Performance Review
Which is a Better Invesment - Germany or U.K.?
The U.K. and Germany are two of the largest economies in Europe. In terms of investment returns, Germany is well ahead of the UK in the past five years as shown in the chart below:
Source: MSCI Barra
The chart compares the performance of MSCI country index for Germany and the UK in dollar terms. British equities fell more than German equities during the financial crisis. Over the past five years, German stocks have performed better than British stocks. The 1-year and 5-year annual average returns are 4.25% and 5.28% for Germany compared to 7.69% and -2.28% for UK.
The iShares MSCI Germany Index Fund (EWG) tracks the MSCI Germany Index.The fund has an asset base of $1.5B and financials account for 18% of the portfolio.Year-to-date the ETF is down 1.78%
The iShares MSCI United Kingdom Index Fund (EWU) tracks the MSCI index for UK.The fund has an asset base of about $984M and financials account for 21% of the portfolio.The fund allocation for industrials is 5% compared to 15% in EWG. Year-to-date the fund is up 0.63%.
Which is Better for Investment - Russia or China?
China has been the preferred destination for emerging market investors for many years now.However this year Chinese equities have not performed well. The Shanghai Composite Index fell 27% in the first six months. Despite Chinese stocks rallying in recent weeks, the index is still down 19.5% year-to-date. In terms of performance over a ten year period many other countries have easily beat China.
The chart below shows the performance of MSCI Russia vs. MSCI China over 10 years:
Source: Trustnet
Note: The Total Return shown is in British Pounds
Hence Russian equities have performed better than Chinese equities over a decade.
The two country-specific ETFs available for Russia are SPDR S&P Russia ETF(RBL) and Market Vectors Russia ETF(RSX). Since its launch in 2007, RSX has been highly successful. The fund has an asset base of $1.8B and the gross expense ratio is 0.80%. The energy sector accounts for about half of the fund portfolio with holdings in oil companies totaling 39.5%. The fund’s share price is down about 10% YTD. Since its inception in March this year, the Russia ETF(RBL) from State Street has not been successful in attracting assets. The total net assets of the fund is just $4.36M. Similar to RSX, this fund is also heavily weighted in the energy sector.
Despite the better performance, investors must be cautious in putting their money in Russian stocks as they can be highly volatile. Among global indices, the Russian market fell heavily during the global credit crisis. As a commodity-based economy, the Russian market is highly dependent on the prices of commodities especially oil.
Some of the ETFs that offer exposure to Chinese stocks are: FTSE/Xinhua China 25 Index Fund (FXI), SPDR S&P China ETF (GXC) PowerShares Golden Dragon Halter USX China Portfolio (PGJ), Claymore/AlphaShares China Small Cap Index ETF (HAO), Claymore/AlphaShares China All-Cap ETF (YAO), Global X China Financials ETF (CHIX). The FTSE/Xinhua China 25 Index Fund (FXI) from ishares is the largest China-specific ETF with an asset base of about $8.2B. The ETF tracks the 25 large-cap Chinese companies in the FTSE/Xinhua China 25 Index. Financials account for about 48% of the fund’s portfolio.
The Five Best and Worst Performing Chinese ADRs YTD
The Shanghai SE Composite Index is down 17.71% Year-To-Date(YTD) and is flirting with bear the market territory. While many of the Chinese investors are afraid of the market now some see this plunge as a good time to enter the market. The optimists reason that it is not worth keeping money in banks due to the low interest rates and investments in real estate is not wise either since prices have skyrocketed. So they figure that the only alternative to is the equity market and are also convinced that stock prices have now become cheap.
One of the reasons for the crash of the Chinese equity market is the fear that The Peoples Bank of China will raise interest rates soon to cool down rising consumer and property prices.Speculation is still rampant in the equity and property markets and authorities may be forced to take strong actions to arrest this trend.
The Shanghai SE Composite Index 5-year Chart
Reflecting the performance in the domestic market, many Chinese ADRs have also fallen heavily this year. Out of the 80 Chinese ADRs that trade on the organized exchanges, just 24 are in the positive column YTD.
The Five Best Performing Chinese ADRs YTD:
1. Baidu(BIDU)
Current Price: $74.80
YTD Change:79.91%
2. Spreadtrum Communications(SPRD)
Current Price: $8.40
YTD Change:51.65%
3. China Southern Airlines(ZNH)
Current Price: $22.83
YTD Change:46.69%
4. ReneSola(SOL)
Current Price: $6.65
YTD Change:36.13%
5. CNInsure(CISG)
Current Price: $27.47
YTD Change:34.61%
The Five Worst Performing Chinese ADRs YTD:
1. Agria Corporation(GRO)
Current Price: $1.79
YTD Change:: -42.81%
2. Duoyuan Global Water(DGW)
Current Price: $20.24
YTD Change:: -43.43%
3. KongZhong(KONG)
Current Price: $6.74
YTD Change::-45.60%
4. Xinhua Sports & Entertainment(XSEL)
Current Price: $0.40
YTD Change::-52.94%
5. VisionChina Media(VISN)
Current Price: $3.43
YTD Change:: -68.59%
Note: Data shown is as of market close May 14, 2010
It must be noted that IFM Investments(CTC) and China Hydroelectric(CHC) may be the two worst performing Chinese stocks YTD but data is not unavailable.
