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4 Country ETFs To Gain From Weak Commodity Prices
Commodities across the board, ranging from natural resources to metals, are trapped in a vicious trading circle this year and see no sign of respite. This is especially true, as the Bloomberg Commodity Index has plunged nearly 13% in the year-to-date time frame. This is especially true in the backdrop of a strong dollar, global growth concerns, global supply glut and waning demand that have dampened the appeal for the commodities. Notably, a rising U.S. currency makes dollar-denominated assets more expensive for foreign investors. In particular, a persistent slowdown in the world’s largest buyer of raw materials – China – and the turmoil in the Chinese stocks have been the major culprits. To add to the woes, the latest disappointing trade data and China’s surprise move to devalue its currency, the yuan, has raised concerns over the health of the world’s second-largest economy. This suggests that demand for basic industrial commodity inputs will remain weak. Sluggish growth in the Eurozone and a possible U.S. interest rates hike are also taking a toll on the commodities market with an extreme bearish outlook on a number of commodities like natural gas, oil, coffee, sugar, wheat, corn, platinum, nickel, gold, aluminum, silver and copper. While low commodity prices are threatening a number of commodity producers and key producing countries, they are a boon to the raw material intensive nations. This is because persistent weakness in commodities has made raw materials extremely cheap for the countries that import them. It will lead to expansion in balance of payments, increase output and reduce inflation in these countries, thereby leading to a surge in overall economic growth. As a result, commodities importing countries are expected to outperform as long as the commodities slump. In fact, some nations have seen this phenomenon take place while many are yet to see the positive impact of lower prices due to their slumping currencies. With the advent of ETFs, these nations are easier to play than ever. In light of this, we have highlighted four country ETFs that could enjoy smooth trading in the months ahead should commodity prices remain weak or fall further. Investors should note that these funds have a favorable Zacks ETF Rank of 2 (Buy) or 3 (Hold). iShares MSCI India ETF (BATS: INDA ) Falling commodity prices would benefit India, which is a net commodity importer, and provide a boost to national income. While crude oil accounts for one-third of the total imports, industrial metals, coal and precious metals also make up for a large part of imports. Given this, Indian ETFs could see smooth trading in the coming months and INDA could be one of the intriguing picks to play the surge. It follows the MSCI India Total Return Index and charges 68 bps in fees per year from investors. Holding 71 stocks in its basket, the fund is highly concentrated on the top two firms – Infosys (NYSE: INFY ) and Housing Development Finance Corp. (NYSE: HDB ) – that together make up for 20% of total assets. Other firms hold no more than 6.29% share. Further, the product is slightly tilted towards the information technology sector at 21.5% while financials, consumer staples, healthcare and energy round off the top five. The ETF has amassed over $3.9 billion and trades in volume of nearly 2 million shares a day. INDA is up 2.5% in the year-to-date time frame and has a Zacks ETF Rank of 2. iShares MSCI Italy Capped ETF (NYSEARCA: EWI ) Italy imports about 17% of oil, and 10% of minerals and non-ferrous metals. In addition, it also imports food products and beverages from its trading partners. The best way to invest in Italy is through EWI, a product that has nearly $1.1 billion in assets. The fund tracks the MSCI Italy 25-50 index, holding 26 stocks in its basket. It is heavily concentrated on the top two firms, Intesa Sanpaolo ( OTCPK:ISNPY ) and Eni (NYSE: E ), with a combined 23% share while other securities hold less than 8% of total assets. Further, about 42% of the fund’s portfolio is allotted to financials from a sector look while utilities, energy, industrials and consumer discretionary round off the top five with double-digit exposure each. The fund trades in heavy volume of more than 2.2 million shares a day on average and charges 48 bps in annual fees. It has returned about 17.1% so far this year and has a Zacks ETF Rank of 2. iShares MSCI Netherlands ETF (NYSEARCA: EWN ) The Netherlands is also a big net importer of oil, which accounts for 29% of total imports. Iron, steel and aluminum also make up for nearly 5% of imports. The most popular way to target the Dutch economy is with EWN, which tracks the MSCI Netherlands Investable Market Index. In total, the fund holds 50 stocks in its basket with the largest allocation to the top two firms – Unilever (NYSE: UN ) and ING Groep (NYSE: ING ) – that together make up for 33.7% of assets. Other firms hold no more than 8.55% share. Consumer staples and financials actually take the top two spots in the basket with 30% and 22.7% share, respectively, while industrial and information technology also account for double-digit exposure each. The product is rich as it has accumulated over $208.7 million in AUM and sees average daily volume of nearly 2.3 million shares. Expense ratio came in at 0.48%. The fund has gained 10.7% so far this year and has a Zacks ETF Rank of 2. iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ) Last but not the least, South Korea is the major beneficiary of lower commodity prices, which in turn would boost investments and consumption. While oil forms a hefty 23% of total imports, natural gas, coal, steel and iron ore also account for a decent part of imports. Investors could focus on this economy (Asia’s fourth largest) through the proxy $3.6-billion EWY, which is the most popular and liquid option to track the country’s equity space. The ETF follows the MSCI Korea 25/50 index, holding 109 stocks in its basket. Samsung ( OTC:SSNLF ) dominates the fund’s return at nearly 20% while other firms hold less than 3.7% of assets. From a sector look, information technology accounts for nearly one-third share while consumer discretionary, financials and industrials round off the next three spots with double-digit allocation each. The fund trades in average daily volume of 2.5 million shares and charges 62 bps in annual fees. It has lost 13.3% in the year-to-date time frame, as a decline in the South Korean currency more than offset the lower commodity prices. EWY has a Zacks ETF Rank of 3. Original Post
