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RSX Is My Top Pick For 2016

Summary The Market Vectors Russia fund is poised to have two factors pushing it up starting from next year, aside from the oil & gas recovery. It is looking increasingly likely that EU-Russia relations are set to normalize next year, given many positive signals given by EU officials. Russia’s other industries, such as defense, agriculture, IT have been growing at a strong pace, which should not be under-estimated going forward. I predicted last year that 2015 will be a good entry point to buy the Market Vectors Russia ETF (NYSEARCA: RSX ). There is a good chance that I may have been right and perhaps the bottom did occur at the end of 2014 at just under $14/share, given that it is currently at over $15/share. I myself did not buy, because I thought at the time that other investments related to energy were more attractive, such as Chevron (NYSE: CVX ), Suncor (NYSE: SU ) and Shell (NYSE: RDS.A ). I have been building up positions in those stocks, in the past few months, looking to hold for the next few years. Truth is that RSX is an investment which might more or less mirror the performance of those stocks, with the added twist of the geopolitical situation in the past few years. For instance, the bottom RSX made for this year in late August coincides with the ceasefire which took effect between the Ukrainian army and the ethnic Russian rebels in the East, starting from the first of September. This led to speculations that the EU sanctions against Russia will be lifted soon, which is what gave the fund a bit of a boost. EU sanctions. A lot does depend on those sanctions being lifted. After all, Russian companies do depend on being able to access the EU debt markets to a great extent for their financing needs. Some may have hoped that the sanctions will be lifted sooner, especially after EU president Junker made a pro-Russia reconciliation speech, where he suggested that Europe needs to start thinking about ending the confrontational relationship with its Eastern neighbor. Now it looks like the sanctions might last until next year, but more and more people are grumbling about it, therefore I think it will not be much longer before the sanctions end, unless things in Ukraine take a nasty turn back towards open conflict. Even if they do turn worse again, it may no longer be seen as Russia’s doing. Europe cannot afford this extra load of hardship given its already full plate. There is the almost decade of almost zero percent average yearly growth since 2008. There is the resulting social and economic tensions, including the continued threat of defaults in the Euro-zone, and the rise of the extremist parties due to dissatisfaction with the mainstream. Now, the migration crisis, which is the greatest challenge that the EU ever faced, is leading to an actual shutdown of one of Europe’s most important institutions, namely its Shengen agreement. Within this context, removing an important impediment from realizing increased trade and other economic exchanges with the EU’s third largest trading partner is an increasingly popular concept. Oil & gas prices. While normalizing relations with the European Union is an important factor which is likely to affect the RSX fund, there is nothing more important than achieving a higher price for Russia’s dominant export, namely oil & gas. As we can see, investor sentiment is increasingly turning bearish on oil prices for the near-term, with prices threatening to break towards $30/barrel. But we should remember that there is a very important fact which makes current prices far from viable, namely the fact that many current and future projects are not even close to reaching breakeven at current prices, in fact many projects which our future medium to long-term supplies depend on are not viable at anything short of $80-100/barrel. While we are currently seeing a surplus in supply, which is pushing prices ever lower due to heavy investment during the 2010-2014 $100/barrel price plateau period, as well as almost a decade of subdued global economic growth, which has dampened demand, we should not mistake this for something it is not. It is definitely not some sort of long-term fundamental shift. We are already seeing a drop in supplies from some of the most flexible projects, namely the U.S. shale patch, where it contributed to a 500,000/barrel production decline in the U.S. so far this year from the April production peak according to the EIA weekly report. We are also seeing it in Canada, where it seems production is in decline. (click to enlarge) Source: OPEC November report. In fact, if we compare quarterly data for the year, it seems global non-OPEC production may have peaked in the first quarter of this year and may already be down by about a million barrels per day. This means that we are clearly on a path of global production decline, even if some of the headline numbers such as the 2015 average, versus the 2014 average will not show it. Source: OPEC November report. In my personal opinion, in 2016 we will see a dramatic decline in production compared with 2015, while global demand is still increasing, even if it is at a relatively slow pace. Within this context, by this time next year, we will most likely be looking at oil prices that are significantly above current levels. Russia’s other industries. While there is no debating the fact that Russia’s oil & gas industry is by far the most important factor in determining Russia’s future, we should remember that we cannot treat Russia same