Tag Archives: economy

Why Brazil ETFs Are Gaining Despite Economic And Political Risks?

The Brazil stock market has been one of the best performers this month with the benchmark Ibovespa gaining 16% as of March 24, 2016. Several Brazilian ETFs – Shares MSCI Brazil Capped (NYSEARCA: EWZ ), Market Vectors Brazil Small-Cap ETF (NYSEARCA: BRF ), iShares MSCI Brazil Small-Cap (NYSEARCA: EWZS ) and Global X Brazil Mid Cap ETF (NYSEARCA: BRAZ ) – have jumped 28.3%, 20.3%, 24.7% and 19%, respectively, in the last 30 days (as of March 24) (read: Catch these Brazil ETFs on a Rebound ). The rally came on the back of speculations regarding a change in government. Brazil has been witnessing a highly charged political drama since the beginning of this month when speculations that President Dilma Rousseff will be impeached were afoot. Even her major coalition partner, the Party of the Brazilian Democratic Movement (PMDB), is working on policies including welfare cuts if the Rousseff government is toppled and it comes to power. Meanwhile, the Brazilian Bar Association has filed a new request for impeachment proceedings to Congress. Rousseff is under political pressure regarding one of the largest corruption controversies in Brazil. The bribery scandal surrounding Brazil’s national petroleum company Petrobras continues to involve several of the country’s politicians. Investors in favor of a change in government believe that new leadership could be in a better position to revive the battered economy. Apart from that, markets were also buoyed by potential rate cuts by Brazil’s central bank. Although in its meeting earlier in March, the central bank kept the benchmark rate at 14.25%, several analysts believe that it might consider lowering interest rates later in the year. A rate cut could help boost consumer and corporate spending. Once the star performer of BRIC and emerging markets, Brazil is currently in shambles thanks to the economic slowdown and an endless streak of corruption scandals. A new government could infuse a fresh lease of life into the ailing economy which otherwise is expected to contract for the second straight year in 2016. After shrinking 3.9% in 2015, the economy is expected to contract by 3.5% this year. Other worrying factors include an increasing unemployment rate, rising inflation and the currency losing its value. Although it is questionable how long the rally will continue, a new government might revive the moribund economy. So, investors looking to tap into this market could consider the following ETFs in the days to come. EWZ in Focus This product tracks the MSCI Brazil 25/50 Index and is the largest and most popular ETF in the space with AUM of over $2.6 billion and average daily volume of more than 20.6 million shares. It charges 64 bps in fees per year from investors. Holding 61 stocks in its basket, the fund is highly concentrated in its top two holdings with one-fifth of the portfolio invested in them. In terms of industrial exposure, financials dominates the fund’s return at 35.5%, followed by consumer staples (19.8%), energy (10.3%) and materials (9.6%) (read: Fragile Five ETFs Not At All Fragile This Year? ). BRF in Focus This fund provides exposure to the small cap equities of the Brazilian market and tracks the Market Vectors Brazil Small Cap Index. The fund holds a total of 57 small cap stocks and has a total asset base of $76.9 million. The fund trades an average daily volume of 58,000 shares. The fund is well diversified with no stock holding more than 5% of weight. Among the different sectors, consumer discretionary and consumer staples occupy the top two positions with 42% of investment made in these two categories. Market Vectors Brazil Small-Cap ETF charges a fee of 60 basis points for the investment. Investors, however, should invest in small cap companies with caution as these are more volatile than their large cap counterparts. EWZS in Focus Another fund tapping the small cap companies of the Brazilian market is EWZS. The fund seeks to track the MSCI Brazil Small Cap Index. The fund has a total asset base of $19.9 million and trades in average daily volume of almost 43,000 shares. The fund holds a total of 52 stocks with none holding more than 6.5% weight. Among sectors, the fund has almost 40% of assets invested in consumer discretionary followed by industrials (16%) and financials (13.4%). The fund charges an expense ratio of 64 basis points (read: Emerging Market Crisis: 5 ETFs Down Over 30% in 2015 ). BRAZ in Focus The Brazil Mid Cap ETF has been designed to tap the mid cap market of Brazil. The fund seeks to track the Solactive Brazil Mid Cap Index. The fund, through an asset base of $3.3 million, taps 41 stocks. The fund has an average daily volume of 1,400 shares. However, BRAZ appears to be highly concentrated in the top 10 holdings with 51% of the assets invested in those securities. Among sectors, the fund has 19% invested in utilities, thereby holding the top position in terms of sector exposure. The investors pay an expense ratio of 69 basis points for the investment made in the fund. Original Post

Small-Cap Value ETFs: The Right Play Now?

