Tag Archives: europe

The New Silk Road Is A Great Opportunity For The BRIC And Asia Ex-Japan Shares

Summary BRIC and Asia countries want to develop the New Silk Road. The New Silk Road will boost international trade. BRIC and Asia companies will benefit from the existence of the New Silk Road. Every BRIC and Asia shares price reduction should be treated as an opportunity for accumulation. When 500 years ago the economy of many countries began to integrate, Eurasia became the world trade center. But in the following centuries the USA became a hegemon. Now Eurasia has a chance to change the situation significantly. The construction of the New Silk Road can help. There is a powerful force in Eurasia . This region has 75% of the global population. On its territory there are more than 70% of all energy resources and about 65% of global wealth. An alternative for controlling an entire continent is to dominate the world’s oceans. Controlling the sea trade routes allows control of international trade and movement of strategic raw materials, so Eurasia can be indirectly controlled. This was a British Empire strategy in the 19th century – whoever control the sea routes, controlled Eurasia also. In the 20th century, control of the oceans has passed into the hands of the United States. Just as the British, the Americans control Eurasia with the help of numerous military bases . Americans have more military bases than all other countries put together. Where in the world is the U.S. Military? (August 2015) (click to enlarge) Lily pads – small security locations Source: Politico China and Russia show the largest disapproval against the US hegemony. Unable to resist the sea power of the United States, these countries are trying to neutralize it. Russia and China are trying to transform Eurasia in such way, which allows them to control trade routes but also allows to diminish the importance of the sea trade routes. (click to enlarge) Source: World Shipping Council Reducing the role of the sea trade is of great importance in terms of geopolitics. The transformation with which we now have to deal with on the Eurasia continent is one of the major changes on the international scene since the end of World War II. Reintegration of Asia and Europe – known most recently as the “New Silk Road” – is what the United States fear most. Silk Road existed in the past. It was a trade route which connected China with Europe . It was more than 6,500 km length. The Old Silk Road Source: Perceptions The New Silk Road is supposed to be a network of high-speed railways, modern highways, airports, seaports, energy networks and infrastructure. If everything will go according to the plan, the train from London will reach Beijing in just two days in 2025 ! The New Silk Road (click to enlarge) Source: Xinhua New Silk Road is the largest infrastructure investment in history. The combination of Europe and Asia overland trade routes will give Eurasia the independence from the United States. Reactivation of the Silk Road was announced in 2013 by the Chinese president Xi Jinping. Officially, the project was not, of course, a counterweight to the US sea hegemony. The project was presented as the axis of cooperation between the countries of Europe and Asia. The Chinese are incredibly effective and consistent, they have access to appropriate technology and they have huge financial resources and political will to implement such an ambitious project. The New Silk Road project is officially in the initial stage. Implementation of the first stage has already begun. The train run from Yiwu (China) to Madrid (Spain) took four months at the turn of 2014 and 2015. An ambitious project of the New Silk Road is just one of the elements that integrate the economy of Eurasia. In the past three years we saw the establishment of the Asian Infrastructure Investment Bank (AIIB), New Development Bank (NDB), Eurasian Economic Union (EEU). There are also ongoing works at SWIFT-alternative payment system . Summary China, Russia and other BRIC and Asia countries know that they must act together in order to counter the military and economic power of the United States. The development of the New Silk Road will create new conditions for trade. The projects are incredibly ambitious, but the Chinese are very effective in the implementation of the economic assumptions. In just three years, their local currency was made the fifth most commonly used trading currency in the world. The Chinese established juan-denominated crude derivatives contract just few weeks ago. However, it is not certain that the New Silk Road will emerge. Chinese projects will encounter the powerful resistance from the US administration and its allies. The United States – as a real hegemon – will do everything it can to maintain a dominant position. In addition, the creation of a New Silk Road may be hampered by the imperial Russian impulse under the leadership of W. Putin. For example, the extension of the conflict in the east of Ukraine on the whole CEE region will certainly hamper the implementation of the New Silk Road project. How to invest in the development of a New Silk Road Assuming, however, that all will go well, and the new Silk Road will be built in 10-20 years, you can ask the question: how should I invest to achieve gains from the emergence of this incredible infrastructure project? Of course, the creation of the New Silk Road will benefit – first and foremost – Russia, China and all countries which find themselves on the trail. The companies from countries which are now in 3rd league of world economy can grow significantly. So it seems that every panic sale of Asian, Russian and BRIC’ shares should be used by investors to accumulate. Of course, the easiest and cheapest way to do it is investing through appropriate ETFs. Below there are lists of the cheapest and the best performing ETF funds. 