Emerging vs. Devloped Markets 12-Month Foward EPS Growth: Chart

Emerging equity markets have performed well so far this year. After a few years of disappointing average to poor returns emerging stocks are projected to have good growth potential this year. For example, commodities such as copper prices are rising due to rising demand.

Some of the emerging markets’ year-to-date returns are listed below:

China’s Shanghai Composite: 4.8%
India’s Bombay Sensex: 8.0%
Brzail’s Sao Paulo Bovespa: 14.7%
Russia’s RTS Index: 0.8%
Chile’s Santiago IPSA: 5.0%
Mexico’s IPC All-Share: 4.3%

Source: WSJ

In an article published last week, Stephen H. Dover of Franklin Templeton Investments is also bullish on emerging equities. From the article:

Despite some uncertainties, we see opportunity in emerging markets in 2017 and are optimistic many investors will see value in making greater allocations to them. GDP growth is expected to outpace that of developed markets, with the International Monetary Fund projecting growth of 4.5% in emerging and developing economies versus 1.9% in developed markets this year.8 We see evidence that earnings growth in emerging markets could likely be higher than in developed markets, too. Emerging markets have been lagging in regard to earnings growth, but 2016 marked the first time in more than five years they outperformed developed markets. We think there’s still quite a bit of room for emerging markets to further catch-up.

8. Source: International Monetary Fund World Economic Outlook, January 2017 update. There is no assurance that any estimate, forecast or projection will be realized.

Source: An Emerging-Market Evolution, Franklin Templeton Investments

From an investment perspective, not all emerging markets are out of the woods yet. However many attractive opportunities can still be found in some markets such as Chile, Brazil, Mexico, etc.

Should Investors Avoid Canadian Banks Now?

Canadian bank stocks are a favorite for many domestic and foreign investors for many reasons. For example, they offer solid stable growth, pay decent consistent and dividends, etc. During the global financial most of the Canadian banks were largely unscathed. However despite the many positive factors investors need to be cautious of Canadian banks according to an article by McLean&Partners. Some of the reasons discussed by them are:

  1. “Tighter restrictions on mortgage lending: With the new qualification process, mortgages will be approved based on a higher posted rate. This means the maximum allowed mortgage for every level of income will decline by roughly 20%.
  2. Pending regulation on risk sharing of mortgages with CMHC: Mortgages insured by CMHC were considered risk free. If loans were to default, CMHC would cover it. The risk sharing regulation will require banks to share the risk of mortgages with CMHC, which will result in the banks allocating more capital against them.
  3. High debt to disposable income of Canadians: The current debt-to-disposable income for Canadians is 168%. The financial crisis in the US started when this ratio was 135%. Though there are hardly any similarities, eventually borrowers’ capacity to borrow will be curtailed, leading to substantially slower loan growth.
  4. IFSR9 will create provision volatility: An accounting regulation will require banks to provide or release provisions against loan losses faster, creating higher earnings volatility.
  5. High current valuations of bank stocks: We consider the banks to be expensive as they are currently trading at a 10-year high (Figure 4).”


Source: Caution on Owning Canadian Banks, McLean&Partners

Banks account for about one fourth of the S&P/TSX Composite index and the banks have under-performed the index only twice in recent years – once in 2007 and once in 2010.

Though all the points noted above are valid, investors need not avoid Canadian bank stocks.The benefits of owing them for the long-term far outweigh the short-term concerns. U.S. investors especially cannot go wrong owing banks from north of the border.

The bog five banks trading on the US exchanges are listed below with their current dividend yields:

1.Company: Bank of Nova Scotia (BNS)
Current Dividend Yield: 3.51%

2.Company: Bank of Montreal (BMO)
Current Dividend Yield: 3.46%

3.Company: Canadian Imperial Bank of Commerce (CM)
Current Dividend Yield: 4.12%

4.Company: Royal Bank of Canada (RY)
Current Dividend Yield: 3.34%

5.Company: Toronto-Dominion Bank (TD)
Current Dividend Yield: 3.13%

Note: Dividend yields noted above are as of Feb 17, 2017. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long BNS, BMO, CM, RY and TD


Why Market Timing Does Not Work: A UK Example

One of the topics that I have written many times on this blog is the concept of Market Timing. This strategy involves selling at market peaks and buying at market lows. While this sounds pretty simple, obviously it is impossible to execute for any investor. If it was so easy to do, then everyone will be making money in the equity market. Even professional money managers playing with other people’s money fail in timing the market. Since it is very important for retail investors to avoid trying to identify the market tops and bottoms and execute trades accordingly let me discuss why market timing never works in this post using the example of the British equity market.

The following chart from an article by Rory McPherson at pSigma, UK shows the adverse impacts of market timing in the British market:

Click to enlarge


Source: Asset Allocation – “Keep Calm and Stick to the Plan…”, pSigma Hat-tip: Money Observer

Mr.Rory noted the astonishing fact:

As the chart above shows, missing the best ten days of performance in the last twenty years of UK stock market returns would have cost you 170%! In fact, if you’d missed the best thirty days returns then you’d have lost money over that twenty-year period instead of almost tripling your wealth. (emphasis mine)

The more best days of the market an investor misses, the worst their returns are.

