Tag Archives: chinese

More Pain Ahead For Basic Materials ETFs In 2016?

It’s been years since basic materials ETFs last saw their days of glory. As for the last few years, the space has been an area of concern, thanks to a surging greenback, massive crash in oil prices and hard landing fears in China. Moreover, supply glut has been a long-lasting issue for this space. Things were fragile for long in China given the protracted slowdown in the domestic manufacturing sector, credit crunch concerns and a property market slowdown. As a result, the Chinese economy has been undergoing a tumultuous phase for the last few months. To shore up the ailing economy and the turbulent market, the Chinese government took several measures; but nothing could really heal the pain. Since the Chinese economy accounts for about half of the global consumption of industrial commodities and is the second biggest purchaser of oil, a further slowdown in the Chinese economy would mean weaker demand for commodities. In any case, most developed economies are presently in a state of slowdown and thus require lesser commodities for weak demand. Also, the strength in the greenback owing to Fed policy tightening marred the broader commodity prices as most of these materials are priced in the U.S. dollar. Also, a hike in interest rates tends to boost investors’ interest in income-generating assets and thus hurts the investment demand for non-yielding commodities. So, all in all, fears of softening demand amid abundant supplies have led to a broad-based meltdown in commodities prices. Commodities at Multi-Year Lows Copper prices have already plunged to a new six-year low on Chinese economic issues. Events in China are major contributors as the country is the world’s biggest consumer of this industrial metal, making up roughly 40% of global copper demand. Thus, a prolonged manufacturing slowdown in the world’s second largest economy cast a dark cloud over the red metal. Iron ore fell to a five-and-a-half year low in December 2015 and analysts predict that the rout can deepen further as ” Chinese steel mills rebuild the inventory.” Nickel prices plummeted to a 12-year low on low demand from “the stainless steel sector , the dominant source of demand for nickel.” Most agricultural commodities are also in the red. The oil price rout is getting more and more acute lately with Brent crude having slipped to a 12-year low and WTI crude falling to a seven-year low. Analysts expect the pressure to remain in place. ETFs to Lose More in 2016 iShares U.S. Basic Materials ETF (NYSEARCA: IYM ) – Down 20% in the last one year (as of January 12, 2016) and about 9.6% year to date. The fund is the most exposed to chemicals though steel, gold and aluminum take about 10% of the fund. SPDR Materials Select Sector Fund (NYSEARCA: XLB ) – Down 16.4% in the last one year (as of January 12, 2016) and about 9.2% year to date. The fund puts 73.8% off its assets in the chemical sector followed by 9.5% of assets in the metals & mining sector, and 8.7% in containers and packaging sector. The fund is heavy on Du Pont (NYSE: DD ) (11.4%) and Dow Chemical (NYSE: DOW ) (11.2%). SPDR S&P Metals & Mining ETF (NYSEARCA: XME ) – Down 53.9% in the last one year (as of January 12, 2016) and about 15% year to date. Steel occupies almost half of the portfolio followed by 10% in aluminum, diversified metals and gold each. iShares MSCI Global Metals & Mining Producers ETF (NYSEARCA: PICK ) – Down 50.4% in the last one year (as of January 12, 2016) and about 15.8% year to date. Materials hold about the entire fund though consumer services and consumer durables take a slight portion of the ETF. The fund’s main focus is on companies like BHP Billiton (NYSE: BHP ), Rio Tinto (NYSE: RIO ) and Glencore ( OTCPK:GLNCY ). Bottom Line With the operating backdrop in 2016 expected to be no different than 2015, the basic materials sector will replay the same pattern that we saw in the recent past. At Zacks, we have most of the materials ETFs as Sell-rated at the time of writing. Original Post