Which is Better for Investment: Chile or Brazil ?
Chile and Brazil are two of the hottest destinations for foreign investors in Latin America. Though Chile has had tremendous economic growth over the last 20 years, Brazil beats Chile in terms of attracting foreign capital. Chile’s economy growth has slowed in recent years.
The chart below shows the performance of Chile Vs. Brazil over the last 10 years:
Source: Trustnet
In the last 10 years, the MSCI Brazil index has grown by 470% while the MSCI Chile index has increased by only 270%. Both the countries performed very well when compared to the MSCI World index which fell by about 5% during the same period.
Despite the strong performance of the Brazilian market, some investors prefer Chile over Brazil. In 2008, during the global financial crisis the MSCI Brazil index crashed over 60% whereas the MSCI Chile index fell only 20%. In addition, the annualized volatility rates for the past 10 years for Chile and Brazil are 16.3% and 25.4% respectively.
However it must be noted that unlike Brazil, Chile is heavily dependent on commodity exports particularly copper. The Brazilian economy is much more diversified compared to the Chilean economy. With a larger population and rising income levels among the middle class, Brazil offers a wide range of opportunities for investors. But since a huge amount of foreign investment dollars is flowing into the country, Brazil is prone to higher volatility. Overall as emerging economies both Brazil and Chile have strong potential for growth but they must be evaluated based on the economic factors unique to each of them.
The iShares MSCI Brazil ETF (EWZ) offers exposure to the Brazilian market. The fund has an asset base of $10.4B and 76 holdings in the portfolio. Investors can access Chilean equities via the iShares MSCI Chile Investable Market ETF (ECH) . This ETF has an asset base of $365.0M and 32 holdings in the portfolio.The difference in net assets between the two ETFs is huge since more investors choose Brazil over Chile.
The Five Best and Worst Performing Latin American ADRs YTD
With two months over for the equity markets lets take a quick look at the leading and lagging Latin American ADRs from a performance perspective.
The five best performing Latin American ADRs YTD as of 2/26/10:
1. Banco De Chile (BCH)
Country: Chile
Sector: Banking
YTD Change: 15.01%
2. GRUMA (GMK)
Country: Mexico
Sector: Food Producers
YTD Change: 13.34%
3. Nortel Invesora (NTL)
Country: Argentina
Sector: Fixed Line Telecom
YTD Change: 13.13%
4. Vina Concha y Toro (VCO)
Country: Chile
Sector: Beverages
YTD Change: 12.44%
5. Ecopetrol (EC)
Country: Colombia
Sector: Integrated Oil & Gas
YTD Change: 10.92%
The five worst performing Latin American ADRs YTD as of 2/26/10::
1. Cemex (CX)
Country: Mexico
Sector: Construction & Materials
YTD Change: -19.12%
2. Fibria Celulose S.A. (FBR)
Country: Brazil
Sector: Forestry & Paper
YTD Change: -19.66%
3. Grupo TMM (TMM)
Country: Mexico
Sector: Industrial Transportation
YTD Change: -20.21%
4. Brasil Telecom (BTM)
Country:Brazil
Sector: Fixed Line Telecom
YTD Change: -33.33%
5. Centrais Eletricas Brasileiras-Eletrobras (EBR)
Country: Brazil
Sector: Electricity
YTD Change: -38.36%
Banco De Chile (BCH) is the top performer with a return of 15% YTD. BCH is consistent high dividend payer and the current yield is 6.57%. The next dividend payment is $3.90 with a record date of March 19th and a pay date of April 6, 2010. Ecopetrol (EC) of Colombia has a dividend yield of 5.62%. For the full year 2009, the company increased production of crude oil and natural gas by 17% from 2008 and sales volume rose by about 19% compared to 2008. Cement and construction materials maker Cemex(CX) announced disappointing quarterly results in January.
Stocks Outperform Bonds in the Long Run
The 2010 edition of the Credit Suisse Global Investment Returns Year Book confirms that equities outperform bonds over the long term. The chart below shows the performance of U.S. stocks, bonds and T-bills from 1900 thru 2009:
A $1,000 invested in U.S. equities in 1900 would be worth $727,000 now. This number is adjusted for inflation. The real rate of return equals to 6.2% which is very good. However it must be noted that the majority of the returns came from dividend reinvestment and not capital appreciation. Capital gains accounted for just 1.8% per year.This study proves again the importance of investing in dividend paying stocks and dividend reinvestment. When compared to stocks, the rate of return on bonds and T-bills is very low.
The following graphic shows the rate of return for equities over different time periods:
Source: Credit Suisse Global Investment Returns Year Book 2010
