy and the consequent burst of the Chinese stock market on the one hand and the Fed policy tightening as well as massive crashes in oil prices on the other sent the global markets into a difficult state. The contagion effect of the double whammy was strong enough to make global equities see the most horrible start to a year in 16 years. Grave economic releases out of China and heightened volatility in its stock market caught the global markets off guard lately. There was a trading halt on the key Chinese bourses, with the indexes diving 7% to start the new year. The decline was the worst single-day performance since the 8.5% decline on August 24, 2015, which was the root of the global market rout last summer. Hints of further shrinkage in the Chinese manufacturing sector in December were held responsible for the bloodbath in the market. The Caixin/Markit Purchasing Managers’ Index (PMI) for China declined to 48.2 in December, representing the 10th successive month of factory output contraction. The data was worse than the prior 48.6 and well below the market’s expectation for 48.9. Additionally, China’s central bank guided the yuan to a five-year low in offshore trading on Wednesday, which raised expectations of further weakness in the Chinese economy as well as sparked off fears of a currency war among export-centric Asian nations. If this was not enough, news of Saudi Arabia cutting off diplomatic ties with Iran joined China-led worries to start the year. While investors somehow started to digest fears of a hard landing in China, things seemed unsteady even in the U.S. Despite the Fed liftoff in December, subdued inflation is still a concern. From this global trend, we can easily say that the macroeconomic environment is anything but steady. Asian shares are approaching their largest weekly decline in over four years . Added to this, oil prices are stubbornly low, having slipped to below $34/barrel level lately on supply glut and global growth worries. The continued downward pressure on oil prices crushed several oil-rich nations during this course. Brent crude tested an 11-year low, while WT has seen a 7-year low in the first week of 2016. For the top U.S. ETFs, investors saw the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) lose over 5.8%, the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) shed over 6% and the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) move down by 7.5% in the last five trading sessions (as of January 7, 2016). So, it would be wise for investors to settle on safe ETFs while playing the U.S. Safety and value should be the investment mantra in this stormy market. If caution is the keyword, investors can take a look at these three long/short ETFs which beat the aforementioned broader U.S. ETFs in the first week of 2016. QuantShares U.S Market Neutral Anti-Beta ETF (NYSEARCA: BTAL ) Investors who want to shift their focus to investing in low-beta stocks during this uncertain market environment can consider adding BTAL ETF to their portfolio. This fund tracks the Dow Jones U.S. Thematic Market Neutral Anti-Beta Total Return Index, which is an equal-weighted, dollar-neutral, sector-neutral benchmark. The index identifies the lowest-beta stocks and goes long on them, while at the same time going short on the highest-beta stocks. Like MOM, this fund also invests in equal dollar amounts for both the long and short positions, and looks to profit from the spread return between low- and high-beta stocks. This is thin on AUM having amassed just $8.5 million in assets. The fund charges 99 basis points as expenses and gained 4% in the last five trading sessions (as of January 7, 2016). WisdomTree Dynamic Bearish U.S. Equity Fund (NYSEMKT: DYB ) The fund looks to track long equity positions or long U.S. Treasury positions and short equity positions. The long equity positions take care of about 100 U.S. large- and mid-cap stocks that satisfy eligibility criteria and have the best combined score based on fundamental growth and value signals. The stocks are weighted as per their volatility features. The short equity positions comprise the largest 500 U.S. companies designed to act as a market risk hedge. This $1.3-million fund charges 48 bps in fees and added 2.3% in the last five trading sessions (as of January 7, 2016). QuantShares U.S. Market Neutral Momentum ETF (NYSEARCA: MOM ) The fund looks to track the performance of the Dow Jones U.S. Thematic Market Neutral Momentum Index. The target index is equal-weighted, dollar-neutral and sector-neutral. The index takes the highest-momentum stocks into account as long positions and the lowest-momentum stocks as short positions, in almost equal measure within each sector. Thanks to its focus on momentum stocks, this low-volatility ETF offers a nice return even in a bull market. The basket of about 200 stocks that the fund is long on seeks to outperform the portfolio of about 200 stocks with short positions. Despite its solid strategy, the product has so far been overlooked by investors with AUM of $8.4 million. It charges a fee of 1.49% per year from investors and gained about 0.4% in the last one week. Original Post