RBS: Sell All Of It, Everything Except High-Quality Bonds

Original post By Stuart Burns We like to think of ourselves as optimists at MetalMiner. If given the option, we prefer the glass half full than the glass half empty, so an article in the London Telegraph and many other newspapers this week reporting RBS Bank’s latest client note makes depressing reading, but unfortunately worthy of discussion. The note advises clients to “Sell everything except high-quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel. It All Must Go! Nor is RBS playing a new tune; since November, it has been warning the oil price and stock markets are headed lower, sure enough the oil price has continued to fall, dropping to a 12-year low of $30.41 for Brent and $30.43 for West Texas Intermediate this week. Click to enlarge Source: Telegraph Newspaper The markets are clearly spooked and by a number of factors. China’s stock market is being kept alive only on the oxygen of government support via state enterprises buying shares. Oil consumption has stalled due to slow growth and warm weather, and oil supply continues to grow as Iran gears up to enter the market. This year, the biggest factor seems to be the fear of a devaluation of the Chinese yuan, a move Beijing is seeking to reassure the markets is not on the cards. But, guess what? No one believes them. Fears over China, therefore, are multiplying and RBS says, “China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, “and the bank’s Andrew Roberts, research chief for European economics and rates, expects Wall Street and European stocks to fall by 10% to 20% this year. Larry Summers, the former US Treasury Secretary, in more measured terms, agrees saying it would be a mistake to dismiss the current financial squall as froth. What Does This Mean for Metals? Metals prices have taken their cue from energy and have been weak since the start of the month, but if RBS is right, they could see support in the months ahead. Prices have, in part, been weak due to a stronger dollar, but RBS suggests the Federal Reserve won’t raise rates again at the March meeting and by the summer may be looking at a rate reduction. Either way, if rates don’t rise as the market had been expecting and had priced into the dollar, we could see dollar weakness in 2016 removing one of the factors depressing metal prices. It’s true, global growth is muted, global trade is down and loans are contracting, all in an environment of record debt, not a great backdrop for companies to invest and create growth. Yet, there are some bright spots. Growth in Europe is looking more positive as austerity has largely come to an end. Money supply in Germany is up 10% and growth in the US has remained solid if unspectacular. What to Do? Would you follow RBS’s advice if you were its client? Would you get out of everything? Bank of America runs a Bull & Bear Index that tracks global equity prices and is supposed to give warning of contrarian buy signals. We have all heard of the saying “the night is darkest just before the dawn.” Well, BOA’s index is supposed to peak over the horizon and see if dawn is approaching. Click to enlarge Source: Bank of America As you can see, 88% of global indexes are now trading below their 200-day and 50-day moving averages. The index is therefore at an ultra-negative level of 1.3, but BOA is not suggesting we take our cue and rush out to buy shares. Even though the index has a good track record, the bank says we need certain “catalysts” to be in place, not least a stabilization of the Chinese yuan and oil prices, better Purchasing Managers’ Index data and a halt to the rising dollar before it would say, with any confidence, RBS has got it wrong and the BOA index has it right. As so often before, then, it is down to China. We watch and wait, and hope events unfold more positively in the weeks and months ahead than they have started to so far this year.

