Tag Archives: chinese

Fund Managers Are A Frightened Lot!

Today we will focus on Merrill Lynch’s monthly survey of global fund managers, who overlook around $600 billion in AUM. Majority of the time, but not always, surveys such as these should be taken from the contrary perspective and include some great insights as to how the consensus is positioned. As always, there are some pretty good charts and interesting observations, so let’s get started. Click to enlarge Equity allocations remain quite low, especially when one considers the recent multi-month powerful rally in global equities. Fund managers allocations towards the stock market fell to 9% overweight this month, from 13% last month and 54% in April 2015 (just before equities rolled over). The chart above shows that data with MSCI Hong Kong, which has been one of the most oversold markets since the Chinese rout began. However, on our Twitter account readers can also see the same data with the MSCI Australia index. We would assume equities have further to run based on this data alone, however we would advise caution on using only one indicator to make your financial decisions. Click to enlarge Bond allocations remained similar to previous two months, as readings came in at 38% underweight. Worth noting however, fund managers were 64% underweight in December, just before the equity market sold off and bond market rallied. In the chart above, we have shown the difference in allocation of equities vs bonds, together with the ratio of stocks vs bonds. Globally, managers have been quite risk averse. While positioning towards the debt markets is not that extreme (allocations have risen to 20% underweight or even higher historically), there are other sentiment gauges arguing that Treasury yields could rise somewhat from here. Click to enlarge Firstly, small speculators positioning in the futures market shows dumb money is chasing Treasuries with an expectation of lower yields. Secondly, Mark Hulbert’s Bond Newsletter Sentiment Index ( click here to see the chart ) shows record bullish recommendations by various advisors and newsletter writers. Thirdly, number of shares outstanding on various Treasury ETFs has spiked in recent weeks ( click here for the chart, thanks to Tom McClellan ). Finally, according to ICI, fund inflows towards government bonds have been very elevated for weeks. Putting it all together, one can see that there is room for unwinding of positions in the Treasury bond market. We have been long for a few months now and have recently changed our duration towards very short term Treasuries and Corporate grade bonds, as we expect a correction. Having said that, Treasuries still remain attractive for three reasons: 1) relative to rest of the developed world, Treasuries look attractive and could be considered high yielding sovereigns with only Australia & New Zealand paying you more; 2) we still continue to favour assets priced in US dollars as we see the greenback resume its bull market once the current correction runs its course; and… Click to enlarge … 3) we think that longer duration Treasury yields could eventually break down from the technical consolidation patterns. Click to enlarge Finally, cash balance increased in the month of April to 5.4%, from 5.1% a month earlier. As already discussed above, despite a very strong multi-month stock market rally, fund managers continue to hold extremely high levels of cash. Risk averse behavior resembles bear markets of 2000-02 and 2007-09, however, year to date performance of all major asset classes is pretty much positive (chart below). Click to enlarge Our take on high cash allocations by fund managers requires an investor to step away from day to day activities of the financial market, and focus on the longer-term picture. We believe there is an overvaluation in all major asset classes, where global central bankers have goosed up and inflated value of just about everything. We are very nervous and seem not to be the only ones with this view (Bloomberg: Peter Thiel Says Just About Everything Is Overvalued ). Bonds and cash are more expensive than they have ever been, with yields on Treasuries lower than at any other time in the last 220 years. Europe and Japan have gone into “la-la land” of negative interest rates, something that hasn’t happened in over 5,000 years of recorded history . Cash yields essentially zero or even negative in some countries. US stocks are the most expensive ever, apart from a few months during dot com bubble, with some metrics showing future expected returns to be flat over the coming decade. Basically, we have a situation where stocks, bonds and cash are expensive all at once. Depending on how events unfold, returns on all major asset classes could be very low or even negative (in tandem). No wonder global fund managers are frightened! Original post