Note the returns shown above are for the FTSE All Share Index and not the popular FTSE 100.

So in a nutshell, retail investors should not try to time the market.Instead investors are better of holding a diversified portfolio thru the market’s roller-coaster days.

Below are some of the recent geo-political events that shook investors’ confidence:

  • Crude oil price collapse in the past few years. As prices continued to tumble analysts and pundits predicted it would reach $10 or a below for a barrel and a global recession. This prediction failed.
  • UK’s vote for Brexit last June. Fears of total collapse of UK and possibly the EU proved wrong. Markets simply shrugged off this political drama.
  • Election of Donald Trump as US President in November. Almost overnight markets’ mood changed abruptly with stocks soaring ever since. All the predictions of crash if he got elected turned out to be incorrect.
  • Other significant events in the past that also did not crash the global equity markets are the Greek sovereign debt crisis, EU debt crisis, PIIGS crisis, commodity markets plunge, etc.

All thru these crises markets continued to move forward and today many global markets including the US are in record territory.

Below is an excerpt from an article at MarketWatch on market timing:

If you had a crystal ball and knew that a peaking stock market was about to drop 30%, what would you do?

About a week ago I found myself talking about retirement planning with a fellow saver who confidently offered: Stop contributing to your 401(k). They argued that it’s better to wait for the market to tumble then get back to contributing to a retirement savings plan because much of what you save now will be eroded by the market crash.

There are compelling reasons to conclude that the stock market is near its peak. The S&P 500 SPX, +0.50% which has been rising since early 2009, is up 26% over the past 12 months, trading at all-time highs. It is, by many measures, at very stretched valuations. The cyclically adjusted price-to-earnings ratio, or CAPE, at 29 is at extreme levels, seen only twice over the past century, in 2000 and 1929.

Source: Here’s why market timing is bad for your retirement goals, MarketWatch

Composition of MSCI Emerging Markets Index 2008 vs. 2016

The widely used benchmark for emerging markets from provider MSCI has changed substantially in recent years. As emerging markets evolve the index weightings changes accordingly.

The graphic below shows the comparison of country and sector weights of the MSCI Emerging Markets Index in 2008 and 2016:

Click to enlarge

Source: Active Viewpoint: Global Emerging Markets, Martin Currie

Financials have maintained about the same allocation in 2008 and 2016 but materials and energy sector weights have declined in the index. However the weighing of the technology sector rose 130% between the years.

MSCI Emerging Markets Index Composition in Jan, 2017:

Click to enlarge

Source: MSCI

Energy and Materials still amount to about 7% of the index allocations.

The key takeaway is that developing countries are no more just for commodities and natural resources. Since these countries continue to develop some sectors will become more important and larger than others. According investors must adjust their portfolio allocations.

Related ETFs:

  • iShares MSCI Emerging Markets ETF (EEM)
  • Vanguard MSCI Emerging Markets ETF (VWO)

Disclosure: No Positions


Four Flaws Of India’s Sensex Index

The benchmark index of the Indian equity market is the BSE Sensex Index. Though the Sensex is main index for Indian equities it is not the ideal index for many reasons. For example, emerging market investors such as those investing in Indian stocks invest to gain from the growth in the Indian economy.However investing in an ETF or a fund that tracks the performance of the Sensex is not the best way to capture the growth potential.

Simply put, Sensex is not the right representation of the Indian market.

Four flaws of the Senses index are discussed below:

  1. Index composition methodology: The Sensex constituents are selected based on the  free float market capitalization Methodology which means liquidity and market cap is important to gain entry into the index. Other factors such as profitability or long-term growth which truly impact the performance of a stock are not considered. So more popular and widely traded stocks are part of the index simply because they have momentum and high trading levels every day.
  2. Price Return Index: The Sensex is not a total-return index such as Germany’s DAX. When considering an investment especially over the long-term dividends reinvested must be included in the return calculation.
  3. Sector Composition: About 45% of the Sensex is allocated to finance and IT. This type of high concentration in just two sectors is not optimal.  Sensex Composition by Sector :

Source: BSE India

4.High Reliance on Foreign Markets: Many constituents in the Sensex derive a substantial portion of their revenue from foreign countries.This makes them dependent on the state of the overseas economies then India. For instance, IT outsourcers such as Infosys(INFY), Wipro(WIT) and TCS are heavily reliant on foreign companies for their earnings. So investing in their stocks does not mean one is betting on the growth of Indian middle class.Similarly Tata Steel and Tata Motors (TTM) have large overseas operations which impact their performance.

From an investment standpoint, it is important to research and pick individual stocks in emerging markets instead of simply going with an index tracker. Like with the Sensex example, an index may not serve the purpose of an investor looking to gain exposure and profit from the vast growth opportunities in those markets.

Related ETFs:

  • WisdomTree India Earnings ETF (EPI)
  • iShares S&P India Nifty 50 Index ETF (INDY)
  • PowerShares India ETF (PIN)

Disclosure: No Positions