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Where To Invest In 2015 In Asian Emerging Markets

We are at crossroads of diverging monetary policies. GRI’s analyst Tanya Rawat breaks down what this means for investment in emerging markets (EM) in Asia. The U.S. gets ready to tighten policy rates whereas the Eurozone and Japan have adopted easing measures to invigorate economies at a risk of falling into a disinflationary cycle if not deflationary. Taking account of this paradigm shift, the lure of high carry, which some of the high yielding Asian currencies offer will no longer suffice, especially if U.S. Treasury yields were to rise quickly as well. The differentiating factor then in choosing the right investment destination in emerging market (EM) Asia will be domestic stability, external fundamental factors viz. current account balances, FX reserves, percentage of short-term liabilities backed by these reserves, robustness of FX policy and the credibility of the central banks. We use a rather simple scorecard methodology to choose probable winner and losers: (click to enlarge) Korea is the only the country with a positive fiscal balance and as a function of it, the lowest gross public sector debt. Add to this the layer of currency sensitivity to rising US interest rates, in 2014, the Korean Won performed the best with high core balance (current account balance + net FDI, both as a % of GDP), low real interest rates, REER undervaluation when compared to historical levels, a low leverage economy, high fiscal balance (% GDP), low gross public sector debt (% GDP) i.e. less susceptible to inflation and lastly sufficient FX cover. However, it does remain receptive to competitiveness from a weaker Yen and China’s growth uncertainty (largest export partners are China and the U.S.). Taiwan has the highest current account surplus, large FX Reserves and the highest import cover in the EM Asia universe. This makes it extremely robust to external shocks and there still remains room for inflation to catch up with the rest of the countries. While Malaysia scores well, investors should be sceptical as external FX vulnerability (exposure to changes in US rates) remains its Achilles’ heel and the country is also highly leveraged (household debt 86% of GDP). The Central bank has been sluggish in raising interest rates to curb this activity; the first hike of 25 bps since 2011 took place in the latter of 2014. Malaysia is a net oil exporter and thus remains to benefit the least from lower oil prices. Indonesia with the lowest current account balances (% GDP), import cover and highest short-term external debt (% of FX reserves), also remains quite vulnerable to US rate hikes. Also, it is one of only two countries on the planet with twin deficits; the other being India. However, the fiscal balance looks set to improve as the government stands to save highly due to elimination of fuel subsidy supported by lower oil prices, which now renders the current price cheaper than the subsidized rates. While India is neutral due to low core balance, low import cover and short-term external debt cover, it is positive that falling oil renders an improving current account balance, government savings on energy subsidies and ‘Modinomics’ that ensures momentum in economic reforms. Currently, all three rating agencies have India on a ‘Stable’ rating. Apart from offering the highest carry, inflation is trending lower as commodity prices continue to fall (CPI has a high sensitivity to energy prices) and monetary policy remains robust and supportive. Also, the Indian Central bank is keen to shift to inflation targeting from 2016 onwards (4% with deviation +/-2%). Thus far it has been enhancing credibility, largely by following prudent FX policy – absorbing portfolio inflows when they are strong and selling dollars when sentiment weakens. Reforms in the food market, rising investment in agriculture and a boost to rural productivity are necessary steps in the flight against persistently high inflation in India. Philippines and Thailand both have one of the lowest FX reserves in the world and food constitutes a high percentage of their CPI. Additionally, they do not fare well compared to other regions due to rising leverage and/or fiscal deficit, high portfolio liabilities and weaker core balances. Finally, while China offers the highest GDP growth (y-o-y) and has the largest FX reserves, it has one of the lowest current account balances (% GDP). Although signs of a fundamental slowdown in the economy became evident last year, the market was still one of the best performers in the world. This disconnect is worrying as the rapid increase in momentum came close in the heels of the opening the Chinese market to international investors via Stock-Connect. Recently, stimulus ‘steps’ are a case in point that the government is aware of this slowdown and is taking appropriate steps to alleviate the same. Investors should be skeptical of the China story simply on the basis that this time the stock market is lagging economic indicators, which maybe seen acting as a precedent to a deeper fundamental problem. Spending by the government may turn China into only the third region in the EM Asia universe with a twin deficit. (click to enlarge) (click to enlarge) 1-year (2013-14) performance of Asian EM currencies. Spot returns were trivial, while yield chasing was the norm given the rather benign carry environment. On such a playing field, the Indian Rupee was the prime victor (1M NDF Implied Yields). (Source: Bloomberg) (click to enlarge) With lower oil prices, Thailand, Indonesia, Taiwan and India standing to be relative gainers with Malaysia standing to lose as it is the only net exporter. (click to enlarge) Sensitivity of headline CPI changes to changes in energy costs. (click to enlarge) Even if the pass-through to consumer inflation is muted (as corporations will prefer to remain sluggish in lowering oil prices to maintain profitability), governments will eventually save on subsidies.