The ominous clouds that have been hanging over the U.S. small-cap ETFs space since the start of the year seem to be dispersing now. The space came under pressure at the beginning of 2016 due to a raft of downbeat U.S. economic readings, weaker greenback and risk-off trade sentiments in the market (owing to global growth worries as well as oil price turmoil) and threw U.S. small-cap ETFs out of investors’ favor. However, things are turning around lately with a volley of improving U.S. economic data, be it labor market, retail and manufacturing. Though the Fed reduced its forecasts for rate hikes in 2016 from four to just two hikes, a few hawkish comments from some Fed officials revived the rate hike talks. As per these officials, the reduced rate hike projection mainly reflected the tantrums thrown by the global financial market, which are now showing signs of cooling off. The two important indicators to measure the timing of another rate hike – labor market and inflation – are both stabilizing. San Francisco Fed president even said that he would promote a hike as early as April. Meanwhile, Q4 2015 U.S. GDP was adjusted higher, from the advanced estimate of 0.7% to 1.0% in the second estimate and then finally to 1.4% in the third reading. This is the reason that small-cap stocks could arguably be better plays in today’s economy. Small caps perform better when the domestic economy is marching higher as these pint-sized stocks generate most of their revenues from the domestic market, turning out to be safer bets than their large and mid-cap cousins. As these are less exposed to foreign markets, these stocks remain less scathed by the stronger greenback. Having said this, we would like to note that uncertainties in the economy still persist. The latest data which showed that the U.S. consumer spending grew slightly in February and overall inflation moved back gave us some reasons to doubt the possibility of an April rate hike. Also, small caps normally experience higher levels of volatility. That is why investors intending to bet on small-cap ETFs may also need some amount of safety or value quotient in their portfolio. This strategy may prove fruitful for investors as the chances of the market going wild are higher next month. Analysts noted that, “during the periods when the Fed was raising interest rates, the value stocks had an average return of 1.2% a month, or 14.4% a year, versus the growth index’s 0.7% a month, or 8.3% a year.” Below we highlight three such ETFs which could be in focus in the coming days. SmallCap Dividend Fund (NYSEARCA: DES ) DES looks to track the performance of the WisdomTree SmallCap Dividend Index. The fund is one of the popular choices in the small-cap value space with about $1.17 billion in AUM. It charges 38 bps in fees. Holding more than 700 stocks in its basket, the product puts about 10% of its total assets in the top 10 holdings, suggesting low concentration risk. Sector wise, this ETF is heavy on financials (24.6%) followed by consumer discretionary (18.3%), industrials (16.5%) and utilities (10.0%). The fund has a yield of 2.94% per annum. The fund carries a Medium risk outlook along with a Zacks ETF Rank #3 (Hold). Vanguard Small-Cap Value ETF (NYSEARCA: VBR ) This fund provides exposure to the value segment of the U.S. small cap market by tracking the CRSP US Small Cap Value Index. It holds a large basket of 856 stocks, which is widely spread across individual securities as none of these has more than 0.6% of assets. In terms of sector exposure, financials dominates the portfolio at 30.4%, followed by industrials (20.2%) and consumer services (12.2%). The ETF is quite popular with AUM of more than $6.01 billion. It charges 9 bps in fees per year from investors. The fund has a dividend yield of 2.30% (as of March 28, 2016). VBR has a Zacks ETF Rank #3 with a Medium risk outlook. S&P Small Cap 600 Value Index Fund (NYSEARCA: IJS ) The fund looks to provide exposure to U.S. small-cap value stocks by tracking the S&P SmallCap 600 Value Index. The $3.23-billion fund holds a total of 453 small cap stocks. The fund appears diversified as no stock accounts for more than 1.07% of the basket. Among the different sectors, Financials, Industrials, Consumer Discretionary and IT occupy the top four positions with 21.7%, 18.9%, 16.4% and 16% of weight, respectively. The fund charges a premium of 25 basis points annually. This Zacks Rank #3 ETF yields 1.52% annually (as of March 28, 2016). Original Post

