Posts Tagged ‘Msci Emerging Market’
Going Defensive With Dividend Funds
Tuesday, May 29th, 2012
While market volatility now looks closer to fair value than it did in early May, I still believe that investors should remain defensive. Stocks remain very much exposed to a potential disorderly Greek exit (“Grexit”) from the euro and any accompanying contagion.
One defensive play I particularly like: dividend paying stock funds, including those consisting of equities in traditionally volatile emerging markets.
As I write in my new Market Update piece, dividend stocks generally have been less volatile than the broader market, which can make them a good defensive choice.
Since 1992, the beta (a measure of the tendency of securities to move with the market at large) of the Dow Jones Select Dividend Index to the S&P 500 has been around 0.8. That means that for every 1% the market moves this index typically moves around 80 basis points (see how I calculated the beta in the chart below).
In the case of the Morningstar Dividend Yield Focus Index, the beta has historically been even lower, at around 0.7.
This historical pattern has continued during the most recent downturn. As of Thursday’s market close, the S&P 500 was off approximately 6% from its May peak, while the Dow Jones Select Dividend Index and the Morningstar Dividend Yield Focus Index were down 3% and 2% respectively.
Even in emerging markets, typically a more volatile sector of the market, dividend stocks tend to cushion the downside. For instance, the Dow Jones Emerging Markets Select Dividend Index has a beta of roughly 0.80 to the broader MSCI Emerging Market Index.
Given the ongoing uncertainty surrounding Greece and the overall European Union, near-term market volatility is likely to remain high and I continue to advocate that investors have a high allocation to high dividend equity funds. In particular, I like the iShares High Dividend Equity Fund (NYSEARCA: HDV), given its low beta and quality screen, and the iShares Emerging Markets Dividend Index Fund (NYSEARCA: DVYE). Another potential solution focusing on US equities is the iShares Dow Jones Select Dividend Index Fund (NYSEARCA: DVY).
Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog. You can find more of his posts here.
Source: Bloomberg
The author is long HDV
Tags: Defensive Stocks, Dividend Funds, Dividend Paying Stock, Dividend Stocks, Dividend Yield, Dow Jones, Equity Fund, Equity Funds, ETF, ETFs, Focus Index, High Dividend, Index Fund, Ishares, Market Volatility, Morningstar, Msci Emerging Market, Msci Emerging Market Index, Quality Screen, S Market, Stock Funds, Volatile Sector
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Time to Exit Emerging Markets? (Koesterich)
Thursday, April 12th, 2012
“Is it time to sell emerging market equities?” That’s what many investors are wondering given that emerging market stocks are up significantly since fall lows and have modestly outperformed developed markets year to date.
Despite emerging markets’ strong recent performance, I believe there are two major reasons why investors should still consider overweighting select countries relative to their weight in the MSCI ACWI benchmark.
Cheap Valuations: First, and most importantly, emerging markets remain cheap compared both to their own history and to developed markets. Currently, the MSCI Emerging Market Index is trading for around 12x earnings. As the chart below indicates, this is a significant discount to the index’s long-term average multiple of 16.
The current valuation of roughly12x earnings is also a 22% discount to where the MSCI World Index is trading. And historically, when emerging market stocks have been at a 20% or more discount to developed market equities, they have significantly outperformed over the next year.
Falling Inflation: A second factor supporting emerging market equities is that inflation continues to decline in most emerging markets, India being a noticeable exception. For instance, over the past nine months, inflation in China has fallen from 6.5% to roughly half that level, while inflation in Brazil has decelerated to around 5% from 7.5%. Lower inflation should provide for some multiple expansion in emerging market stocks.
However, since not all emerging markets currently look attractive, I continue to advocate overweighting only certain areas through a regional and country implementation.
In particular, I like Latin America, Brazil, China and Russia, and I prefer to access these markets through the iShares MSCI Emerging Markets Latin America Index Fund (NASDAQGM: EEML), the iShares S&P Latin America 40 Index Fund (NYSEARCA: ILF), the iShares MSCI Brazil Index Fund (NYSEARCA: EWZ), the iShares MSCI China Index Fund (NYSEARCA: MCHI) and the iShares MSCI Russia Capped Index Fund (NYSEARCA: ERUS).