A Low-Tech Index Offering Exposure To The High-Tech Sector

By Robert Goldsborough Investors craving a big helping of large-cap growth stocks with a strong tilt toward the technology sector can consider PowerShares QQQ ETF (NASDAQ: QQQ ) . A perennial favorite among U.S. large-cap growth investors, QQQ is the sixth most actively traded U.S. exchange-traded fund and has the sixth-most assets of any U.S. ETF. QQQ also offers exposure to leading Nasdaq-listed consumer discretionary firms (18% of assets) and biotech firms (15% of assets) and tracks the cap-weighted Nasdaq-100 Index, which includes the 100 largest nonfinancial stocks in the Nasdaq Composite Index. Given its narrow sector focus, this ETF would work best as a satellite holding in a diversified portfolio. This is a high-quality portfolio with a mega-cap tilt, with more than 87% of assets invested in large-cap companies and more than 93% of assets invested in companies with Morningstar Economic Moat Ratings, those that Morningstar’s equity analysts deem as having sustainable competitive advantages. However, given this fund’s sector tilts, it is more volatile than a broad portfolio of large-cap stocks. For example, over the past 10 years, it has had a volatility of return of 18.0% compared with 14.6% for the S&P 500. When considering whether to invest, investors should take note of the fact that stocks in this fund make up almost the entire 20% tech component of the S&P 500. Despite the relatively low overlap, QQQ has a high correlation in performance with the S&P 500 (90% over the past 10 years) and an even higher correlation with the large technology ETF Technology Select Sector SPDR (NYSEARCA: XLK ) (98% over the past 10 years). Fundamental View The U.S. technology sector dominates QQQ and accounts for fully 58% of its assets, and large-cap tech firms’ performance determines its fortunes. The single largest dynamic affecting the tech sector right now is the shift to mobile computing and growth in cloud computing. Mobile and cloud computing are truly disruptive forces in the tech sector. As users shift to mobile devices, PC sales continue to fall. Global PC shipments dropped by 10% in 2013 and were flat to slightly down in 2014, with developed markets stabilizing but emerging markets seeing declines, as users shift to tablets. Despite sluggishness in PC sales, the total number of devices sold is expected to rise meaningfully in the years to come, as consumers and businesses adapt to smartphones and tablets. Our analysts project that some 2.6 billion-plus computing devices will ship in 2017–more than twice the total number of devices that shipped in 2012. Across the tech sector, firms are reshaping their portfolios for this ongoing transition. Microsoft (NASDAQ: MSFT ) in 2013 acquired Nokia’s (NYSE: NOK ) handset business and has developed the Windows Phone operating system, while Intel (NASDAQ: INTC ) has invested heavily in producing microprocessors optimized for mobile devices. Apple (NASDAQ: AAPL ) leads the marketplace with its iPhone and iPad, continually gaining share from struggling competitors. And Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) long has had a dominant position in Internet search and has aggressively invested in its Android operating system for smartphones and tablets, providing it free of any license fees. Having Google software on the device helps to ensure that when users search, they use Google. Enterprise hardware suppliers also are reshaping their businesses. Broadly, we are confident in tech firms’ positioning for growth in the medium term. Tech firms generally are procyclical in their performance, and with continued economic strength, tech firms generally should do well. The Gartner Group estimates that tech spending grew 3.2% in 2014, measured in constant currency, to $3.8 trillion and forecasts a growth rate of 3.2% in 2015. As large tech firms manage and reshape their businesses to adapt to secular declines in PC demand, we expect that they will continue to find ways to benefit from smartphone and tablet growth. To be sure, not all technology players will win in a world dominated by mobile computing and cloud computing. For instance, we view cloud computing as a moderate threat to all IT infrastructure suppliers, as cloud service providers are technically