5 Best Broad Asia ETFs – 3 Years Return Source: ETFdb 5 Cheapest Broad Asia ETFs Source: ETFdb BRIC ETFs 5 Year Returns Source: ETFdb BRIC ETFs Expense Ratio Source: ETFdb

IShares MSCI Poland Capped ETF: Playing The European Growth Story Without The Commodity Risk

Polish equities seem highly attractive given their exposure to the European growth story and the oil price decline with little risk from China and the commodity slowdown. Poland’s fundamentals look relatively strong with few overbearing structural issues. Trade prospects and strong competitiveness coupled with attractive long term valuations should drive stock price appreciation. Political uncertainty and economic risks have been overstated given rising lending and the ability to ease policy further. International markets, especially emerging markets, have sold off violently in recent months with the MSCI EM Index down almost 20% YTD. The selloff has been widespread, leaving investors the question of where it is most appropriate to find value and what stock markets have been unjustly discounted while also limiting exposure to the uncertain environment in China and commodities. Polish equities seem highly attractive in this context given their exposure to the European growth story and the oil price decline which are still not fully priced in. US investors seeking to invest in Poland can find exposure through the iShares MSCI Poland Capped ETF (NYSEARCA: EPOL ). Unlike a large portion of the emerging markets space, Poland’s fundamentals look relatively strong with few overbearing structural issues. Poland’s growth remains around a 3-handle, largely driven by domestic demand which also provided support during the global financial crisis. Resilient domestic demand helps shelter Poland from external shocks. Growth will likely benefit indirectly from European QE, and with the benchmark rate at 1.5%, the Polish central bank still has some ammunition to ease policy. Poland’s trade situation is likely to improve going forward given strong forward-looking fundamental in Europe and the recent slide of oil prices. According to MIT’s Observatory of Economic Complexity, Poland’s largest export destinations remain Germany, France, and the UK. German domestic demand and consumption are experiencing a cyclical upswing given a tightening labor market, QE (until September 2016), and a rise in European bank lending. In addition, an uptick in spending in the US should increase German production and incomes which could easily transfer to Poland through exports. France also benefits from some of the same cyclical forces as Germany, while the UK continues to be one of the strongest domestic demand stories in all of Europe, with potential rate hikes coming in 2016 given strong GDP growth and increasing wage inflation. Given that Poland’s primary import is crude oil which has gone through a large correction, its trade balance should continue to improve as more income stays in the pockets of exporting businesses and domestic consumers. Lower oil prices not only help bolster production in Poland but are beneficial to the Euro Area as a whole, providing more wealth by which to buy Poland’s exports. In contrast to a number of emerging markets, especially in Eastern Europe, Poland is in a strong position to take advantage of positive trade developments. According to the OECD, Poland’s real effective exchange rate adjusted for unit labor costs has declined significantly over the last few years. Price competitiveness gains are not possible for the European periphery (a strong competitor of exports to Germany) due to being part of a single currency union. Likewise, the rest of Eastern Europe and much of the emerging markets space is just now devaluing to adjust for weaker global demand. Poland’s lack of exposure to the slowdown in China and general commodity prices should also help differentiate the region from other vulnerable emerging markets. (click to enlarge) Source: Bluenomics https://www.bluenomics.com/ Paired with the strong trade prospects for Poland are attractive valuations that could play out over the short and medium term. The Shiller CAPE (valuation metric that has a strong correlation with 5-year and 10-year equity returns) for Polish equities is estimated to be around 10, setting up an attractive entry point for potential investors. This also resides in the context of low interest rates, low inflation, and growing bank lending. EPOL maintains a large exposure to financials whose equity