Hidden Champions As A Source Of Wide Moat Investment Opportunities

Summary Hidden champions are market leaders in specific niches that are off the radar of most investors. U.S. hidden champions include companies like Columbus McKinnon, the domestic market leader in material handling products; and Gaming Partners International Corporation, the world’s largest seller of casino chips. Asian hidden champions hold even greater promise than their U.S. counterparts, due to their relative obscurity and longer growth runways. Background On Hidden Champions A hidden champion is defined as a market leader either globally or in any specific continent in terms of market share, with sales under $4 billion, and operating out of the public limelight. The term “hidden champions” was first coined by Professor Hermann Simon, chairman of Simon-Kucher & Partners Strategy & Marketing Consultants, in his 1996 international best-seller of the same name. He went to published an updated version of his book in 2009 titled “Hidden Champions of the 21st Century, Success Strategies of Unknown World Market Leaders.” In a 2010-2011 survey done in German-speaking countries, Professor Hermann Simon was voted the most influential management thinker after the late Peter Drucker. Hidden champions are potential sources of wide moat investment ideas, since both high market share and high Return on Invested Capital (NASDAQ: ROIC ) are indicators of sustainable competitive advantages. However, while it is possible to screen for high ROIC stocks, hidden champions boasting high market shares require significant digging by investors on their own. Examples Of Hidden Champions I have written extensively about hidden champions in several Seeking Alpha articles. They include companies such as Columbus McKinnon (NASDAQ: CMCO ), PGT, Inc. (NASDAQ: PGTI ), Gaming Partners International Corporation (NASDAQ: GPIC ), Knowles Corporation (NYSE: KN ), EnerNOC, Inc. (NASDAQ: ENOC ) and Generac Holdings (NYSE: GNRC ) among others. I will elaborate in greater detail about the moats and growth runways of three of these stocks below. Columbus McKinnon holds the largest domestic market share (46%) in material handling products, representing 74% of its fiscal 2014 U.S. sales. Its largest product category comprises hoists, trolleys and components. Columbus McKinnon benefits from high customer switching costs, since its material handling products improve efficiency, enhance productivity and maximize profitability for its client, but yet cost a fraction of their customers’ total product costs (80% of its revenues are generated from products that are sold at under $5,000 per unit). Also, stealing market share from competitors is not Columbus McKinnon’s only growth avenue, since its largest installed base of hoists in North America allows it to cross-sell complementary and new products to its existing customers and benefit from after-market sales for replacement units and components and repair parts. Gaming Partners International Corporation is the global market leader in casino currency and boasts approximately 90% market share of the casino chip, plaque, and jeton sales in Macau. Given that casino operators place a strong emphasis on the quality of casino currency and the need to minimize the threat of counterfeit gaming chips, they are likely to stick with trusted players like Gaming Partners International Corporation. There is a razor-and-blade model at play here, as Gaming Partners International Corporation can cross-sell ancillary products and consumables like playing cards, table layouts, dice, and table accessories as an integrated supplier of casino table gaming equipment. PGT has approximately 70% market share of impact resistant window and door market in Florida. PGT’s moat is derived from the strength of its WinGuard branded products, which are now synonymous with quality, built upon a three-decade long track record of zero reported impact failures. Its growth drivers are the strength of the Florida housing market and the increase in penetration rates of impact resistant window and door market in Florida. Moats Of Hidden Champions While individual hidden champions might have their respective competitive advantages and diverse moats, a recurring theme is what Morningstar terms as the efficient scale moat. Hidden champions typically have significant market share in a niche where the