Meanwhile, investors looking for a lower risk alternative for accessing emerging markets may want to also consider the iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSEARCA: EEMV).
Source: Bloomberg
The author is long EWZ and ERUS
Investing involves risk, including possible loss of principal. Past performance does not guarantee future results.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility.
Tags: America Index, Amp, Brazil Index, Earnings, Emerging Market Stocks, Emerging Markets, Ewz, Index Fund, Inflation In China, Ishares Msci Brazil, Latin America, Lows, Msci Acwi, Msci Emerging Market, Msci Emerging Market Index, Msci World Index, Nasdaqgm, Nine Months, Valuations, Year To Date
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Emerging-Market Stocks Have More Upside, But in Need of Correction
Tuesday, March 6th, 2012
In past articles I referred to the relationship between the MSCI Emerging Market Index expressed in Swiss francs and China’s CFLP Manufacturing PMI. By using arguably one of the world’s only non-fiat currencies the influence of currency movements on the MSCI Emerging Market Index is minimized.
The graph below illustrates just how out of line and inexpensive emerging-market equities were compared to the state of the world’s growth locomotive in the latter half of 2011 as the Eurozone debt crisis spooked investors. The market returned to rationality as the crisis eased in recent months, with the MSCI Emerging Market Index in line with February’s PMI of 51.0.
Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Holdings.
But where to from here?
After collapsing to 48.3 in November last year my seasonally adjusted CFLP Manufacturing PMI for China increased for the third consecutive month to 51.9 in February, with the drop in the reserve requirement rate (RRR) of Chinese banks filtering through to the economy. As the global economy is not out of the woods yet, the further cut in the RRR in February is likely to lend additional support to the seasonally adjusted PMI and therefore China’s economy in coming months.
Sources: CFLP; Li & Fung; NBSC; Plexus Holdings.
After being held in check by the Golden Week celebrations of China’s lunar New Year from the second half of January through mid-February, the unadjusted CFLP Manufacturing PMI is likely to receive a significant seasonal boost in March and April.
Sources: CFLP; Li & Fung; Plexus Holdings.
I therefore argue that the MSCI Emerging Market Index in terms of Swiss francs is likely to be underscored by the expected seasonal strength in the unadjusted PMI, as well as the acceleration in growth as reflected in the seasonally adjusted PMI, on the back of the reduced RRR of Chinese banks.
In a previous note I pointed out that changes in the direction of China’s banks’ RRR were soon followed by directional changes in the Shanghai Composite Index (SSEC 2410.45 ‘0.00%). In the following graph the cumulative change in the RRR was quantified where a 0.5% change in RRR amounts to approximately US$60 billion. When depicted against the MSCI Emerging Market Index in Swiss francs it is evident that changes in direction in the RRR are followed by major changes in direction of the MSCI Emerging Market Index in CHF. The cuts in the RRR in the last quarter of 2008 were followed by a bottom in the MSCI Emerging Market Index in the first quarter of 2009. The hike in the RRR in the first quarter of 2010 was initially followed by the topping out of emerging-market equities, while further increases led to a slump in equity prices. Although equity prices showed an improvement at the start of the fourth quarter last year the cut in the RRR pulled equity prices out of the doldrums.
Sources: NBSC; I-Net Bridge; Plexus Holdings.
The MSCI Emerging Market Index has significantly outperformed the MSCI World Index since December last year and is currently in line with China’s unadjusted CFLP Manufacturing PMI.
Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Holdings.
The Shanghai Composite Index in terms of U.S. dollars relative to the S&P 500 Index (SPX 1350.02 “-1.05%) has moved completely out of line with the unadjusted CFLP Manufacturing PMI, though.
Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Holdings.
The appearance of another black swan will alter my view but as things are I am of the opinion that the rally in emerging-market equities is likely to continue over the next few months. That said, the market has had a huge run and, being overbought, it is in desperate need of consolidation or even a major correction. I continue to favor the Chinese stock market above other emerging markets and developed markets.