prices directly benefit from increased lending while capital ratios remain high in Poland. EPOL provides an attractive dividend yield of 3.64% and is down 15% YTD. Risks to the outlook for Polish equities include political uncertainty, direct exposure to Russia, and a large external debt stock. Given where valuations are currently and the future trade prospects of Poland, these risks should not derail a strong recovery in Polish equities. Poland’s presidential elections earlier this year saw PiS candidate Andrzej Duda win the general election, representing a change to a more populist mindset by the Polish public. This could have important implications on upcoming parliamentary elections which are significantly more relevant for policy and the economic outlook in Poland. PiS currently leads parliamentary polls by a significant margin, suggesting a change in government and potential leftist policy shifts. According to Reuters, the composition of the Polish central bank could also change as a PiS parliamentary majority appoints less hawkish members. Despite the danger of a more populist government, PiS rhetoric has softened in recent months as the party attempts to appeal to more centrist voters. According to Bloomberg and other news outlets, PiS will likely continue to abide by the European Union’s deficit requirements of 3%. In addition, taxes on banks could be less onerous than originally thought. Given strong adequacy ratios and profitability, lending should not be affected materially especially with European QE in full swing. According to Poland’s central bank, the total capital ratio of banks in Poland is at 14.9% as of the first quarter of this year, having increased by over 6% over the previous year. This is in the context of decreasing impaired loans and stable domestic growth. Lending is also tracking GDP growth at around 3%, which suggests sufficient credit conditions for a stable economy. Some relief for domestic consumers, especially those still servicing Swiss mortgage debt, could also be in store from increased corporate taxes. Less hawkish central bank members potentially appointed by the PiS could also provide for easier monetary policy in the near-term, containing any negative lending developments. Events near the Russia-Ukraine border as well as sanctions against Russia are a continuing negative for Poland, but do not seem to be playing much of a role in depressing equity prices. Poland’s export exposure to Russia seems to be already priced in and, despite being a relatively large exposure, could be offset by positive developments with its other European trading partners. According to the Financial Times , farmers in Poland who can no longer export apples to Russia (one of Poland’s largest agricultural exports) have looked to other markets including the Middle East, Hong Kong, and India. It is difficult to see a near-term resolution to the crisis but there could be relief of sanctions on Russia with an escalation of the Syrian refugee problem. Europe may have to rely on Russian leverage in the region given that Syrian rebels have made little headway in Syria. A resolution to the crisis may involve keeping Bashar al-Assad in power and striking some kind of agreement. A removal of sanctions could lead to a removal of a Russian ban on Polish exports, further improving the trade balance. Perhaps the most serious risk to Polish equities is the large stock of external debt the country must service and the effects of Fed tightening on the ability of Polish households and companies to service that debt. Though Fed tightening may lead to an emerging market liquidity squeeze (anticipation of rate hikes has already created an environment of large capital outflows), Poland seems to be less exposed than other markets. Poland lacks many of the structural issues present in a number of emerging market economies. Domestic growth remains strong and the current account balance is only slightly negative. This is in contrast to a number of Latin American economies that are directly exposed to commodity prices and China. In addition, lending and capital adequacy ratios remain strong, lessening the effects of a liquidity shock. The central bank of Poland has stated that Swiss mortgages should only have a moderate effect on economic activity going forward if the Zloty were to depreciate (January 2015 saw the Swiss Franc appreciate 15-20% but with few negative consequences for Polish households). Meanwhile, central bank data suggests general foreign currency loans have stabilized and continue to fall year over year. Competitiveness is higher than in countries like Turkey, Russia, and Brazil where significant devaluations in exchange rates must take place. Poland is also experiencing no inflation, providing plenty of room to ease policy if downside pressures were to materialize. Not all emerging markets are created equal and Poland certainly stands out as a potential outperformer. Political and economic risks have been overemphasized as serviceability of debt and growth remain healthy. Poland is a unique way to play the European recovery and the oil price decline with attractive growth prospects at discounted valuations.

