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Emerging Market Currency Bond ETFs: Safe Haven/Risky Bet?

The global market rout is nearing its peak and the U.S. treasury bonds are drawing attention with investors seeking refuge to safe havens. However, this strategy earns investors safety in their portfolio but deprives them of high yields. Previously, emerging market currency bonds and the related ETFs were shelters for investors seeking juicy yields as well as relatively higher protection to capital gains. But they seem to have lost their appeal now. There are a plenty of reasons that are pushing this investing arena out of favor. Below we highlight what’s spoiling the fervor in emerging market currency bond ETF investing and marring its safe haven appeal. Why A Risky Bet Now? Stronger Dollar : First of all, several emerging market currencies have been facing tough times in recent months and stacking up losses due to a still strong U.S. dollar. WisdomTree Emerging Currency Strategy ETF (NYSEARCA: CEW ), which measures changes in the value of emerging market currencies relative to the U.S. dollar, is down over 10% this year and lost 8.8% in the last three months (as of September 9, 2015). The speculation for the Fed lift-off has never been as strong as it is this time around. Though U.S. job numbers in August grew at the most sluggish pace in 5 months and fell short of analysts’ expectation, this might not deter the Fed from finally hiking the rate. This has made the greenback a king of currency that has weighed heavily on a basket of emerging market currencies, be it across Asia, or Latin America. Slumping Commodities : Many emerging market nations are commodity-rich. As a result, a broader commodity market swoon on supply glut, lower demand on global growth worries and a strong greenback wreaked havoc on currencies of commodity-focused economies including Russia, Brazil and Columbia. This was truer given the oil price crash over more than the last one-year period which has wreaked havoc on oil-oriented emerging economies like Russia and Columbia. This also dealt a blow to the emerging market currencies. China-Induced Global Market Rout : Upheaval in the Chinese economy and the stock market crushed the global market in August and it is still not out of woods. This episode sent shockwaves to other emerging markets, making the economic health of the entire EM bloc questionable. Impact on Emerging Market Currencies As a result, global emerging market bonds were hit hard at the last week of August and saw the highest exodus in assets (worth about $4.2 billion ) since the taper threat in 2013. Several analysts like Societe Generale ( OTCPK:SCGLF ) are against the emerging market currency bonds and believe that even if the Fed holds up the lift-off at the current level keeping the global market turmoil in mind, sheer ambiguity in policy decision will likely keep the outlook of the emerging market currencies downbeat. In short, underperformance in currency has marred the appeal for higher yields in emerging market bond ETFs. The recent price performance also bore testimony to this fact. Fundamental Emerging Markets Local Debt Portfolio (NYSEARCA: PFEM ) was the weakest performer in the emerging market debt ETF pack while the U.S.-dollar denominated ETFs like Emerging Markets Sovereign Debt Portfolio (NYSEARCA: PCY ) performed relatively better. U.S. dollar-denominated bond ETFs invest in sovereign debt from various emerging nations, but do so via U.S. dollar-denominated securities and are thus not hurt by currency translation troubles. Some of the worst-performing emerging market currency bond ETFs in recent times are Market Vectors Emerging Markets Local Currency Bond ETF (NYSEARCA: EMLC ), WisdomTree Emerging Markets Local Debt Fund (NYSEARCA: ELD ), iShares Emerging Markets Local Currency Bond ETF (NYSEARCA: LEMB ) and SPDR Barclays Capital Emerging Market Local Bond ETF (NYSEARCA: EBND ). These ETFs shed the most in the last one-month frame, having lost in 5% to 7% range while retreated about 2% in the last five trading sessions (as of September 9, 2015). So, we can conclude from the recent trend that emerging market currency bond ETFs are hardly safe with attractive yields. Instead, these are rather unsafe with melting gains. 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.