way as we do Saudi Arabia. Yes, Russia’s economy is contracting this year due to the drop in oil & gas prices. But, if we look at other oil exporting countries such as Canada, it also entered recession this year, even though it is nowhere near as dependent on those exports as Russia is. Russia may be very dependent on oil & gas, but far less dependent compared with many other petro-states. Russia does in fact have a relatively diverse economy. There is the defense industry which has been doing alright in terms of exports growth for over a decade now. Russia’s defense industry employs three million people and in 2014 it exported $15 billion worth of products, which is a 50% increase compared with 2010. In agriculture, Russia has in fact been helped by its counter-sanctions against the EU and the U.S., which mainly focused on food import bans. Russia is still a major net food importer, but its situation seems to be steadily improving, with production last year growing in the double digit range. Grain exports are increasing, while domestic products are capturing a larger part of the domestic market. Even as Russia is in recession this year, the government has made it a priority to increase support for agriculture by 50 billion rubles. There are other industries which are seeing growth, such as in IT , with growth in software exports in the double digits range every year for the past half decade. Russia’s auto industry is increasingly looking at increasing exports, in part spurred by the weak ruble. In effect, we are seeing to a great extent a re-balancing of the economy which we cannot expect from other petro-states such as Saudi Arabia. In this respect, Russia is a lot closer to more economically diverse countries such as Canada or Brazil, due to its more diverse nature. It is this mis-perception in regards to Russia’s economic diversity which I think makes RSX a potentially interesting play which I am looking to potentially get into possibly early next year. In addition to my expectations of the oil market turning soon, there is also the positive trend we are seeing in a number of non-commodity related industries which could in conjunctions with the expected normalization of relations with the EU provide an extra boost to Russian assets in coming years. RSX main holdings explain why fund is doing much better compared with most energy major energy investments. If we are to look at the top holdings in the RSX fund , we see that energy is indeed the most crucial part in its current and future performance. Lukoil ( OTCPK:LUKOY ), and Gazprom ( OTCPK:OGZPY ) are of course significant holdings in the fund, with 7.93%, and 7.77% respectively. And as one might expect, these stocks are down significantly year to date. In fact, most of the energy related companies, which dominate the fund are down for the year, with only a few exceptions. At the same time, there are other stocks, which are not related to energy which are mainly up for the year, including the top holding of the fund, Sberbank ( OTCPK:SBRCY ), which is up over 50% so far this year and it makes up 9% of the fund. There is also the retail stock, X5 Retail Group, which is up almost 70% for the year, which is also contributing to the overall fund being up for the year. The reason why these non-energy related stocks are mainly doing alright is because as I pointed out already, many non-energy related sectors of the Russian economy are doing alright. Because of that, Russia’s unemployment rate did not increase significantly since it entered recession, which makes it less likely for companies such as Sberbank to suffer losses, due to a deterioration of the loans in its portfolio. In fact, the unemployment rate in Russia remains near the ten year low of 4.8% achieved a year ago. It only rose relatively modestly to 5.5% since then. Because of that, there is no significant uptick in loan defaults in Russia, which is benefiting holdings such as Sberbank. It is true that other funds such as the iShares MSCI Russia Capped ETF (NYSEARCA: ERUS ) may offer a more aggressive way to play the expected rebound in energy. It gives more weight to Gazprom, Lukoil and other energy stocks compared with RSX. At the same time however, the attractive aspect of the RSX is the fact that it is more balanced, with stocks not related to energy, which will still most likely do well when energy recovers, at the same time are not likely to suffer as much if the current depressed energy price environment will last longer than most of us expect. This concept seems to be already working as we can see, given that RSX, which is heavily tied to energy is up 5% year to date, while the S&P 500 is flat for the year. With downside risk relatively limited given that energy and the Russian economy are not likely to fall much further from here and the prospect of a Russian economic rebound, driven by a recovery in energy at some point relatively soon in my opinion, I think the RSX fund has the potential to be a very strong performer starting next year and most likely will go relatively strong for some years as energy will most likely outperform. Given the fact that the world needs to stop what is seemingly a start to oil production decline gripping the world, even if there will be an economic slowdown in coming years, RSX may in fact become a star performer as investors will pile into the few investments which will not be headed down. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Positioning From The United States Into The Eurozone

