Tag Archives: korea

Most Vulnerable Asia-Pacific ETFs On China Issues

The summer 2015 woes of China have resurfaced in winter 2016, making global stocks go ballistic. While China shook the global markets in August when its policymakers devalued the country’s currency by 2% against the greenback, the latest Chinese economic data have been extremely weak to start the new year. Activity in China’s services sector expanded at its slowest rate in 17 months in December. There was a trading halt on the key Chinese bourses, with the indexes diving 7% to start the new year. The decline was the worst single-day performance since the 8.5% decline on August 24, 2015, which was the root of the global market rout last summer. Additionally, China’s central bank guided the yuan to a five-year low in offshore trading on Wednesday, which raised expectations of further weakness in the Chinese economy and sparked off fears of a currency war among the export-centric Asian nations. Many analysts are now projecting a free fall in yuan so that the currency can reach equilibrium . As a result, hordes of global stocks have been offloaded, leading them to the most awful start to a year in 16 years. Spiraling woes in the Chinese economy and apprehensions of a currency war in the near future, especially among its Asian neighbors, led the Asian shares to suffer their largest weekly decline in over four years. Export-centric Asian economies may be now forced to depreciate their currencies to stave off competitive pressure and rev up their exports, while growth issues in China have marred investing prospects of countries with close trade ties (see all Asia-Pacific emerging ETFs here ). In any case, the Asian region has been buckling under pressure for quite some time now, thanks to bleeding capital. Apart from slowing growth, the region faces threats from the Fed tightening and its ominous impact on the Asian currencies. A continued hike in interest rates will add to the strength of the greenback, which in turn would devalue a set of Asian currencies. Moreover, a few Asia-Pacific economies are commodity-rich and tend to underperform massively in a period like this, when commodities are slouching. All these offhand occurrences clarify the recent sell-off in the Asian shares. Below, we highlight a few Asia/Asia-Pacific ETFs which are highly susceptible to issues in China. These ETFs lost massively in the last five trading sessions (as of January 8, 2016) on the Chinese market upheaval, more specifically at the start of the new year. The funds are likely to bounce back more swiftly as soon as the doldrums in China calm down (see all Asia-Pacific (Developed) ETFs here ). iShares MSCI Australia ETF (NYSEARCA: EWA ) – Down 9.6% China is one of the largest trading partners of Australia, and thus acts as a key driver in the movement of the latter’s economy. This is why Australia ETF EWA retreated 10.4% in the last five trading sessions (as of January 7, 2016). The fund has a Zacks ETF Rank #4 (Sell). iShares MSCI South Korea Capped ETF (NYSEARCA: EWY ) – Down 5.2% Korea was also left in a quandary, as Chinese currency devaluation raised concerns over general trade. There are several South Korean companies, namely Samsung Electronics ( OTC:SSNLF ), Hyundai Motor ( OTC:HYMLF ), LG Corp. ( OTC:LGEAF ) and Daewoo which have big export markets and thus pared gains. Also, the nuclear test by North Korea had an adverse impact on the South Korean securities. EWY was down 5.3% in the last five trading sessions (as of January 7, 2016). The fund has a Zacks ETF Rank #3. iShares MSCI Taiwan ETF (NYSEARCA: EWT ) – Down 7.6% Apart from South Korea, the Taiwanese economy also thrives on exports. As a result, Taiwanese companies also recorded losses on fears of losing on currency competitiveness to China. Notably, Taiwan houses one of the largest semiconductor companies in the world – Taiwan Semiconductor. In short, South Korea and Taiwan’s stock markets will be hit by yuan devaluation in a passive way. This Zacks Rank #3 ETF lost 8.3% in the last five trading sessions. iShares MSCI Singapore ETF (NYSEARCA: EWS ) – Down 4.8% Singaporean securities were under pressure lately on issues in the neighboring country China. This happened even after Singapore reported faster-than-expected expansion in the economy. EWS has a Zacks ETF Rank #3 (Hold). Original Post