market is sufficiently small, making it uneconomical for new entrants to compete. So what can potentially narrow or even destroy an efficient scale moat for hidden champions? If either the niche market experiences faster growth, or larger ancillary market segments experience slower growth, it might attract new competitors like bees to honey. Customer preferences and switching costs could also change, leading to greater ease of grabbing market share from the incumbent hidden champions. Growth Potential Of Hidden Champions Growth is another interesting topic for hidden champions. Most hidden champions will find it difficult to grow significantly by gaining market share from competitors, since they are usually already the outright market leader. Similarly, the organic growth prospects for the niche market tend to be modest (which deters new entrants). On the other hand, moving to ancillary market segment tends to expose them to competition from larger players and entrenched incumbents in other markets. As a result, hidden champions possessing either pricing power or the ability to cross-sell complementary products under a razor & blade model are favored. Asian Hidden Champions There are no shortcuts to identifying hidden champions. I seek hidden champions by starting with the As in a list of sub-$1 billion market capitalization stocks and paying attention to details on market share and unique niches based on the industries they operate in. My own experience is that Asian-listed hidden champions tend to have a higher probability of remaining off the radar of most investors. Firstly, Asian stocks in general have a lower concentration of stocks enjoying sell-side analyst coverage, due to the relatively lower market capitalizations and liquidity of a wider spectrum of companies listed on Asian stock exchanges. Secondly, since certain Asian companies neither report their financial results in English nor feature themselves in English media, a great proportion of international investors are unable to access these names. On the flip side, it is precisely because Asian hidden champions are relatively more “hidden,” their potential for outsized investment gains will be higher. More importantly, as these Asian companies are smaller, lie at an earlier stage of their corporate lifecycles and are still working hard at penetrating the broader yet fragmented pan-Asian market, their growth runways are also longer. This compares favorably with most other U.S. hidden champions already in the mature stage of their corporate lifecycles with limited growth drivers. As a special bonus for my subscribers, they will get access to the names of five (5) Asian-listed hidden champions in a separate bonus watchlist article. My December 2015 Stock Idea meant exclusively for subscribers also happens to be an Asian hidden champion with leading domestic market shares in certain money handling equipment. Note: Subscribers to my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service get full access to the list of wide moat investment candidates and value traps, which include “Magic Formula” stocks, wide moat compounders, hidden champions and high quality businesses, that I have profiled.

EWZ – November Review: The Political Crisis Deepens

Summary Share price of the iShares MSCI Brazil Capped ETF declined by 1.53% in November. The development was driven mainly by the political factors. The economic situation of Brazil is worsening, the political crisis is deepening and the financial markets would welcome the fall of president Rousseff. The iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) lost 1.53% of its value in November. Although it was up by more than 11% at one point, it lost all of its gains during the last days of the month, as the political crisis deepened and investors started to fear that the government will be unable to enforce the needed economic reforms and budget cuts. The economy is still in a bad shape, the latest data show that it declined by 4.5% y-o-y in Q3, which is worse than expected. The unemployment rate is at 7.9% and growing and inflation is in the double digit area. Shares of the beverages producer Ambev (NYSE: ABEV ) are still the biggest holding in EWZ’s portfolio, with weight of 10.61%. Ambev is closely followed by preferred shares of Itau Unibanco (NYSE: ITUB ) (10.24%). Besides Ambev and Itau Unibanco, only preferred shares of another bank, Banco Bradesco (NYSE: BBD ), have weight over 5%. The 10 biggest holdings represent 61.47% of the portfolio, which is slightly less, compared to 62.22% in October. Generally, no significant changes in the structure of EWZ could be observed in November. Only common shares of Vale (NYSE: VALE )are not among the TOP 15 holdings anymore, as their value declined sharply