Summary The economy in the U.S. is deteriorating, while the Eurozone is prospering. The euro is about to take off due to fundamentals in current account and balance of trade. European stocks will be boosted due to good production and retail sales numbers. Investors are focused too much on the U.S., while they are totally ignoring what is happening in Europe. What they are missing is that Europe’s economy is actually improving. I will highlight some of the main key indicators of both economies and invite investors to jump into Europe and out of the U.S. First off, the trade balance, one of the most important indicators of export and import, has favoured Europe as the euro declined 20% against the U.S. dollar last year. Europe still has a positive balance of trade, while the U.S. has seen widening deficits. (click to enlarge) (click to enlarge) This translates into a current account deficit in the U.S., while Europe has a current account surplus. A positive current account is typically good for a currency so we should see the euro prosper against the U.S. dollar. The only reason why the U.S. dollar is so strong is because it is still the reserve currency. (click to enlarge) (click to enlarge) Second, the unemployment rate in Europe is really improving now, unlike the manipulated numbers in the U.S. The reason why the U.S. had such a major decline in unemployment rate is because a lot of people dropped out of the labor force (which we don’t see in Europe as more people actually have a job) and because the U.S. has seen a lot of part-time employment, especially in the low-paying service sector industry. (click to enlarge) (click to enlarge) Third, as I already suggested, the U.S. manufacturing industry is collapsing with a manufacturing PMI dropping to 52 in November 2015. All the jobs are going into the service sector. In Europe on the other hand, the manufacturing PMI is on the rise to 54. These trends tell me that GDP growth in the U.S. will decline, while GDP growth in Europe will improve. That also means that government debt to GDP will go up more in the U.S. (103%) than in Europe (92%). (click to enlarge) (click to enlarge) The trend in industrial production numbers confirms my previous statements. Year over year industrial production growth in the U.S. is flatlined at the moment, while Europe is improving. (click to enlarge) (click to enlarge) As the industry collapses in the U.S., factories need less capacity and this results in a declining capacity utilization rate to a low of 77%. In Europe on the other hand, we see a continuing improvement with capacity utilization well over 80%. (click to enlarge) (click to enlarge) Fourth, the consumer is also more confident in Europe as compared to the U.S. When we look at retail sales there is a huge discrepancy between the U.S. and Europe. In the U.S. we see a steady decline, while in Europe the retail sales are booming. Of course, a lot of these numbers depend on inflation and due to a strong decline in the euro, inflation in the Eurozone has been somewhat higher than in the U.S., boosting retail sales numbers. Nevertheless, it looks like the European consumer has more money in its pocket to spend than its U.S. counterpart. And keep in mind that the European savings rate is double (13%) that of the U.S. (6%). (click to enlarge) (click to enlarge) Conclusion: It looks obvious to me that Europe is the better deal here and investors should start looking to invest in Europe instead of the U.S. I believe the euro will be heading north soon due to improving current account surplus and industrial production. European stock markets will fare better due to higher GDP growth, manufacturing PMI, consumer sentiment and retail sales. An improving employment picture in Europe will boost the overall economy. Investors can choose out of a series of European ETFs, but the ones I recommend are the 4 largest: the WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ), the Vanguard FTSE Europe ETF (NYSEARCA: VGK ), the iShares MSCI EMU ETF (NYSEARCA: EZU ), the SPDR EURO STOXX 50 ETF (NYSEARCA: FEZ ). These ETFs are the closest in replicating the price and yield of equities in the Eurozone. Of these ETFs the highest return on equity is found in the Europe Hedged Equity Fund. The reason for this is because this ETF yields higher returns when the euro falls against the U.S. dollar, which is what we saw happening in 2014-2015. Now that the euro is going back up, the returns in this ETF will be lower. This ETF invests mainly in stocks from Germany (26%), France (24%), the Netherlands (17%), Spain (26%) and Belgium (8%). The second highest return is found in iShares MSCI EMU ETF which invests mainly in stocks from France (32%), Germany (30%), Spain (11%) and the Netherlands (9%). To a lesser extent this ETF has exposure to Belgian and Italian equities. The FTSE Europe ETF has the third highest return with interests mainly in the U.K. (29%), Switzerland (14%), Germany (14%) and France (14%). Although these are European countries, this ETF invests in global companies like Nestle ( OTCPK:NSRGY ), Roche ( OTCQX:RHHBY ), Novartis (NYSE: NVS ) and HSBC (NYSE: HSBC ). So we can’t really say that this is a pure European ETF. For more European exposure you should look at EZU and HEDJ. The last ETF is the SPDR Euro STOXX 50 ETF which has the lowest return. One of the reasons of this low return is because it has a pretty high exposure to France (37.44%) and we have seen France underperform this year, not only due to its high unemployment rate, but also due to the Paris terror attacks. Other holdings are mainly invested in Germany (30%).

