Tag Archives: ETFs

How Much More Can Emerging Markets Debt Grow?

EM versus US High Yield Bonds riskLondon-based Clear Path Analysis has an excellent report detailing investment considerations for Emerging Markets debt and FX investing. So good, actually, that it’s forcing me to second-guess my previously held view that Emerging Markets debt is in a bubble approaching crisis proportions. It’s a long-ish report (32 pages) and it’s all important, so let’s get straight to some of the notable commentary they’ve put together. I think these quotes really speak for themselves.

Gregoire Haenni, Chief Investment Officer, CERN Pension Fund, on why Asia has and will continue leading EMs:

One of the main reasons why investors are beginning to allocate into EM is because of the Asian sovereign credit re-rating trend. Asian sovereign credit fundamentals have generally been on the up for the last six years which is in contrast to other developed countries. The fiscal discipline and underlying economy growth has capped government debt to GDP without exceptions and trade surpluses over the past decade have resulted in a build up of foreign exchange reserves.
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What The BRICS Really Have In Common

2013.03.28.BRICS as The_Breakfast_ClubSometimes news editors exercise such brain-dead judgment that it’s a wonder journalism as a practice even survives.

That sentence was one of a few I conjured up as a possible lead-off thought. Well, technically, it was the only sentence, since the rest are thoughts posed as questions. Here they are:

Is the BRICS Durban conference officially the acronym’s 14th minute of fame?

When will the country grouping of France, Uganda, Chad, Kenya, Oman, Fiji and Finland finally supplant the BRICS as the political economy cadre du jour? What about Bulgaria, Uganda, Lithuania, Latvia, Spain, Haiti, Italy and Thailand?

2013.03.28.bric_summit_durbanDoes anyone honestly still believe in the BRICS as an investment theme?

Am I the only one seeing that Brazil, Russia, India, China and South Africa may actually have less in common than a brain, an athlete, a basket case, a princess and a criminal?

What drives this apparently human need to shrink everything down into bite-sized archetypal infonuggets?

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Making A Case For Buying Chile and Selling Mexico

2013.02.27.The Case for Buying Chile and Selling MexicoWhat I’m about to put here has gone through many evolutions. The latest came out in the form of a Seeking Alpha article which I just had published the other day under the headline, “A Preliminary Case For Chile Over Mexico.”

For a couple of weeks now I’ve been looking at the merits of either buying the Chile ETF (ticker: ECH), shorting the Mexico ETF (ticker: EWW) or both. And by the way things have been looking recently, not only do my instincts look about right, but I may have even missed the boat. For those who have been watching the elections in Italy, the fallout for the euro has been pretty hard, on the order of 300 bps in Monday alone. So what does this have to do with Latin America? Well, a lot, actually. I initially wrote about this back in June last year for Seeking Alpha here, and apparently my thesis still holds.

The storyline as I see it is pretty simple.

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Chart of the Day: The top 10 stock exchanges of 2012

This is actually going to be a few charts, because the first chart as you can see looks ridiculous:

Top 10 Frontier Market stock exchanges v DJIA

It should go without saying that there’s something very wrong with this picture, and indeed Miguel Octavio sums it up better than anyone I know here, but the long and short of it is that runaway inflation and an ass-headed capital controls regime has wildly overstated the “returns” in Venezuela. So let’s get rid of Venezuela and look at how the rest of these stack up against the Dow Jones Industrial Average. Here’s what we get:

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Untangling Zambia’s Currency Controls And Implications For Copper ETFs

A variety of conflicting signals from Zambia in recent weeks demands a closer look at what’s driving its economic policy and the implications for Global X Copper Miners ETF (COPX), First Trust ISE Global Copper Index Fund (CU) and Market Vectors Africa (AFK).