savvy customers. So as enterprises migrate their infrastructure to these service providers, infrastructure suppliers’ pricing power likely will decrease. Apple makes up 13% of the assets of QQQ and is far and away this ETF’s largest holding. Apple surged in 2014 after a turbulent 2013. The company benefited from strong earnings reports and guidance that beat expectations, driven by solid iPhone unit sales in both developed markets and in China. Although iPad sales have continued to lag, investors have been enthused by the launches of two larger-screen iPhones, Apple Pay, and Apple Watch and what it means for Apple’s continued ability to innovate. We expect Apple to remain a leader in the premium smartphone and tablet markets for years to come. Portfolio Construction Known as the Cubes or the Qubes, this ETF tracks the Nasdaq-100 Index, which was created in 1985 to represent the Nasdaq Composite Index’s 100 largest nonfinancial stocks by market capitalization. The top 10 holdings account for a significant 47% of the portfolio. While Apple has a narrow moat, this ETF’s next-largest eight holdings all have wide moats. The average market cap of this fund’s holdings is about $96.6 billion. The Nasdaq-100 index rebalances once a year, although it has on occasion conducted special index rebalances in order to prevent any one company from having an outsize impact on the index (the index caps any one company’s weighting at 24%). The last special index rebalance took place in 2011 and was driven by the continued overweighting of Apple. Fees This ETF is relatively inexpensive, with an annual expense ratio of 0.20%. Its estimated holding cost is slightly higher, at 0.25%. Estimated holding costs are primarily composed of the expense ratio but also include transaction costs, sampling error, and share-lending revenue. One alternative is Fidelity Nasdaq Composite (NASDAQ: ONEQ ) , which tracks the broader Nasdaq Composite Index. ONEQ contains 1,920 stocks listed on the Nasdaq, making it a much broader portfolio than QQQ’s. Given its broader holdings, ONEQ is less top-heavy, with the top-10 names accounting for about 31.5% of total assets. ONEQ also includes Nasdaq-listed financial stocks, which make up about 6.5% of its portfolio. The average market cap of ONEQ’s holdings (about $31.5 billion) is considerably less than that of the holdings in the Cubes (about $97.0 billion). This can be attributed in part to ONEQ’s 17% exposure to small-cap stocks. ONEQ charges 0.21%, with an estimated holding cost of 0.12%. A cheaper and less volatile large-cap growth fund is Vanguard Growth ETF (NYSEARCA: VUG ) , which has an expense ratio of 0.09%. The performance of QQQ is highly correlated with the performance of VUG (96% over the past five years). Similarly, another large-growth option is iShares Russell 1000 Growth (NYSEARCA: IWF ) , which charges 0.20%. With just more than one third the holdings of ONEQ, IWF is more concentrated than the Fidelity offering. At the same time, it’s far more diverse than QQQ. Even so, QQQ’s performance is highly correlated with the performance of IWF (96% over the past five years). Those seeking more-concentrated exposure to tech names can consider Technology Select Sector SPDR ( XLK ) , which carries a 0.16% expense ratio and holds 71 companies, all of which are information technology and related services, software, telecommunications equipment and services, Internet, and semiconductors. A less-liquid alternative is Vanguard Information Technology ETF (NYSEARCA: VGT ) , which holds 393 companies and charges just 0.12%. Disclosure: Morningstar, Inc. licenses its indexes to institutions for a variety of reasons, including the creation of investment products and the benchmarking of existing products. When licensing indexes for the creation or benchmarking of investment products, Morningstar receives fees that are mainly based on fund assets under management. As of Sept. 30, 2012, AlphaPro Management, BlackRock Asset Management, First Asset, First Trust, Invesco, Merrill Lynch, Northern Trust, Nuveen, and Van Eck license one or more Morningstar indexes for this purpose. These investment products are not sponsored, issued, marketed, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in any investment product based on or benchmarked against a Morningstar index.