My Investment Plan For 2016

Summary I’m overweight on domestic equity (non-REITs) and want to scale it down over the next year. Raising my international allocations looks attractive with policies that favor GDP growth in Europe. I have 22% in equity REITs and intend to bring that allocation higher. The most attractive equity REIT sector for me right now is the triple net lease REIT. My personal tax planning and preference for low expense ratios will push me to continue sending cash to domestic non-REIT equity. I may sell some of my domestic ETFs to offset that allocation. With 2015 nearing a close, I’m looking over my holdings and asking myself what I want my portfolio to look like for the next year. Followers will now I’m primarily a buy and hold investor. I will occasionally sell of shares to make an adjustment to the weights in my portfolio or to harvest a tax loss after a terrible investing decision, but for the most part my investing philosophy is to focus on buying quality and diversification at a reasonable price and then planning to hold that position for decades. I’ll make an exception when it comes to mREITs because there are market failures that indicate very clear opportunities to exit or opportunities to make a short term buy. My Portfolio Investors can see my precise allocations as of late November. For this piece I want to reference my allocation by sectors because that is a major area I expect to modify over the next year: (click to enlarge) Domestic or International? My allocations to the domestic market excluding REITs are over 50% of my portfolio value. That is too high for my taste going into 2016. With the Federal Reserve planning to raise interest rates and with the dollar having strengthened materially against the Euro, I’m expecting the growth rate of GDP in the United States to suffer and growth rates throughout Europe to pick up. Based on expectations of higher growth rates for the general economy there, I want to increase my positions in companies that perform most of their operations outside the United States. To be fair, my domestic equity allocation includes a substantial exposure to large cap multi-national companies that earn substantial revenues abroad. However, I would still like to increase the my exposure to that area. I’ll be looking at a combination of the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) and the Schwab International Equity ETF (NYSEARCA: SCHF ) to get that job done. Why those funds? Because my investments accounts are with Schwab so I get the benefit of free trading on those ETFs. That serves as the tie breaker. Without free trading on those ETFs I would find Vanguard’s funds for that allocation to be very comparable. Those two funds currently combine to be just 1.44% of my portfolio. I’d really like to increase that over the next year. The small-cap companies are particularly interesting to me because I expect them to have more localized exposure to their markets and to see a larger boost in sales. If we were to look at the financial statements of those companies in USD (United States Dollars) the stronger dollar would make their earnings and dividends look weaker. On the other hand, strength in exports should mean more economic activity including more people being hired which should cut down on unemployment. The values should look weaker in the short term, but I would expect better growth over the next several years. Therefore, I think there may be enough short term weakness to get my positions established without having to sell off any current investments to fund it. I’d rather fund the acquisitions by earning more money and sending it to my brokerage account. Equity REITs I work hard to get my assets into tax advantaged accounts. By making that a major part of my investing philosophy, I’m able to hold higher exposure to REITs without concerns about tax implications. While the Federal Reserve is aiming to increase short term rates, I don’t think they’ll be successful in raising rates as quickly as they would like to raise them. If the rates remain low the equity REITs should provide solid value to the portfolio from a combination of dividends and growth in dividends. Share prices may not move perfectly with the dividend growth, but with a holding period measured in decades, I’m just going to treat any low prices as sale prices. While I do a substantial portion of my investing with ETFs, I may be adding a couple individual names here. I started doing some research on Realty Income Corporation (NYSE: O ) a while ago and found the structure of their business was excellent. After that I took a quick look at National Retail Properties (NYSE: NNN ) and found their operations were also exceptional. I see the triple net lease REIT space as being very attractive because of the structural benefits it offers. The way leases are handled in the triple net lease system results in a better alignment of interests because it makes the tenant responsible for most costs. This is a win/win situation for the REIT and the tenant because it allows the property to be held in a more efficient format. However the REIT and the tenant split up the savings created by financing the property through the triple net lease REIT, it is still possible for both sides to profit from the deal. Looking at the combination of dividend yield and growth and AFFO (adjusted funds from operations) yield and growth makes me feel pretty comfortable with either of those REITs. I recently transferred more cash into my brokerage account and I’m looking to open a position in a triple net lease REIT. I’ll probably end up with shares in both of these triple net lease REITs, though I’ll be looking at a couple other options in the sector as well. The timing on my entry will largely be a function of price. Overweight on mREITs I’m already quite overweight on mREITs. I might still make a few short term plays in the sector and I’ve got my holdings set to reinvest dividends, but I don’t expect to be adding more long term positions in the space. I think 10% allocation is fairly heavy so 20% is definitely more than enough. Adding More Domestic Than I Want Remember how I said it was a big priority for me to focus on tax advantaged accounts? My wife’s retirement plan through her employer has very limited choices. After researching the funds available I found precisely one fund that I liked as a long term investment due to intelligent diversification and low costs. Unfortunately, the fund is purely domestic large capitalization. Since I aim to shove as much money as possible into tax advantaged accounts each year, I pick the lowest fee allocation with an intelligent exposure and then build around that using my other accounts. Fortunately, using a solo 401k I have a great deal of flexibility in my holdings. The most likely candidates for sales would be shares in the Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ) or the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) since these holdings are in accounts where I have full control. Conclusion Over the next year I want to increase my allocations to equity REITs and international ETFs. I’ll try to do it by adding new cash to the portfolio to keep buying, but I may need to liquidate some of my domestic allocations within my accounts to accommodate for buying more through my wife’s retirement accounts. I see the Federal Reserve policies offering Europe a path to higher GDP growth and lower unemployment, but I don’t see enough large rate increases in the near future to push me away from wanting to buy the triple net lease REIT sector.