Tags: Acceleration, Celebrations, China Economy, China S Economy, Chinese Banks, Currency Movements, Debt Crisis, Emerging Market Stocks, fiat, Fiat Currencies, Global Economy, Locomotive, Lunar New Year, Msci Emerging Market, Msci Emerging Market Index, Nbsc, Pmi, Rationality, Rrr, Swiss Francs
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Is Derating of Emerging Market Stocks Justified?
Sunday, October 23rd, 2011
The dividend yield of the iShares MSCI Emerging Markets Index Fund (EEM) recently moved above the dividend yield of the iShares S&P 500 Index Fund (IVV) for the first time since the 2008/2009 financial crisis.
Sources: iShares; Plexus Asset Management.
Sources: iShares; Plexus Asset Management.
The 76% increase in the dividend from EEM for the six months to June put the fund’s dividend yield on par with that of the IVV, but the continued market turmoil resulted in emerging-market equities significantly underperforming the S&P 500 Index.
Sources: iShares; Plexus Asset Management.
The sell-off resulted in the ratio of the dividend yield of the EEM relative to that of the IVV lingering close to the peaks that prevailed during the 2008/2009 crisis.
Sources: iShares; Plexus Asset Management.
The severe underperformance of the EEM in 2008 was justified as dividends were slashed by 30% over the following 12 months.
Sources: iShares; Plexus Asset Management.
By comparing the EEM’s underperformance against the IVV this time round, it seems that the markets are anticipating a cut of the same proportion over the next 12 months.
Sources: iShares; Plexus Asset Management.
Is the cold shoulder the market is giving emerging-market equities justified at this stage? I would say not. During the 2008/09 crisis the emerging-market currency I derived at by dividing the MSCI Emerging Market Index in US dollar by the MSCI Emerging Market Index in local currency terms fell by 22% and therefore contributed to the bulk of the slash in dividends. This time round the same MSCI Emerging Market Currency Index fell by only 7%. I am not professing that further depreciation is not on the cards. What I am saying is that given the current state of affairs the significant derating of emerging-market equities is not justified in light of dividend expectations.
In previous articles I argued that the valuation of the S&P 500 as measured by Robert Shiller’s PE10 is highly influenced by anxiety levels as represented by the VIX. The relationship between the dividend yield on the IVV and VIX is another example of that.
Sources: iShares; Plexus Asset Management.
The valuation of emerging-market equities is also influenced by financial market anxiety.
Sources: iShares; Plexus Asset Management.
The valuation of emerging-market equities is more highly geared to anxiety than the valuation of the S&P 500 Index as emerging-market equities are derated relative to the S&P 500 Index during times of heightened anxiety.
Sources: iShares; Plexus Asset Management.
One aspect that came to the fore in my analysis is that since the middle of last year emerging-market equities were derated relative to the S&P 500 Index before anxiety levels or market volatility increased.
Sources: iShares; Plexus Asset Management.
It appears as if the lead time is approximately 20 trading days. With the dividend yield of the EEM remaining at elevated levels relative to the IVV, it seems to me that we can expect volatility levels as measured by the VIX to remain high and move even higher over the next 20 days.
Sources: iShares; Plexus Asset Management.
A strong reversal in the relative dividend yield will therefore be the leading indicator for the VIX to decline. But until then the restlessness in the markets will persist and the roller-coaster ride will continue.
Tags: Asset Management, Cold Shoulder, Currency Index, Currency Terms, Current State, Dividend Yield, Eem, Emerging Market Stocks, Emerging Markets, Index Fund, Index Sources, Ishares Msci Emerging Markets Index, Ivv, Management Sources, Market Currency, Market Turmoil, Msci Emerging Market, Msci Emerging Market Index, Robert Shiller, State Of Affairs
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Emerging Market Equities – Potential for Strong Outperformance!
Friday, July 22nd, 2011
Emerging-market equities have underperformed mature-market equities since the start of the year, with the MSCI Emerging Market Index down 1.4% while the MSCI World Index is up 2.04% and the S&P 500 4.6%. This raises the question of whether investors have lost faith in emerging-market equities.