Why Dave Ramsey Is Wrong

There is no denying that Dave Ramsey has done a commendable job of bringing back our grandparents’ financial values into popular culture. Many Americans have been poor stewards of their finances and have been saddled with avoidable debt. Ramsey’s advice has helped thousands get back on the right financial track. Even at my own company, we use the debt snowball of Financial Peace University to help right the finances of our pro-bono planning clients. Ramsey has become a multimillionaire by simply telling people to live within their means by creating and maintaining their household budget. Certainly, in today’s society of zero interest and only three easy payments of $19.99, this is no simple task. However, once a person overcomes modern-day financial temptation and begins investing in his or her future, Ramsey drops the ball and becomes a spokesperson for one of the most confusing industries in America, financial product sales. Ramsey recommends his followers work with brokers who are paid high commissions for investing in mutual funds. Ramsey, as popular as he is – and no one disputes that – has missed the boat on one thing – dismissing the credibility and sensibility of a fiduciary and fee-only financial advisor. That may not sound like a big deal, until you understand that picking the right financial advisor can lead to an overall stronger financial foundation for your family, your future and your state of mind. Let’s look at this a bit closer. The Fee-Only Advantage Fiduciary (your best interest) fee-only advisors take a different approach to investing. There are no selling products; fee-only advisors are not paid a commission from a product. This removes the conflict of interest that brokers carry in their relationships with their clients. This also causes the advisor to look differently at the product that he or she recommends to the client, which is why we see a much higher usage of index funds from the fee-only community. These highly diversified funds carry very low fees, because they don’t pay any advisor any commission, and historically have beat actively managed, commission mutual funds over long periods of time. A well-diversified index fund portfolio should cost no more that 0.25% a year, with most of the funds trading at no charge. Fee-only advisors are compensated as a percentage of assets they manage, by a flat monthly retainer, or bill hourly for financial planning. Each of these options are free from any conflict that the advisor gives to the client. Most fee-only firms also include financial planning in their asset management fees. A financial plan sets how the portfolio should be allocated. Proper asset allocation is a large ingredient to successful long-term investing. A mutual mess Ramsey, on the other hand, encourages his followers to contact a broker within his referral network when they are ready to start investing. In the interest of full disclosure, his network rejected my firm telling me that being a fiduciary fee-only financial services firm we did not qualify because his network is made up of only commission brokers. Ramsey recommends that his flock work with a broker and invest in a mutual fund that has a long track record of good results vs. the S&P 500. He then adds that the investor should purchase and stay put, meaning don’t sell when the market falls, be a buy and hold investor. The broker will collect a 5% +- commission from the sale and will receive a smaller percentage on a quarterly basis, assuming the investor does not sell the fund. Additional investments into the fund, whether it is annually or monthly, will also be charged the large upfront fee. Ramsey supports this model because he believes this to be the cheapest form of investing compared to fee-based firms that would be charging 1.2% a year to give advice and provide planning services. In the 80’s and early 90’s this may have been the correct advice, but unfortunately the US brokerage business has taken a turn for the worst, in that products are not built to benefit the client, they are built to make money for the firm and the broker. A retired executive from a large brokerage company recently told me he got out because his firm no longer focused on the client, they focused on what they could get away with selling to the client. Even if Ramey’s referral network has the best intentions, history is against them. There have been very few mutual funds that actually beat the S&P 500 net of fees over long periods of time. Some get lucky over a 10 year stretch, but after 15 years the list is very short. Historically we see less than 1% of funds beat the S&P 500 (after fees) over 30 years. This might be a long time, but how long are you going to be invested? If you live to age 95 and are in your 40’s or 50’s, 30 years is not that long. Another issue is Ramsey’s buy and hold philosophy. The idea is great on the surface, but when a year like 2008 strikes many individual investors, without a good financial support system, are going to sell. If you get burnt, you first want to stop the pain (sell low) and when you go back, if at all, it will be when you feel ready (buy high). Buy and hold is the correct advice, but when you call the broker for reassurance there is always the potential of him or her selling you another fund at 5% commission to help “make you feel better,” while padding his or her pockets with more of your money. This is where a fee-only advisor earns their fee. By keeping the client focused long term, buy high and sell low tendencies can be eliminated, increasing the client’s rate of return. Ramsey also recommends that you not own bonds. He states “bonds are mistakenly believed to be safe.” While it is true – not all bonds are safe – there is a good case to be made for adding the right bonds to a portfolio to lower volatility. Bonds in a portfolio help keep you from hitting the panic button when it feels like the stock market is falling into oblivion. A fee-only advisor can help choose the right bonds for the portfolio. Ramsey also wants his followers to stay away from Exchange Traded Funds (ETFs). ETFs, if used properly are more tax efficient than any mutual fund, held outside retirement accounts, are more liquid and offer cheaper fees. There are good ETFs and bad ETFs, and I think Ramsey has thrown the baby out with the bath water with this advice. Perhaps it is because his network of advisors would not receive a commission or trailing fee if ETFs were used. What should Ramsey do? If Ramsey and his network of brokers wanted to truly work in the best interest of his radio and print flock, I propose that he endorse a network of fee-only advisors, simply being paid by the hour. These advisors would help create portfolios for the Ramsey following at a fraction of the cost of his commission advisors, all while giving unbiased investment advice. In the end, Ramsey’s math does not add up and the investor loses. Ramsey, who tweeted that he was the “big dog on the porch” in a recent tweet with fee-only advisor Carl Richards, could use his status to help make all advisors work in the best interest of their clients, as is being discussed at the SEC in 2015. Instead, he sits in the pockets or every big insurance company on Wall Street who wants to maintain the current system of taking from Main Street to pad the profits of Wall Street.