after the disastrous dam collapse . Source: own processing, using data of iShares.com Out of the 15 biggest EWZ holdings, the biggest gains were recorded by Fibria Celulose (NYSE: FBR ) in November. The credit rating of the pulp and wood producer has improved, it has completed the financial package for its Horizonte 2 project and it declared a dividend that will bring to its shareholders dividend yield over 7%. Shares of the company grew by 8.72% in November. Shares of the Brazilian airplane producer Embraer (NYSE: EBR ) jumped by 7.5%. For Embraer, November was the third consecutive month of very big gains. On the other hand, November was very negative for Vale. After the dam collapse, shares of the miner declined strongly. Preferred shares of Vale lost almost 25% of their value. (click to enlarge) Source: own processing, using data of Bloomberg The traditionally high correlation between EWZ and Petrobras (NYSE: PBR ) share price was disturbed during the first two weeks of November, although it increased back to its normal levels in the end of the month, after the corruption scandal became one of the main topics of discussion again. Also, the correlation between EWZ and oil prices (represented by the United States Oil ETF (NYSEARCA: USO )) and between EWZ and S&P 500 was relatively low or even negative during the better part of the month. One could say that the Brazilian share market lived its own live and the share price development was driven by the political situation in the country and by the efforts to enforce the austerity measures. (click to enlarge) Source: own processing, using data of Yahoo Finance November was a relatively calm month for EWZ. Although the EWZ share price was up by 11% only a couple of days before the end of the month, but eventually ended the month with a 1.5% loss, the overall volatility measured by the 10-day moving coefficient of variation was lower compared to most of the 2015. It moved in the 1%-3% range for the better part of November, however it broke out of this range in the last days of the month. Given the early December developments, December will be probably more volatile compared to November. (click to enlarge) Source: own processing, using data of Yahoo Finance Some of the more interesting news: Fibria announced that the estimated capex for the Horizonte 2 Project has been revised from $2.5 billion to $2.2 billion. The expenditures will be funded by a combination of its own cash, Agribusiness Receivables Certificates and credit facilities, the estimated average borrowing cost is only 2% p.a. The company also announced that Moody’s has improved its credit rating from Ba1/Positive to Baa3/Stable. Fibria will pay a dividend of approximately $0.96 per shares, which means a dividend yield of over 7.2%. On November 5, a disaster occurred in southern Brazil. A tailings dam owned by iron miner Samarco collapsed and more than 60 million cubic meters of toxic mud destroyed the town of Bento Rodrigues and contaminated the Rio Doce river. Samarco is a 50:50 joint venture of Vale and BHP Billiton (NYSE: BHP ) and the disaster had a significant impact on share prices of both companies. According to the latest news, Brazil sued Samarco for $5.3 billion over the spill. Cemig (NYSE: CIG ) won generation concessions for 18 hydro plants with total installed generation capacity of 699.57 MW. The new concessions should partially offset the probable loss of the Jaguara and Sao Simao concessions with total installed capacity of 2,134 MW. Companhia Siderurgica Nacional (NYSE: SID ) together with an Asian consortium consisting of ITOCHU Corporation ( OTCPK:ITOCY ), JFE Steel Corporation, POSCO (NYSE: PKX ), Kobe Steel ( OTCPK:KBSTY ), Nisshin Steel ( OTC:NSSSY ) and China Steel Corp. ( OTC:CISEY ) combined some of their assets into a new company Congonhas Mineiros. The new company will consist of an iron ore mine, railroad and port and it will be 87.52% owned by CSN and 12.48% owned by the Asian consortium. A prominent member of the ruling Workers’ Party, senator Delcidio do Amaral, was arrested due to his participation in the Petrobras related corruption. Amaral is a close collaborator of president Rousseff. His arrest further supported the voices calling for Rousseff’s impeachment. Conclusion As the early days of December showed, the Brazilian share market is still strongly affected by the Petrobras corruption scandal and the related political crisis. On December 2, the impeachment proceedings against president Rousseff opened in the lower house of Congress. As a result, the EWZ share price jumped by almost 6% in two days. The financial markets welcomed the vision of a government change and if further developments indicate that Brazil will be able to get rid of Rousseff, EWZ will grow further.