How The BRICs Came Down To Earth

The popularity of the acronym “BRICs” – which stands for the fast-growth economies of Brazil, Russia, India and China – spread like wildfire in the post-financial-crisis world. Coined by ex-Goldman Sachs economist Jim O’Neill in 2003, the BRICs came to symbolize the shift in global economic power away from the developed G7 economies and toward the developing world. Not so long ago, the rise of the BRICs seemed inevitable. After all, together, the BRICs encompass more than 25% of the world’s land mass and 40% of the world’s population. And the combined Gross Domestic Product (GDP) of the BRICs exceeds that of the United States. And if you adjust for Purchasing Power Parity, together, the BRICs already account for 52% of the planet’s GDP. In 2010, Standard Chartered Bank predicted China would overtake the United States to become the world’s largest economy by 2020. And China’s economy would be twice as large as the United States’ by 2030 and account for 24% of global GDP. U.S. jobs were migrating to Indian outsourcers. Brazil was finally set to take its place among the world’s great economic powers, with its economy having overtaken the United Kingdom’s in size. No wonder that investors poured money into the BRICs stock markets in the expectation that their profits would echo the rise to global prominence of these newly dominant economies. Alas, things did not quite turn out that way. BRIC Investing Gone Bust After the financial meltdown of 2008, many investors favored BRICs over stagnant, old-world economies like the United States. Yet things turned out differently. Even as U.S. markets still trade within striking distance of their all-time highs, the MSCI BRIC Index now languishes 48% below its 2007 peak. No wonder BRIC investors are pulling in their horns. Below is a quick look at how BRIC investors in the United States have fared in the recent market turmoil. I. China – Deutsche X-trackers Harvest CSI300 CHN A (NYSEARCA: ASHR ) The Chinese stock market has been in the headlines often of late, collapsing pretty much as I had predicted in early June . The latest news is that the Chinese government has thrown in the towel on supporting the stock market in a $200 billion spending spree funded by the central bank, local brokerages and commercial banks. Attention has shifted to Chinese journalists, who now are “confessing” to writing stories that stoke panic in the markets. In the meantime, bad loans at China’s banks have soared, with ICBC’s book of bad loans soaring by 28% last quarter alone. And the banking sector is often the canary in the coal mine about more bad things to come. In any case, the “this time it’s different” conviction that seemed to undergird China’s dominance in the world has waned along with the size of investors’ portfolios in the Chinese markets. Deutsche X-trackers Harvest CSI300 CHN A has fallen 35.88% over the past three months. (click to enlarge) II. Brazil – iShares MSCI Brazil Capped (NYSEARCA: EWZ ) The knock-on effects of the Chinese slowdown are particularly evident in Brazil, as its commodity bet on China has turned sour. Brazil’s exports to China tumbled by an astonishing 19% in the first seven months of this year. Economic growth in Q2 came in worse than expected at minus 1.9%. Put another way, on an annual basis, Brazil’s economy contracted by a whopping 7.2%. Inflation is nudging double digits. The government is cutting back spending, exacerbating the contraction. Wealthy Brazilians are abandoning ship, snapping up properties in southern Florida. As one commentator put it in the Wall Street Journal , “Brazil mania has turned to Brazil nausea.” iShares MSCI Brazil Capped has fallen 21.46% over the past three months. (click to enlarge) III. Russia – Market Vectors Russia ETF (NYSEARCA: RSX ) Senator John McCain once dismissed Russia as “a gas station with a country attached.” Over the past 18 months, Russia has been hammered by the oil price and the costs of its increasing economic isolation and political adventurism. At the same time, Russia is a value investor’s dream: it is both hated and cheap. In fact, Russia is the second-cheapest market in the world on a long-term cyclically adjusted price earnings (“CAPE”) basis. Trading at a price-to-earnings (P/E) ratio of about 4.8, and a price-to-book ratio of 0.7, the Russian market trades at about half of the level of the broader MSCI Emerging Markets Index. Gazprom, the world’s largest natural gas producer, trades at a P/E ratio of 5. Here’s the biggest surprise. Despite the pullback in recent months, Russia is up 14.97% for 2015. That makes it the third-best-performing market of 2015 among the 47 markets I track at my firm, Global Guru Capital. NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser and is not affiliated with Eagle Financial Publications. Market Vectors Russia ETF has fallen 11.24% in the past three months. (click to enlarge) IV. India – WisdomTree India Earnings ETF (NYSEARCA: EPI ) India has long suffered in the shadow of China. No wonder Indian officials are working hard not to gloat at the Chinese economy’s well-publicized stumbles. That’s largely because India’s GDP growth forecast for 2015 of 7.7% exceeds China’s estimated 6.9%. And that’s assuming you accept China’s seriously fuzzy economic statistics. That said, critics are equally suspect of India’s projections, which seem too good to be true. Most worrisome is that Prime Minister Modi’s reforms have bogged down in parliament, as investment in industry and infrastructure has ground to a halt. WisdomTree India Earnings ETF has fallen 11.29% over the past three months. (click to enlarge) No ‘Cheery Consensus’ For all the hoopla surrounding the BRICs, this highly fêted group has turned out to be a bust for investors making a one-way bet. Meanwhile, growth in emerging markets is only slowing. Projected growth of 3.6% in emerging markets in 2015 is the lowest since 2001, excluding the crisis year of 2009. And if China’s growth is actually 4%, and not 6.9%, that emerging markets growth number withers to 2.7%. About the only thing that the BRICs have going for them is that they have become among the most hated markets on Earth. And as Warren Buffett has noted, “markets pay dearly for a cheery consensus.” Certainly, the current sentiment surrounding the BRICs is anything but cheery.