The confusion kicked off with an announcement from President Michael Sata’s government that a plan to rebase the currency by three decimal places has since been put on hold. Meanwhile, it has outlawed the use of foreign currency in domestic goods and services transactions, with penalties for transgression that include up to 10 years in prison. The immediate upshot of this measure was a short-term appreciation for the kwacha as Zambians rushed to sell dollars through official channels. Continue reading

Run for Cover: Brazil’s credit blowout has officially begun

Moody’s downgraded eight Brazilian banks, bringing them in line with the country’s sovereign rating. The broad problem they all share, in a nutshell, is twofold: slowing economic growth and lower interest rates, the latter driven almost exclusively by the country’s own central bank and President Rousseff. The idea behind forcing lower interest rates was nominally to make credit cheaper to Brazilian consumers, but apparently there hasn’t been enough of an increase in lending to make up for the profit margin squeeze. Not helping the situation is a spike in household debt.

Also, Eike Batista’s oil firm lost 25% in market value after the company said its first two wells would produce less than one-third of anticipated estimates.

Also, the real is swiftly heading for 2.10 against the dollar for the first time since 2009.
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Avoiding Brazil FX volatility with domestic ETF plays

Brazil’s policy of weakening its currency to make exports more competitive has worked – maybe too well.

The real has lost 13% of its value against the dollar since March 1 to trade at just about 2:1. The Bovespa stock index has slid by almost exactly the same amount during that time, making the currency’s future an all-important indicator for equity and ETF investors, but one subject to contradictory forces.

Even the president of the Brazilian Exporters Association said last week he prefers a stronger real in the 1.80-1.85 range. Yet unnamed currency speculators told Forbes they see a further nosedive to 2.2.

What’s driving bearish sentiment on the real is President Dilma Rousseff’s determination to push domestic interest rates lower. Earlier this month, she issued a decree removing the floor on interest paid by a popular form of savings account, although this controversial move requires congressional approval within 120 days.

This should allow the Brazilian central bank (BCB) to continue cutting its prime rate for commercial lending, known as the SELIC rate, currently at 9%.

Several reports indicate the BCB is seeking a real savings rate of 2%, which is equivalent to the SELIC rate minus inflation. With inflation over the past 12 months averaging 5.25%, that implies a desired Selic of around 7.5%. This will broadly drive real-related investments toward further depreciation.

But other factors point to the real holding at current levels if not strengthening. The inflation rate remains above the BCB’s stated target of 4.5%, though it is down from a seven-year high of 6.5% at the end of 2011.

The central bank, after buying dollars through most of March and April to fuel the real’s decline, has gone comparatively quiet in the currency markets this month. The closer inflation comes to breaching 6.5% again, the more likely the BCB is to re-intervene in the opposite direction to stem continued BRL weakening.

Brazil also has two looming public events: the soccer World Cup in 2014 and Olympic Games in 2016, that will require massive investment, including probably some from abroad. Foreign direct investment into Brazil has become more difficult to define in recent years, as inflows have to evade the obstacle of capital controls.

But to the extent that event-related spending comes from overseas, this is a force for a strengthening the real.

What is for sure is that the World Cup and Olympics will drive sustained infrastructure spending, most of which will stimulate domestic manufacturers and contractors. Meanwhile cheaper money and abiding inflation will drive consumer spending, while much of the benefit the devalued real brings to exporters is offset by weaker global commodity prices.

That means the best way to bet on a Brazilian equities rebound is to stay away from all things exposed to currency volatility or commodities and stick with anything inwardly focused on Brazil. Retail investors can access the domestic sectors through four different ETFs: Global X Brazil Consumer (BRAQ) , Global X Brazil Mid-Cap (BRAZ), EG Shares Brazil Infrastructure (BRXX), or Market Vectors Small Cap (BRF).

This article was originally published at Emerging Money.

Myanmar investment options for U.S. investors

What I like about Seeking Alpha is that they top up the theory with some executable reality. It may be scant, but it’s possible to get exposure to Myanmar. As detailed by “Stock Whiz“:

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