Resilient Consumer? Not During The Manufacturing Retreat And Corporate Revenue Recession

Is the 70% consumer so resilient that he/she can overcome a global slowdown, a stagnant domestic manufacturing segment and a domestic revenue recession. Six of the regional Fed surveys – New York (Empire), Philadelphia, Kansas City, Dallas, Chicago and Philly – show economic contraction in manufacturing. The expected revenue for the S&P 500 for the third quarter is headed for a third straight quarterly decline at 3.3%; the 4th quarter should show a 1.4% decline to make it four in a row. Concerned investors started punishing foreign stocks and emerging market equities in May. The primary reason? Many feared the adverse effects of declining economic growth around the globe as well as the related declines in world trade. By June, risk-averse investors began selling U.S. high yield bonds as well as U.S. small cap assets. A significant shift away from lower quality debt issuers troubled yield seekers, particularly in the energy arena. Meanwhile, the overvaluation of smaller companies in the iShares Russell 2000 ETF (NYSEARCA: IWM ) prompted tactical asset allocators to lower their risk exposure. All four of the canaries (i.e., commodities, high yield bonds, small cap U.S. stocks, foreign equities) in the investment mines had stopped singing by the time the financial markets reached July and early August. I discussed the risk-off phenomenon in August 13th’s ” The Four Canaries Have Stopped Serenading.” What had largely gone unnoticed by market watchers, however? The declines were accelerating. And in some cases, such as commodities in the PowerShares DB Commodity Index Tracking ETF (NYSEARCA: DBC ), investors were witnessing an across-the-board collapse. The cut vocal chords for the canaries notwithstanding, there have been scores of warning signs for the present downtrend in popular U.S benchmarks like the S&P 500 and Dow Jones Industrials. Key credit spreads were widening, such as those between intermediate-term treasury bonds and riskier corporate bonds in funds like the iShares Baa-Ba Rated Corporate Bond ETF (BATS: QLTB ) or the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ). Stock market internals were weakening considerably. In fact, the percentage of S&P 500 stocks in a technical uptrend had fallen below 50% and the NYSE Advance-Decline Line (A/D) had dropped below a 200-day moving average for the first time since the euro-zone’s July 2011 crisis. (See Remember July 2011? The Stock Market’s Advance-Decline Line (A/D) Remembers. ) Equally compelling, any reasonable consideration of fundamental valuation pointed to an eventual reversion to the mean; that is, when earnings or sales at corporations are rising, one might be willing to pay an extraordinary premium for growth. On the other hand, when revenue is drying up and profits per share fall flat – or when a global economy is stagnating or trending toward contraction – investors should anticipate prices to fall back toward historical norms. Indeed, this is why 10-year projections for total returns on benchmarks like the S&P 500 have been noticeably grim. Anticipating the August-September volatility – initial freefall, “dead feline bounce” and present retest of the correction lows – has been the easy part. When fundamental valuations are hitting extremes, technicals are deteriorating, sales are contracting and economic hardships are mounting, sensible risk managers reduce some of their vulnerability to loss. It is the reason for my compilation of warning indicators (prior to the downturn) in Market Top? 15 Warning Signs . Anticipating what the Federal Reserve will do next is a different story entirely. The remarkably low cost of capital as provided by central banks worldwide is what caused the investing community to dismiss ridiculous valuations and dismal market internals up until the recent correction. Now Fed chairwoman Yellen has explicitly acknowledged that the U.S. is not an island unto itself. The fact that half of the developed world in Europe, Asia, Canada, Australia are staring down recessions – the reality that many important emerging market nations are already there – has not slipped by members of the Federal Reserve Open Market Committee (FOMC). Unfortunately, the Fed’s problem with respect to raising or not raising borrowing costs does not end with economic weakness abroad. With 0.3% year-over-year inflation in July, the Fed’s 2% inflation target has been pushed off until 2018. With 0.2% year over year wage growth (or lack thereof), the Fed’s hope that consumer spending can save the day looks like wishful thinking. For that matter, as I demonstrated in 13 Economic Charts That