Let us first look at the issue of valuation. In order to compare emerging-market equities and the S&P 500, I used two exchange-traded funds (ETFs), namely iShares MSCI Emerging Markets Index Fund (EEM) and iShares S&P 500 Index Fund (IVV). I calculated the annual trailing dividend yields on both since 2004 on a daily basis and compared them in the graph below. Please note that the prices I used were in fact the net asset values of the funds.
But why the dividend yield and not the price-to-earnings ratio, you may ask? Apart from a lack of information regarding the price-to-earnings ratio, I believe dividend yield is a better indication for investors in the ETFs as it is part of their actual returns. Furthermore, dividends are unaffected by accounting policy changes and adjustments that frequently occur and distort the earnings base of companies and indices.
Sources: iShares; Plexus Asset Management.
It is evident that the EEM has generally traded at a premium to the IVV since the EEM was launched, with the dividend yield significantly lower than that of the IVV. The major exception was from the third quarter of 2008 to mid-2009 during the global liquidity crisis sparked by the Lehman saga where the EEM actually traded at a discount to the IVV.
Why should the EEM trade at a premium to the IVV? The age-old investment adage of “relative earnings drive relative price”, and in this case “relative dividends drive relative price”, applies. The compounded growth in dividends of the EEM since 2004 has been 11.6% per annum while that of the IVV has been 1.5% per annum.
Sources: iShares; Plexus Asset Management.
The reason why the EEM moved from a premium rating to a discount to the IVV is evident in the graph below. The market expected dividends for the EEM in 2009 to be sliced significantly more than those of the IVV on the back of 2008/2009’s liquidity crisis. As the liquidity crisis eased because global trade normalised, the price of EEM relative to IVV reverted to the relative dividend index and thereby moved to trade at a premium rating to the IVV. Since the fourth quarter of last year the gap between the relative dividend and price indices has opened as more and more black swans entered the global pool. The gap surged at the end of the second quarter, though, after both the EEM and IVV went ex dividend in June.
Sources: iShares; Plexus Asset Management.
This resulted in the EEM trading on a par with IVV on a dividend yield basis.
Sources: iShares; Plexus Asset Management.
What this is telling me is that the EEM is currently priced in a similar way as in June 2008 just before the 2008/2009 liquidity crisis started in earnest.
Sources: iShares; Plexus Asset Management.
My reading is therefore that the EEM is priced for an imminent global financial disaster.
Sources: iShares; Plexus Asset Management.
I do not know whether such a disaster is indeed imminent, but I can play around with various scenarios, such as the Eurozone crumbling, the debt situation of local authorities in China catching up with them, another earthquake disaster in Japan, etc. But no one can tell.
My research also revealed an interesting feature about the EEM. Its rating relative to the IVV has been steadily falling over the years with the relative dividend gradually trending upwards. The dividend yield of the EEM relative to that of the IVV is currently approaching the upward channel of the trendline (which is the trendline plus 15 basis points). The last time, barring the 2008/2009 crisis period, the relative rating of the EEM found itself at the upper end was in December 2006 through February 2007, after which the EEM outperformed the IVV by a significant margin.
Sources: iShares; Plexus Asset Management.
If I assume that the historical dividend growth rates of EEM and IVV remain unchanged at 11.6% and 1.5% respectively, it means that to receive $1 dividend in 5 years’ time I am paying USD 32.09 now for the EEM compared to $51.57 for the IVV – a 37.8% discount! Yes, despite the risks, I can live with that. Put another way, given the respective dividend growth rates for the EEM and, IVV it will mean that the relative dividend yield of EEM to IVV will swell to 1.61. Allowing for a further derating from the current dividend yield ratio of 1 to 1.1, it means a relative price outperformance of 46%.
But what really caused the recent slump in the MSCI Emerging Markets Index? To eliminate the distortions caused by currencies, I decided to convert the MSCI Emerging Markets Index from US dollar to Swiss franc. Are you prepared for this? The MSCI Emerging Market Index in Swiss franc has an extremely good correlation with China’s CFLP manufacturing PMI. This demonstrates the importance of China’s economy, and especially the manufacturing sector, for emerging-market equities.
Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Asset Management.
It is no coincidence, though. Look at how the monthly high/low of the Shanghai Composite Index corresponds with the CFLP manufacturing PMI.
Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Asset Management.
It is evident that the Shanghai Composite Index is currently anticipating a jump in July’s CFLP manufacturing PMI. But will it happen? The impact of my calculated seasonality of the PMI on the Shanghai Composite Index is clearly evident in the graph below. It also indicates that the players in China’s equity market as reflected by the Shanghai Composite Index may be a bit optimistic.
Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Asset Management.
What stands out, though, is that the manufacturing sector in China is on the verge of a period of seasonal strength. that will last through end September.
On the other hand, the MSCI Emerging Markets Index in terms of Swiss franc is solidly anticipating the seasonally weak PMI. I think there is a more than even chance that the MSCI Emerging Markets Index in terms of Swiss franc will continue to follow the seasonal pattern in China’s CFLP manufacturing PMI in coming months. I am thus inclined to believe that July will also mark a seasonal low for emerging-market equities in general.
Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Asset Management.
Need I say more?
Tags: Asset Values, Daily Basis, Dividend Yield, Dividend Yields, Eem, Emerging Markets, Exchange Traded Funds, Global Liquidity Crisis, Index Fund, Ishares, Ivv, Markets Index, Mature Market, Msci Emerging Market, Msci Emerging Market Index, Msci World Index, Outperformance, Price To Earnings Ratio, Relative Earnings, Relative Price
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Markets Since Japan Earthquake: Consumer Sentiment Rules
Wednesday, April 27th, 2011
During and since the massive Tohoku earthquake that hit Japan on March 11, global financial markets have been characterized by a high degree of volatility. I thought it would be worthwhile to compare how the different markets reacted and what trends I could pick up.
Hard currencies were particularly volatile. The euro was by far the most stable of them all. In the following chart I depicted the yen, US dollar and British pound against the euro. The yen initially strengthened significantly against all currencies, but intervention saw the currency weakening significantly until a day or two ago. The US dollar weakened from the outset, while the British pound was relatively strong. The Eurozone’s debt woes surfaced again at the start of the week, when the euro weakened significantly against other currencies.
Sources: I-Net Bridge; Plexus Asset Management.
In comparing the major stock indices, I decided to do so in terms of euro instead of US dollar, as is normally done, due to the latter’s relative weakness.
It is very interesting that, until the end of last week, the MSCI Emerging Market emerged as the stronger equity market, followed by MSCI Europe. Since then the euro has weakened while European shares have fallen.
Sources: I-Net Bridge; Plexus Asset Management.
The yields on 10-year Government notes initially fell immediately after the earthquake, but rose strongly afterwards on expectations that Japan’s earthquake will have limited impact on the global economy. Japan was the exception where the yield remained relatively steady, though. Over the past week the yields on the respective government bonds turned south again, probably due to the fact that Japan’s recovery from the disaster will be more prolonged than originally anticipated. On Monday two issues came to the fore: Firstly, German bond rates fell as Greece indicated that the country wants to reschedule debt. That refueled worries about the debt situation in the region and the possible impact on regional growth. Secondly, US Government debt was de-rated by Standard & Poor’s, resulting in a rise in the yield on the 10-year US Government note as bond prices fell.
Sources: I-Net Bridge; Plexus Asset Management.
In comparing the commodities, I have also expressed them in terms of euro instead of US dollar in light of the latter’s relative weakness. Silver was by far the best-performing commodity since the day before the Tohoku earthquake. Next was oil, followed by gold. Industrial metals were soft compared to the other commodities.
Sources: I-Net Bridge; Plexus Asset Management.
Is somebody pulling off a Hunt Bros type of cornering of the market as in 1979/1980? I will rather hold gold than silver, but will not short the latter!
Sources: I-Net Bridge; Plexus Asset Management.
But where does it leave the markets?