Markets Will Always Present Opportunities For The Patient Investor

There is a theory that markets perfectly process external information such that they always serve up fair valuations for a stock. I beg to differ. I have had serious reservations about the validity of the efficient market hypothesis for a long time. I believe that markets overreact to negative news that is not stock specific. I’ll provide a couple of examples where I think this is the case. Alibaba I have had my eye on Alibaba’s (NYSE: BABA ) stock for a considerable period of time. Ever since the IPO in fact, I had been looking for opportunities to own the stock. However, time and again, the company just proved itself too be too far out of my strike zone, and traded above a valuation at which I would be interested to make a purchase. I didn’t let that disturb me too greatly as I felt the next scare about China related growth or fears of a worldwide recession would bring the company back to a price that I was more comfortable buying. It’s not hard to see why I was so keen on the Alibaba business. The company benefits from strong network effects, courtesy of being the dominant e-commerce play in China. At latest count, BABA had roughly 367M buyers across its marketplaces. Taobao in particular enjoys strong brand loyalty among a younger generation of Chinese consumers. A platform with the greatest number of buyers attracts the greatest number of sellers and provides strong monetization for Alibaba. Having such a dominant platform makes it hard for competitive platforms to find a place. Others either need a clear value proposition to supersede BABA, such as better pricing, or offer services in a small niche that Alibaba doesn’t cater to. What’s interesting to note is that the Alibaba business has been on a constant upswing in recent times. Revenues have grown at a strong pace over the last five years, averaging just under 30% annually. Operating income and EPS have shown similar levels of growth over the last five years. Most recent quarterly growth has been outstanding as well, with revenue and operating income increasing 30% year on year. BABA’s growth potential remains immense. China’s e-commerce sales still only represent about 10% of total retail sales, implying that there is still a long way for digital commerce to go. Yet looking at the movements in the Alibaba stock price suggests a market that is confused by the prospects for this business. Alibaba’s stock was down 20% in 2015. In the year to date, the stock is down another 7%. However, it was a lot worse just several weeks ago when the stock was down almost 26% year to date. Alibaba’s prospects haven’t changed at all in the intervening few months. There have been no new competitive threats, no profit warnings and no stock specific bad news. Yet the stock plunged almost 25% in the year thus far on concerns over poor Chinese data, even though the underlying business is in glowing health. Even if poor economic data from China did indicate a slowing down of the economy, does that justify marking down a high quality business growing at 30% annually by almost 25%? Baidu Another victim of market irrationality was Baidu (NASDAQ: BIDU ). Baidu is the “Google of China” and controls close to 80% of the overall share of internet search in the country. This provides a natural monopoly for the business. Users are likely to continue to leverage the dominant search engine if it continues to provide them with the most relevant search results. Having the most users in turn tends to attract the largest share of advertisers willing to pay the most to advertise. The company has a great track record of long-term growth. Average annual revenue growth over the last 10 years has come in at close to 82%. Revenue growth over the last couple of years has still averaged over 40%. Yet, the stock has been hammered. It was down 17% in 2015, and down almost another 26% at various points during 2016. While the stock has significantly bounced back in the last few weeks, Baidu was another name that sold off in the absence of specific information impacting the underlying business. With the Chinese online advertising market set for steady growth over the coming decade, market hand wringing over Baidu’s prospects arguably set up an attractive share valuation for patient, long-term oriented investors. I have given examples of 2 companies that I think have compelling growth stories that should be well placed for the long term, which the market chose to mark down on no real company specific news. I’ll offer one further example of a company that I believe has been overly marked down on a company specific event. Chipotle Chipotle (NYSE: CMG ) is a relatively rare success story in the retail space, as it is one of the few businesses that has managed consistent revenue growth at close to 20% annually over the last decade. This also isn’t a case of a business with growth that has started strong and been progressively declining. The business has seen 3-year average revenue growth top 20% for each of the last few years. Chipotle’s gross margins and operating margins have been responsible for juicing earnings growth. It’s amazing that gross margins have increased from 18.5% to almost 27% in the last decade. Even more impressive is that operating margins have grown from 4% to 18.5% in that same time. However, a spate of E. coli and noro virus scares have decimated the company and the company’s stock. Chipotle’s stock plunged from close to $750 in 2015 to a low point of $400 which was reached early in 2016. That’s a fall which is just shy of 50%. This is another example of a business that I have really liked, which was trading at a valuation that I wasn’t comfortable with. However, that large share price drop was tough to ignore. Now these sorts of E. coli scares and virus epidemics are actually relatively common place in the fast food industry. A lack of hygiene amongst employees and problems in the supply chain make these incidents unavoidable. In fact, Jack In The Box (NASDAQ: JACK ) had a particularly nasty virus outbreak a number of years ago that caused the deaths of close to 10 people. Comparatively speaking, Chipotle’s problems are thankfully relatively less severe, but nonetheless, its stores are currently sparsely populated and the company’s earnings have suffered. Thankfully, consumers have relatively short memories, and they typically return back to these stores after a period of time. Lost consumer traffic takes about a year to recover, but consumers eventually return. The market seems to be pricing Chipotle on the basis that it will see severe and sustained consumer losses that will hurt long-term growth. I think a 50% reduction in business value is an overly pessimistic assessment of the business’s prospects and overstates how long a consumer’s memory is. Markets always offer up opportunities for the patient investor. The key is to be willing to wait for them.