The BRICs To Consider Now

Once considered the darlings of the emerging market world, the BRICs have faced economic and political challenges lately. However, certain BRICs still offer opportunities for investors. BlackRock’s Terry Simpson explains. artpixelgraphy_studio / Shutterstock Many BlackRock fund managers have raised their emerging market (EM) allocations lately, and we’ve warmed up in general to the asset class after a long underweight . EM valuations overall, as measured by the MSCI Emerging Markets Index, look cheap, and we see value for long-term investors. A Fed on hold and a weaker dollar are good news for the asset class (see the chart below), and there are signs of progress on structural reforms in certain EM countries. Click to enlarge Which BRIC country do you like best? Join in. You may be wondering, however, what we think of the so-called BRIC countries in particular – otherwise known as Brazil, Russia, India, and China – especially given the recent political scandal and slowing growth headlines surrounding some of these countries. Despite the economic and political challenges facing these one-time darlings of the EM world, we still see long-term opportunities within the BRIC universe. We like Brazil The words impeachment, corruption, bribery, and recession are all too synonymous with Brazil these days. And perhaps with justification, Brazilian gross domestic product (( GDP )), on the decline since 2010, finally entered negative territory in 2015 at -3.0 percent. Economists expect to again see negative economic activity in Brazil this year, with growth at -3.4 percent, according to Bloomberg data. Local inflation remains high, forcing the Brazilian central bank to leave its policy rate unchanged since July 2015. With so much bad news emanating from Brazil, one might ask what’s there to like about this BRIC? We believe Brazil offers value, as there’s potential for a significant turnaround story. Much of the bad news about Brazil appears already priced into the market. Brazilian equities, as measured by the MSCI Brazil Index, are 20 percent cheaper than their 2014 highs on a price to book basis. This means we could see Brazilian stocks move higher if confidence in the market is restored. We think sentiment toward Brazil has just begun to turn, as many long-term investors remain on the sidelines. In addition, lower real wages and declining labor costs are making the country more attractive for foreign business when measured against regional Latin American peers. However, an investor confidence recovery ultimately will rest on whether we’ll see real political change and reforms. We’re neutral toward Russia Undoubtedly, Russia is the BRIC member with the most to gain from recovering oil prices. Russia reaped the benefits of the oil price boom starting in the early 2000s, averaging 7.1 percent GDP for the six years ending in 2008. Last year, oil revenue accounted for 45 percent of Russian government revenue, according to an analysis of data accessible via Bloomberg. But Russia’s economy has suffered more recently, following declining oil prices and economic sanctions imposed by the U.S. and Eurozone. The country entered a recession in 2015 and is expected to produce negative growth again in 2016, based on consensus forecasts available via Bloomberg. A flexible currency has allowed Russia to quickly adjust to economic difficulties, and Russian markets are receiving inflows following rebounding oil prices. However, we need to see sustained economic momentum and a more sustainable long-term economic growth model not so dependent on oil. Thus, in the context of an EM portfolio, we advocate remaining neutral this BRIC. We favor India India is a bright spot within the BRICs and stands out in a world where economic growth is sparse. In 2014 and 2015, the country expanded at 6.9 percent and 7.3 percent, respectively. According to the IMF, India’s 2016 GDP is forecasted to grow at 7.5 percent. Yet even with this rosy economic picture, India’s market performance has waned since reaching a post-crisis peak in January 2015, weighed down by a rising U.S. dollar and slow progress on fiscal reforms. Looking forward, we are encouraged that the Indian government has committed to keeping the fiscal deficit in check. Furthermore, the government is expected to spend 0.3 percent of GDP on public infrastructure that should support growth. As such, we’re likely to see fiscal and monetary policy makers working in unison to spur growth. This, combined with a reasonable valuation for the S&P BSE Sensex Index, bodes well for Indian stocks into 2017. We like China Sentiment toward China began deteriorating in August of 2015, with the domestic stock market crash and less transparent currency management . Long-term issues remain, and the country’s reforms have slowed due to cyclical pressures. However, the reforms that have been implemented are ones that are supportive to growth. In addition, the Fed’s delay has eased pressure on China, and we’re encouraged by the slowing of capital outflows from the country. Finally, Chinese stocks (measured by the Shanghai Stock Exchange Composite Index) have trailed their Brazilian counterparts (measured by the Ibovespa Index) and moved in lock step with Russian equities (represented by the MICEX Index) since late January, based on Bloomberg data, and their low valuations are poised to potentially rise in a risk-on environment. Looking forward, we could see Chinese multiples increase as investors regain confidence in the country’s outlook. Within China, we prefer the offshore market vs. the domestic market, as well as domestic sectors and companies that could benefit from expected Chinese structural reform. The main takeaway from all of this: Investors should be cognizant that EM is no longer a homogenous asset class, and each market faces its own challenges. Even within the BRICs, there is growing heterogeneity across countries. This post , originally appeared on the BlackRock Blog