From a long-term historical point of view the valuation of the S&P 500 index, as measured by Prof. Robert Shiller’s Cyclically Adjusted Price Earnings Ratio (CAPE or PE10), remains at the upper end of the band of the range from 1881 to 1997. The current PE10 is 23.06 compared to the historical average of 16.4 – a massive 40.6% overvaluation should there be a mean reversion!
In previous articles I referred to the historical relationship between the Conference Board Consumer Sentiment index and the PE10 or CAPE of the S&P 500 since 1998. What the relationship is telling me at the moment is that, given the current PE10, the market expects the Conference Board Consumer Sentiment index to rebound to the 75/80 level from the current level of 63.4.
But what if the market is wrong and consumer sentiment remains unchanged? In that case the market will move back to the historical regression line where the PE10 would be 20.46. That means the market will fall back 11.3%.
A similar relationship exists between the Conference Board Consumer Sentiment index and the yield on 10-year Government bonds. Currently the 10-year note at a yield of 3.44% is slightly overvalued given the current level of the Sentiment index that indicates a fair value of 3.60%.
Yes, that’s what it boils down to: Consumer sentiment – if you can read it, you can read the markets!
Tags: Asset Management, Bond Rates, British Pound, Consumer Sentiment, Debt Situation, Debt Woes, European Shares, Eurozone, Global Economy, Global Financial Markets, Gold, Government Bonds, Government Notes, Japan Earthquake, Major Stock Indices, Msci Emerging Market, Msci Europe, Outset, Relative Weakness, Tohoku, Volatility
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Emerging Markets: the Risks are Increasing …
Wednesday, November 24th, 2010
Emerging-market equity prices as measured by the MSCI Emerging Markets Free Index are primarily driven by commodity prices and in particular by metal prices as measured by the Economist Metals Price Index. Currently emerging-market equities are approximately 8 – 10% overpriced given the level of metal prices.
Sources: I-Net Bridge; Plexus Asset Management.
The ratio of the MSCI Emerging Market Free Index and MSCI Global Index is also driven by commodity prices and specifically metal prices. On a relative basis emerging-market equities tend to bottom earlier than mature markets and the ratio therefore acts as a leading indicator of metal prices. At this stage the still-rising and elevated level of the ratio suggests that metal prices are likely to hold up well despite the recent sell-off.
Sources: I-Net Bridge; Plexus Asset Management.
The yield on the JP Morgan Emerging Market Bond Index is at its lowest on record. Sentiment regarding emerging-market bonds is also significantly influenced by metal prices. The JP Morgan Emerging Market Bond Index yield (please note the reverse axis) has dropped significantly more than what metal prices suggested and therefore points to increased risk in emerging-market bonds.
Sources: I-Net Bridge; Plexus Asset Management.
Emerging-market bond yields took their cue from mature-market bonds, though, as the yield spread narrowly tracks that of the Metals Index. However, the yield spread (please note reverse axis) is currently 50 basis points lower than what it should have been given the current levels of the Metals Index. It therefore also indicates that emerging-market bonds are expensive relative to mature-market bonds.
Sources: I-Net Bridge; Plexus Asset Management.
The yield spread between the JP Morgan Emerging Market Bond Index and the calculated mature-market bond index is even lower than the range that existed before the economic malaise started in 2008. It will need a big push in metal prices to reduce the spread further.
My equally-weighted commodity currency index ’ consisting of the Australian dollar, Turkish lira, Brazilian real, Czech koruna, Thai baht, Hungarian forint, Russian rouble and SA rand – is driven by the same forces behind investments in emerging markets, namely metal prices. For some unknown reason the commodity currency index lagged and opened a gap with metal prices towards the end of last year. The gap closed only recently.
Sources: I-Net Bridge; Plexus Asset Management.
The commodity currency index has an inverse relationship with the yield spread of emerging-market bonds to U.S. treasuries, thereby indicating that commodity currencies rise when the risk of investing in emerging markets ’ as measured by the yield spread – declines and vice versa.
With the emerging-market bond yield spread expected to widen somewhat in the short term, commodity currencies can be expected to follow suit and weaken.