Chasing Beta Outside The U.S

Summary According to famous value investor Murray Stahl, beta is out of favor. The contrarian play is to seek out beta. The Powershares S&P Intl Dev Hi Beta ETF is one way to go long beta outside the U.S. Examination of its valuation and contents show how contrarian this bet really is and whether there is value. In his latest investment commentary , famous investor Murray Stahl says investors are now en masse shunning beta in favor of stability. This influx of funds into ETFs with stable prices further helps this category to stabilize. This powers a virtuous cycle that has led to large inflows to so-called low-volatility products or low-beta products. The contrarian thing to do is to go high beta. I don’t think it is a coincidence I’m finding lots of bargains among companies with highly volatile earnings patterns. The contrarian idea can be played through ETFs very easily and one option is the PowerShares S&P Intl Dev Hi Beta ETF (NYSEARCA: IDHB ). IDHB data by YCharts What is beta? Beta shows you the level of volatility in asset prices compared to a benchmark. The baseline volatility is that of the benchmark and it is equal to 1. Assets exhibiting more volatile prices have a beta above 1 and assets with more stable pricing profiles have betas below 1. It is all about movement and it doesn’t matter in which direction it goes. Portfolio Holding high-beta stocks isn’t easy. At times it requires nerves of steel. Often they are highly levered, as leverage amplifies underlying developments for better or for worse. This particular ETF is focused on developed markets ex-U.S. and ex-South Korea and within those markets targets specifically the 200 stocks with the highest beta over the past 12 months. Generally stocks with float under $100 million or less than $50 million of annual trading volume are excluded. So how does such a portfolio look in practice? Well, its top 10 holdings are: Penn West Petroleum (NYSE: PWE ), Alibaba Health Information Technology ( OTC:ALBHF ), Canadian Oil Sands ( OTCQX:COSWF ), Meg Energy Corp. ( OTCPK:MEGEF ), Det Norske Oljeselskap ASA ( OTCPK:DETNF ), Tullow Oil PLC ( OTCPK:TUWOY ) ( OTCPK:TUWLF ), Nokian Tyres PLC ( OTCPK:NKRKY ) ( OTC:NKRKF ), Raiffeisen Bank International AG ( OTC:RAIFF ) ( OTCPK:RAIFY ), Hargreaves Lansdown PLC ( OTCPK:HRGLF ) ( OTCPK:HRGLY ) and DNO ASA ( OTCPK:DTNOF ) ( OTCPK:DTNOF ). Most of the portfolio companies have large or medium market caps. Together these categories make up 68% of the portfolio. On average, the companies have one-third the market cap of the benchmark constituents, so on this front there is a clear discrepancy between the two. It makes sense that prices of small caps are somewhat more volatile, as their earnings are more profoundly impacted by a subset of real-world events. Financial services is the largest sector taking up 24% of the portfolio. This is 9% below the benchmark weighting. The ETF allocated 21.55% of its funds to the energy space, which is double that of its benchmark. A recovery in oil would definitely not hurt this ETF’s performance. One last important sector is basic materials at 14.39%. Another sizeable bet that is different from the benchmark. From a geographic diversification perspective, the ETF disappoints because 83% of the money is bet on companies in continental Europe and another 16% on companies in the U.K. In summary, this ETF is a short cut to bet on Europe / Energy and Leverage. Sounds good, doesn’t it? Valuation The concept of overweighing Europe / Energy and Leverage does not really excite me either, but looking at the ETF from a valuation perspective, it starts to look quite a bit more attractive. It doesn’t score well on forward earnings, but beats the benchmark easily on a present price/cash flow basis. It is also much more attractive on a price/sales basis and offers a slightly higher dividend yield. PowerShares S&P Intl Dev HI Beta ETF MSCI ACWI Ex USA Value NR USD Price/Forward Earnings 14.03 12.56 Price/Book 0.86 1.13 Price/Sales 0.56 0.82 Price/Cash Flow 3.49 4.02 Dividend Yield % 4.9 4.45 Data: morningstar Expenses The ETF’s expense ratio is about 0.35%, but Invesco agreed to waive 0.10% of fees until 2016. Probably in an attempt to increase the assets under management. The expenses are modest, especially considering it invests in mostly foreign issues. Bottom line Even if the contrarian play of going long beta but the idea of going long this ETF does not it is still a useful starting point for further research. Beta is a decidedly backward-looking way of evaluating stocks. If you can dig up companies that experienced high volatility in the past twelve months but where it’s smooth sailing from here on out and buy them at low price/cash flow multiples, you are doing great even if beta stays out of favor. For the brave and lazy, this ETF can serve as an all-in buffet. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Hedge Your Emerging Market Exposure With This Low-Volatility ETF