Asset Allocation: ‘Scenic Route’ For Fed Should Lend Support To Risk Assets

As we move into 2016, investors are anticipating a period of sustained interest rate increases by the Federal Reserve – not an aggressive climb as sometimes seen in the past, but a mild, steady stroll to modest heights. Meanwhile, Europe and Japan remain on level policy ground, as they look to quantitative easing to maintain recovery and avert further contraction, respectively. Potential turbulence in the form of slowing Chinese growth could make the journey a bit uncomfortable, given that country’s central role in global economic health. Putting all this together, the Neuberger Berman Asset Allocation Committee believes that still-friendly monetary conditions and gradual economic improvement should lend support to risk assets and underscore our preference for stocks over bonds in the coming year. Global Equities: Leaning into Europe We are positive on global equities, particularly in Europe, where stocks stand to benefit from continued quantitative easing and a weaker euro. While we had an overweight view on U.S. stocks just a few months ago in light of reasonable valuations and potential for earnings improvement in 2016, that positioning has moved to neutral given the sharp price recovery in October. However, we see opportunity in master limited partnerships, which, despite near-term concerns around energy prices and the sustainability of distributions, still appear to offer attractive valuations and yields. We are relatively cautious on Japan’s market. Although stocks are benefiting from the weak yen and reallocation of pension fund assets, the country faces slow or negative growth and is vulnerable to a slower Chinese economy. Elsewhere, we have a neutral view of emerging markets, where China volatility, commodity weakness and dollar strength are creating economic headwinds, while corporate profitability remains under pressure. In our view, selectivity from a country and company perspective remains paramount. Fixed Income: Appeal of Spreads We are underweight global fixed income for the coming year given our low return outlook for the large, developed-country sovereign bond markets in light of a trend toward higher rates in the U.S. and easy policy in Europe and Japan. In the U.S., we believe the Fed’s rate normalization will be a dovish process relative to past tightening cycles. A meaningful spike in long-term rates appears unlikely to us, but investors should be prepared for periods of heightened volatility. We maintain a preference for credit based on our outlook for modest economic growth and current attractive spread levels. In particular, we see appeal in high yield, where spreads remain at wide levels due to commodity-related weakness. In our view, credit quality among issues in the rest of the high yield universe remains quite good. Credit fundamentals in emerging markets debt remain relatively strong, in large part due to higher reserve levels and much-improved policymaking over the last two decades. Recent troubles, however, have exacerbated weak growth stemming from soft domestic demand in the major emerging markets. We are neutral on a one-year horizon, but are more constructive further out, as we believe the developed market recovery should lend support to emerging markets’ growth and credit fundamentals. Alternatives: Directional Hedge Funds Could Benefit from Volatility Within alternatives, we now have a slightly overweight stance on directional hedge funds, as increased volatility is creating more opportunities for astute traders and active managers to add value. Within this group, distressed managers have suffered in 2015 from exposure to Puerto Rico, Greece and the energy sector, but we believe there are ample opportunities over a 12-month time horizon. We have a modest overweight view on lower-volatility hedge funds and believe that they continue to play an important role in asset allocations, particularly in an environment of higher volatility and likely rising rates in the U.S. Our view on private equity continues to be neutral in light of its long cycle of growth and more elevated valuations. Elsewhere, we are neutral on commodities – an improvement from six months ago – believing that these markets have come under so much pressure that they are not likely to deteriorate much further. China growth concerns may lend support to precious metal prices, while the drought in many parts of the U.S. should help soft and agriculture commodities. We believe oil is likely to be range-bound, but we anticipate better supply/demand dynamics on the margin. For the broader commodity complex, the potential for higher interest rates and the resulting stress on certain commodity producers may lead to production cuts and more balance across markets. Uncertain Journey We believe elevated uncertainty is likely to accompany investors for much of 2016, whether around future monetary policy, geopolitical events, the price of oil or the extent of slowing growth in China. We will continue to monitor developments as we seek to provide guideposts for the current challenging environment. Market Views Based on 1-Year Outlook for Each Asset Class Regional Focus Fixed Income, Equities and Currency * The currency forecasts are not against the U.S. dollar, but stated against the other major currencies. As such, the forecasts should be seen as relative value forecasts and not directional U.S. dollar pair forecasts. Currency forecasts are shorter-term in nature, with a duration of 1-3 months. Regional equity and fixed income views reflect a 1-year outlook. The Committee members are polled on the asset classes listed above, and these discretionary views are representative of an Asset Allocation Committee consensus. As of fourth-quarter 2015. Views expressed herein are generally those of the Neuberger Berman Asset Allocation Committee and do not reflect the views of the firm as a whole. Neuberger Berman advisors and portfolio managers may make recommendations or take positions contrary to the views expressed. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. About the Asset Allocation Committee Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the next 12 months on each of the asset classes noted. The committee covers the gamut of investments and markets, bringing together diverse industry knowledge, with an average of 24 years of experience. 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