Sources: I-Net Bridge; Plexus Asset Management.
My country’s currency, the South African rand, is currently slightly (5%) overvalued against the commodity currency index.
Sources: I-Net Bridge; Plexus Asset Management.
Bar the current situation where emerging-market equities and bonds are somewhat overpriced and a healthy market correction is needed to pull them back to realistic levels compared to mature markets, the longer-term outlook for investment markets in emerging economies is cloudy and becoming increasingly uncertain. Despite QE2 I see no quick fix to substantially boost consumer sentiment in the U.S., especially in light of the absence of new fixed investment given the significantly surplus capacity, severe problems in the house market and the inelasticity of job creation to stimulatory measures.
Furthermore, global demand is likely to remain under pressure. I expect demand in the Eurozone to be lethargic, especially in light of the fiscal crisis in the PIIGS, Japan running the risk of returning to a recession, and emerging economies and China in particular reigning in their economies by hiking interest rates.
I do not see emerging-market economies tanking, though, but in my opinion the short-term risk of investing in emerging markets has increased significantly.
Tags: Asset Management, Basis Points, Bond Index, Bond Yields, Brazil, China, Commodity Prices, Economic Malaise, Emerging Market Bonds, Global Index, Jp Morgan, Leading Indicator, Market Equity, Mature Market, Mature Markets, Metals Index, Msci Emerging Market, Msci Emerging Markets, Msci Emerging Markets Free Index, Price Index, Relative Basis, Russia, Yield Spread
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A New Leg Higher For Emerging Markets?
Tuesday, August 3rd, 2010
This note is a guest contribution by Bespoke Investment Group.
In the chart below, we highlight the relative strength of the MSCI Emerging Market ETF (EEM) vs. the S&P 500 ETF (SPY). In the chart, a rising line indicates that emerging markets are outperforming the US, and vice versa for a falling line. After a six-month stretch of steady outperformance vs. the US from March through September of last year, the rally in emerging markets ran out of gas last Fall as the US began to outperform. Since early June, however, emerging markets have once again taken the leading role. In terms of relative strength, EEM is back near its highs from late 2009. With a six month ‘rest’ to refuel behind them, is now the time for emerging markets to shine once again?
Copyright (c) Bespoke Investment Group
Tags: Bespoke Investment Group, Eem, Emerging Markets, ETF, Msci Emerging Market, Outperformance, Rally, Relative Strength, Spy
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Which way Emerging Market equities?
Tuesday, March 23rd, 2010
With investors’ risk appetite emboldened by the prospects of an economic recovery, emerging-market equities (+104.0%) have outperformed mature-market equities (+73.3%) by a considerable margin since the commencement of the cyclical bull market in early March 2009. But these numbers camouflage the fact that the past six months have been characterized by essentially a sideways movement in relative performance. This raises the question as to how investors should place their bets over the next few months.
Emerging-market equity prices as measured by the MSCI Emerging Markets Free Index are primarily driven by commodity prices and in particular by metal prices, as seen from the comparison of the MSCI Emerging Markets Free Index with the Economist Metals Price Index in the graph below. In short, emerging-market stocks are currently fairly priced given the level of metal prices.
Source: Plexus Asset Management (based on data from I-Net Bridge).
However, the outlook for emerging-market equities is less positive given the cloudy outlook for metal prices owing to China’s credit tightening, and high stock levels of some metals at the London Metal Exchange (LME). Improved global industrial production and stronger economic growth in especially developed economies are likely to underscore metal prices and therefore emerging-market equities, though.
The relative performance of emerging markets versus mature markets, as measured by the ratio of the MSCI Emerging Market Free Index and MSCI Global Index, is also driven by… /Continue reading
Tags: Commencement, Commodity Prices, Economic Growth, Economic Recovery, Economist, Emerging Market Stocks, Emerging Markets, Global Index, Lme, London Metal Exchange, Market Equity, Mature Market, Mature Markets, Msci Emerging Market, Msci Emerging Markets, Msci Emerging Markets Free Index, Plexus Asset Management, Price Index, Relative Performance, Risk Appetite, Stock Levels
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