Top-Performing Energy Mutual Funds In Q1 2016

After bleeding heavily from the beginning of 2016 through early February, the energy sector made an impressive comeback to end the first quarter on a positive note, all thanks to a strong spike in oil prices. The sector’s rebound also helped energy mutual funds to end the quarter with moderate gains. According to Morningstar, the mutual fund category – Energy Equity – returned 2.2% during the first quarter, after losing nearly 10.5% in its first two months. Meanwhile, the WTI and Brent crude, which slumped 28.7% and 19.2%, respectively, since the start of 2016 to reach multi-year low levels on February 11, gained 4.3% and 6.4% during the first quarter. This was the best quarterly performance of crude since the second quarter of 2015 that came on the back of a strong rebound from February 11 through the end of the quarter, when WTI and Brent crude surged 46.3% and 31.7%, respectively. Against this backdrop, it will be worth watching the top performers from the energy equity mutual fund category in the first quarter. But before going into the discussion about the mutual funds, let’s find out the factors that impacted the movement of oil prices during the quarter. Behind the Early Slump Oil prices witnessed a massive slump since the start of 2016, following concerns including China-led global growth worries and the unwillingness of major oil producers to reduce production despite the persistent fall in oil prices. A flurry of disappointing economic data out of China – one of the major importers of oil – raised concerns that an already weak demand environment may deteriorate further following the weakness in the Chinese economy. Dismal economic data out of the major economic regions, such as the U.S., the eurozone and Japan, intensified worries regarding weak global demand. Meanwhile, the major oil producers continued to produce at high levels without considering weak global demand and an already oversupplied market. Continued increase in crude inventories also played a major role in the oil slump during the first half of the quarter. Separately, Iran, which witnessed a lift-off in sanctions on its oil export, continued to raise its production, adding to the supply glut. These were the reasons why crude prices touched 12-year low levels in early February, which in turn, dragged the major benchmarks to multi-year lows. A Remarkable Recovery Strong intentions of major oil producers to control the supply glut played a catalyst for the rebound. Ministers and officials of both OPEC and non-OPEC countries said that they will be meeting on April 17 to discuss an oil production freeze in order to boost prices. Continued decline in oil rig counts and a lower-than-expected rise in crude inventories also gave a boost to oil prices during the latter half of the first quarter. Meanwhile, improvements witnessed in the economic environment of the U.S. and China also eased concerns over weak global demand to some extent. Separately, a weaker U.S. dollar also played a significant role in increasing oil prices, as it made crude more attractive for investors trading in currencies other than the U.S. dollar. 3 Top Energy Mutual Funds In this section, we have highlighted three fundamentally strong energy mutual funds that gained the most during the first quarter, banking on a strong rebound in oil prices and the energy sector. These funds either have a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. Besides having impressive first quarter return, these funds also have strong three-month returns. The minimum initial investment is within $5000. Also, these funds also have low expense ratios. Vanguard Energy Fund Inv (MUTF: VGENX ) seeks growth of capital over the long run. It invests the lion’s share of its assets in securities of companies engaged in operations related to the energy sector. The fund primarily invests in common stocks of companies. Currently, VGENX carries a Zacks Mutual Fund Rank #1. The product has first-quarter and three-month returns of 7.8% and 20.3%, respectively. Its annual expense ratio of 0.37% is lower than the category average of 1.51%. BlackRock Natural Resources Trust Fund A (MUTF: MDGRX ) invests the majority of its assets in equity securities of companies having a significant portion of their assets in natural resources. It invests in securities of companies having operations related to sectors including energy, oil and gas. Currently, MDGRX carries a Zacks Mutual Fund Rank #2. The product has first-quarter and three-month returns of 3.9% and 17.7%, respectively. Its annual expense ratio of 1.10% is lower than the category average of 1.51%. Fidelity Select Energy Portfolio No Load (MUTF: FSENX ) seeks capital growth. It invests a large chunk of its assets in common stocks of companies involved in the energy sector, including oil, gas, electricity and solar power. The fund invests in securities of companies throughout the globe. Currently, FSENX carries a Zacks Mutual Fund Rank #1. The product has first-quarter and three-month returns of 3.3% and 15.8%, respectively. Its annual expense ratio of 0.79% is lower than the category average of 1.51%. Original Post