Well diversified portfolios should have an allocation to emerging market equities even when they are not favorable. There are many ways to get exposure to emerging market equities including both active and passive funds. A low volatility emerging market ETF provides exposure to the asset class with less volatility than a traditional investment. If you’re one of those investors that time your entry into certain asset classes or positions and take big positions when you do so, good luck to you. If you’ve been successful using this strategy then congratulations, you should probably start your own hedge fund and make an additional 2% and 20% of profits from other people’s money. If you’re like the rest of us however, the better strategy is to be diversified across all asset classes, all the time, and increase or decrease allocations to each based on the outlook for each asset class relative to others. One asset class that is not getting much love these days, and for good reason, is emerging market equities. According to the MSCI Emerging Market Index, these markets include China, Korea, Taiwan, Brazil, Mexico, Russia, and India, to name a few. (Note: Korea is not included in all emerging market indexes and may also be included in several developed market indexes). According to the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) , emerging markets are down almost 17% over the last year. That would have been a painful decline in your portfolio if not well diversified with, say, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) , which had a 2.7% return over the same period. While I have been telling clients to lighten up on emerging markets, by no means did that mean to sell all their positions. In fact, we might soon be getting to the inflection point where emerging markets become a good buying opportunity. Maybe we are already there. There are many experts, economists, analysts, and pundits that would argue that it is still too soon to buy EM. To which I say, you should already have some EM, even if it’s a small allocation. If emerging markets scare you but you might kick yourself if you miss the upside that usually happens too quickly to react, I have a solution. Instead of investing in emerging markets through EEM, why not invest in the iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ). It has a beta to the S&P 500 of 0.3 and a standard deviation of 10% over the last 3 years. Compared to EEM, with a beta of 0.6 and a standard deviation of 12.5%, this is one way to get some exposure and not lose any sleep at night. Over the last year, EEMV is down 13.2%, compared to EEM which was down 16.6%. (click to enlarge) Doesn’t seem like much of a difference and EEMV will tend to lag in a rapidly rising market, but for a conservative investor that doesn’t like volatility, it’s a great option. Over the long-run, low volatility strategies tend to do well relative to the comparable traditional strategy. After all, if you’re down 20%, you need a 25% return to breakeven, but if you’re only down 10%, your breakeven return is only 11%. Since EEMV was launched, it has outperformed EEM by over 15%, because it loses less when the markets decline. (click to enlarge) The difference between EEMV and EEM is quite simple: the volatility of each stock is evaluated along with the correlations between stocks. And then a number of constraints are applied to ensure adequate diversification and representation of the broad market while minimizing volatility. The underlying portfolios have slightly different allocations by country, sector, and top holdings, but both provide well diversified exposure to the broad market. EEMV is a much smaller fund with only $2.7 billion compared to the much larger EEM with $27 billion, but $2.7 billion is a good size fund and it hasn’t been around for very long. I anticipate that as emerging market equity volatility increases, more flows will be directed to EEMV instead of EEM. Bottom line here is that every portfolio should be well diversified including an allocation to emerging market equities, even when the consensus view is that it is still too soon. Stay underweight, stay defensive, and consider using the minimum volatility alternative. Source: iShares.com, PM101, Yahoo