India Emerges As An Attractive Option As Lower Chinese PMI And Steel Output Support The Bears
Summary Continued weakness in China makes India an attractive investment destination for investors looking to allocate funds to their emerging market portfolio. The benchmark Shanghai Composite index was absolutely crushed on Monday, falling 8.48%, or 345 points. The decline was the largest in percentage terms since February 2007. Besides, the recent number for the Chinese preliminary Purchasing Managers’ Index (PMI) in July surprised many on the downside, as it stood at 48.2 versus the Bloomberg consensus estimates (49.4). The World Steel Association posted a 1.3% decline in Chinese crude steel output for H1 FY15. The global economy is at a greater risk from the slowing China. As a counter move, investors may find the Indian stock market more attractive and a less volatile option. The recent number for the Chinese preliminary Purchasing Managers’ Index (PMI) surprised on the downside and stood at 48.2 vs. the Bloomberg consensus estimates of 49.4. The PMI from Caixin Media and Markit Economics indicates a contraction below the value of 50. Growth concerns spurred by the low PMI number also find support in a lower crude steel output. In its latest release on 22 July, the WorldSteel Association posted a 1.3% decline in Chinese crude steel output for H1 FY15. WorldSteel represents approximately 170 steel producers (including 9 of the world’s 10 largest steel companies), national and regional steel industry associations, and steel research institutes. China continues to see lower steel output due to a slump in the housing market, persisting credit crunch and weak infrastructure investments. This negatively impacts the steel demand in the region that accounts for 50% of global steel consumption. It is being argued by the market participants that the Chinese Steel Industry may have peaked in 2014 and now the days of record high steel consumption are over. This is also a result of the fact that China has been trying to move from an investment lead to a consumer driven economy. The recent stock crash may have greater negative implications than perceived by the market We argued in our recent post ” China’s moves to counter its stock market freefall riskier than perceived ” that the recent stock crash on July 8 and the ensuing reaction by the authorities may have greater negative implications than perceived by the market. The concerns are being shared by the government, corporates and investors alike. The Chinese stock markets had recovered about 15% from their early July debacle, before the Shanghai Composite Index experienced its biggest one-day drop since 2007. It lost a further 8.5% on July 27th. This is being attributed largely to the drastic steps the officials took from halting trading of more than 1,400 companies, to banning major shareholders from selling stakes, to restricting short selling and to suspending IPOs. The limited stock price recovery since 8 July followed by the biggest drop of the index in the last 8 years, the weak PMI and the steel data indicates the precarious situation that China finds itself in. The international investors have found India as an attractive option On the other hand, a direct beneficiary of the Chinese stock rout has been the Indian stock market . International investors are pulling out of China and have found India as an attractive option. The Shanghai-Hong Kong exchange saw record outflows amidst the $2.8 trillion plunge in the same mainland equity values since June 12th. According to Bloomberg, the international investors have ploughed $705 million in India over the same period, resulting in a world-beating 7% gain in the benchmark S&P BSE Sensex index . Slowing China, which was the driver of the previous commodity super-cycle, has also had a direct impact on commodity prices that are on a downward trend. Lower commodity prices have not only helped the Indian government in tackling the Balance of Payments situation, but also reduced the raw material cost for Indian organizations. The global economy is at a greater risk from the Orient than from the “new” sick man of Europe The impact of the Chinese wealth erosion may have much larger global implications. Majority of participants in China’s local equity markets are retail investors. If the free fall worsens, a significant drop in their portfolio asset values could trigger a widespread economic crisis that could impact consumption, imports and eventually investments. The global economy, it seems, could be at a greater risk from the ‘Orient’ than from the unfolding ‘ Greek tragedy ‘. Investors, watch out for India’s economic growth Investors may find the Indian stock market more attractive and a less volatile option. India, as a net importer of goods and exporter of services, benefits from falling commodity prices. Weakness in China makes India an attractive investment destination for investors looking to allocate funds to their emerging market portfolio. Moreover, recent domestic buying in India indicates continued hopes in the strength in the growth story as the majority government strives to reform various sectors, though at a slower than expected pace. Investors could use the current weakness in earnings to hunt for value in Indian stocks. In terms of positioning, the banking and industrials sectors have been punished due to high NPAs and a slow pickup in the investment cycle, respectively. We could see a re-rating there towards year-end. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I have co-written this article with Himanshu Yadav Assistant Manager – Investment Research at Aranca