Wall Street Doesn’t Want You To See , consumer spending has dropped on a year-over-year basis for 4 consecutive months as well as six of the last eight. Perhaps ironically, I continue to receive messages and notes from those who insist that the U.S. consumer is in fine shape. Even if he/she is stumbling around at the moment, he/she is consistently resilient, they’ve argued. I would counter that three-and-a-half decades of U.S. consumer resilience is directly related to lower and lower borrowing costs. Without the almighty 10-year yield moving lower and lower, families that have been hampered by declining median household income depend entirely on lower interest rates for their future well-being. Even with lower rates, perma-bulls and economic apologists will tell you that housing is in great shape. With homeownership rates now back to 1967? They’ll tell you that autos are in great shape. On the back of subprime auto loans with auto assemblies at a four-and-a-half year low? Wealthy people and foreign buyers have bought second properties, which have priced out first-time homebuyers. More renters than ever have seen their discretionary income slide alongside rocketing rents. And the only thing we’re going to hang our U.S. hat on is unqualified borrowers who cannot get into a house, but can get into a Jetta? (Yes, I intended the Volkswagen reference.) I am little stunned when I see people ignoring year-over-year declines in retail sales as well as the lowest consumer confidence readings in a year to proclaim that “everything is awesome.” If everything were great, the U.S. economy would not have required $3.75 trillion in QE or $7.5 trillion in deficit spending since the end of the recession. The Fed would not have needed 6-months to prepare investors for tapering of QE3 and another 10 months to end it; they would not have needed yet another year to get to the point where they’re still not comfortable with a token quarter point hike. The U.S. consumer requires ultra-low rates to get by, and that’s a sad reality with multi-faceted consequences. In my mind, it gets worse. Those who commonly fall back on the notion that 70% of the economy is driven by consumer activity seem to ignore the other 30% entirely. Manufacturing is falling apart. Year-over-year durable goods new orders? Down for seven consecutive months. Worse yet, six of the regional Fed surveys – New York (Empire), Philadelphia, Kansas City, Dallas, Chicago and Philly – show economic contraction in manufacturing. Does the 30% of our economy that represents the beleaguered manufacturing segment no longer matter? Is the 70% consumer so resilient that he/she can overcome a global slowdown, a stagnant domestic manufacturing segment and a domestic revenue recession? Investors who do not want to pay attention to the technical, fundamental or macro-economic warning signs may wish to pay attention the micro-economic, corporate sales erosion. As Peter Griffin of the Family Guy Sitcom might say, “Oh, did you not hear the word?” Simply stated, the expected revenue for the S&P 500 for the third quarter is headed for a third straight quarterly decline at 3.3%; the 4th quarter should show a 1.4% decline to make it four in a row. The Dow Industrials? They’ve experienced lower sales for even more consecutive quarters. Beware, perma-bulls would like to blame this all on the energy sector. Should we then ignore the ongoing declines in industrials, materials, utilities, info tech ex Apple? If we strip out energy, do we get to strip out the over-sized contribution of revenue gains by the health care sector? There’s an old saying that goes, “You can’t making chicken salad out of chicken caca.” Here’s the bottom line. Moderate growth/income investors who have been emulating my tactical asset allocation at Pacific Park Financial, Inc., understand why we will continue to maintain our lower risk profile of 50% equity (mostly large-cap domestic), 25% bond (mostly investment grade) and 25% cash/cash equivalents. We are leaving in place the lower-than-typical profile for moderates that we put in place during the June-July period. When market internals improve alongside fundamentals, we would look to return to the target allocation for moderate growth/income of 65%-70% stock (e.g., large, small, foreign, domestic) and 30% income (e.g., investment grade, high yield, short, long, etc.). For now, though, we are comfortable with lower risk equity holdings. Some of those holdings include the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ), the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) , the iShares Russell Mid-Cap Value ETF (NYSEARCA: IWS ) and the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ).