Why Invest In Emerging Market Bank Stocks

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Emerging market banks offer distinct advantages over their developed world peers. Other than the obvious diversification benefits, banks in the developing countries tend to have higher growth and profitability rates leading to much better share price appreciations. For instance, in most developing markets a few banks dominate the industry and hence have higher pricing power.

I came across an April article by Tan Van Nguyen and Justin Leverenz at Oppenheimer Funds discussing their strategy for picking EM bank stocks. They identified four factors that determine their investment philosophy. I believe the first factor is more important than the others. From the article:

1. Market Structures Matter Enormously

A concentrated market structure gives banks pricing power, allowing them to consistently generate returns above their cost of capital. Banking is an economy-of-scale business where the largest lenders enjoy inherent advantages in low funding costs, better risk-adjusted net interest margins (NIMs), and superior return on assets (ROAs). Exhibit 1.

Few banks in the world operate in such attractive market structures as Russia and Peru, where the leaders Sberbank and Credicorp control between 30% and 50% of the assets in the banking system. With their extensive branch networks and entrenched brand awareness, these are the go-to banks for customers’ deposits. This explains their competitive risk-adjusted NIMs and their long-term, superior ROAs of 2.0%-2.5%.

Source: Secrets from the Vault: How We Invest in EM Banks, Oppenheimer Funds

Seven emerging market banks trading on the US markets are listed below with their current dividend yields for further research:

1.Company:Banco Santander- Chile (BSAC)
Current Dividend Yield: 4.60%
Country: Chile

2.Company: Banco de Chile (BCH)
Current Dividend Yield: 3.35%
Country: Chile

3.Company: HDFC Bank Ltd (HDB)
Current Dividend Yield: 0.52%
Country: India

4.Company: Credicorp Ltd (BAP)
Current Dividend Yield: 1.87%
Country: Peru

5.Company: Bancolombia (CIB)
Current Dividend Yield: 3.48%
Country: Colombia

6.Company: Nedbank Group Limited (NDBKY)
Current Dividend Yield: 5.04%
Country: South Africa

7.Company: Standard Bank Group Limited (SGBLY)
Current Dividend Yield: 4.81%
Country: South Africa

Note: Dividend yields noted above are as of July 25, 2018. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long CIB and BCH

On the Risks and Rewards of Investing in Single Country Emerging Market Funds

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Single country funds are highly risky especially those related to emerging markets. Holding these funds for the long-term defined as five years or more requires strong conviction and patience and there is no guarantee that the bet would be a winner. I recently came across an article that discussed the risks and benefits of investing in single country funds. From the article:

Scottish American Investment Company was founded by William Menzies in the 1870s, after a series of visits to the US left him impressed by the wealth and opportunities the rapidly industrialising country presented. Being the most exciting emerging market of its day, America, it was hoped, would provide strong returns for investors in the UK.

Similarly, today, many investors are drawn to emerging markets undergoing their own economic transformations, typically by investing through an actively managed fund or investment trust. While many investors may opt to access such economies through broadly spread emerging market or regional funds or trusts, picking a single-country focused investment has become increasingly popular.

‘There has been a sudden rise in the popularity of single-country emerging market funds,’ notes Chady Jouni, senior portfolio manager at Barclays Wealth Management.

It’s not hard to see why. While emerging markets as a whole have done well in recent years, some individual countries have raced ahead of their peers. The Investment Association’s emerging markets sector returned 46.8 per cent over the past five years, while Asia Pacific excluding Japan returned 70.3 per cent. By contrast, funds in the China/Greater China sector more than doubled in value on average over that timeframe. It’s no surprise that China outperformed its peers in both the emerging market and Asia Pacific sectors, but it does underline an important point: going after a broader grouping of countries can act as a drag on returns.

Source: Investing in a country-specific fund – the risks and rewards by Tom Bailey, Money Observer

The following chart shows the performance of country ETFs for China, India, Brazil and Russia over the past 5 years:

Click to enlarge

 

ETFs shown:

  • iShares MSCI China ETF(MCHI)
  •  iShares S&P India Nifty 50 Index Fund (INDY)
  • VanEck Vectors Russia ETF (RSX)
  • iShares MSCI Brazil ETF (EWZ)

Source: Yahoo Finance

China and India have been the biggest success in terms of returns over the time period while Russia and Brazil were poor performers with a decline of about 20%. This shows that an investor that believed in the growth of Russia and Brazil and invested in an ETF and held on for the past 5 years, lost money. The bet did not turn out as expected as Russia was hit hard with collapse in oil prices and Brazil plunged into chaos with a massive fraud at Petrobras(PBR)and other political instability issues.

So they key takeaways for investors is that investing in single country funds is not for the faint hearted. Emerging countries can easily go from top performing to worse performing. So diversify and do not bet too much of a portfolio on one country.

Disclosure: Long PBR

10 Fascinating Facts About Oil

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Oil is the most important commodities in the world. The price of crude oil impacts most of the global economies. Rising oil prices tend to be a boon to oil producing countries but adversely affect consuming countries. Despite being the most important and highly traded commodity, the price of oil is one of the mysteries of the modern world. Unlike other products, the economic concepts like law of supply and demand, capitalism, etc. does NOT apply to the oil market. In addition, while hoarding of a product to manipulate its price in the open market is illegal in all countries particularly strictly enforced in the developed countries, the oil market is an exception. Unlike any other market, cartels are legally allowed in the oil market whereby a group of countries can control the price of the oil. For example, cartels like OPEC does not exist and are not legally allowed for other commodities or products such as milk, beer, copper, iron ore, gold, etc.

With Brent oil prices now trading at over $72 per barrel for September 2018 delivery, some experts are predicting prices to reach over $100 soon.

Canadian magazine Maclean’s published an article titled What fuels oil prices? by Atif Kubursi, McMaster University on Friday discussing the factors that drive the price of oil. The following are some of the key takeaways and my comments from that article:

  1. The price we pay at the pump is determined more by politics than supply and demand.
  2. Oil prices are not determined by the supply and demand of physical oil. In fact, every barrel of physical oil is now traded nine to 12 times on future markets.
  3. The demand for oil is known as what’s called price inelastic.This means unlike other products demand does not collapse when prices rise to very high levels. For example, even at $4 a gallon a few years people had to use their cars. Though demand slightly decreased because there is no substitute for oil, people could not simply stop filling at the pump despite the exorbitant prices.
  4. But small changes in supply immediately impacts oil prices. For instance, some warlord in Libya shutting down a well or some guys with blowing up a pipeline Nigeria will lead to jump in prices.
  5. Oil is the world’s primary source of commercial energy.
  6. Seven large, fully integrated multinational corporations flying the flags of primarily two countries (five of them American and two European) dominate the global oil market.
  7. Though oil is produced in many countries, production costs vary widely. The marginal cost (the cost of producing an additional barrel of oil) is lowest in Saudi Arabia at US$8.98 per barrel; the highest in the U.K. at US$44.33. In Canada, it’s $26.24.
  8. Saudi Arabia has the lowest cost of production. (On a related note, though the US produces almost an equal amount of oil like Saudi Arabia, the Saudis still hold the power to control the price of oil. This is oil production in the US is in the hands of hundreds of shale producers and NOT by a single company. So the Saudis, not the US, get to determine the price of oil in the global market).
  9. Oil producing countries such as Saudi Arabia and Russia need at $100 a barrel to balance their budgets.
  10. Production of oil concentrated in few areas and few hands. For instance, a small group emerging countries mainly the Middle East produce and export most of their oil to major consumers – the US, Japan, Western Europe and China.

Source: What fuels oil prices? by Atif Kubursi, McMaster University, Maclean’s 

Related ETF:

  • United States Oil Fund(USO)

Disclosure: No Positions

Related:

The Top 10 Countries With The Most Diabetes Sufferers: Chart

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Diabetes is one of the top diseases affecting millions of people worldwide. Change in food habits especially in the emerging countries is leading to rises diabetes sufferers in these countries. China and India are the top two countries with most diabetes patients followed by the US. India is projected to overtake China by 2045.

Click to enlarge

 

Source: Fast Food NationStreet Vendors Take on Multinationals To Fight India’s Food Crisis, Der Spiegel

Five Stocks To Monitor For Potential Investment Opportunities

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The US equity market has performed well so far this year with the S&P up by about 5%.Many of the foreign markets including the developed European markets are under-performing the US. With that said, there are plenty of opportunities for investors with a long-term view. The following are five stocks that investors can monitor for potential entry points:

1.Company: Continental AG (CTTAY)
Current Dividend Yield: 2.29%
Sector:Auto Components

Continental has fallen from a recent high of over $61 to $46 now.

2.Company: General Mills Inc (GIS)
Current Dividend Yield: 4.55%
Sector: Food Products

The consumer staples sector is out of favor now. In addition, General Mills has made an expensive acquisition in the pet food space. However food items such cereals are not going to disappear anytime soon.

3.Company: Ecopetrol SA (EC)
Current Dividend Yield: 3.10%
Country: Colombia

After reaching over $23 the stock is currently trading the $20 range. EC is a risky bet but higher oil prices from current levels should help the Colombian oil major go even higher.

4.Company: Royal Dutch Shell PLC (RDS.A)
Current Dividend Yield: 5.46%
Sector: Oil, Gas & Consumable Fuels
Country: UK

5.Company: Magna International Inc(MGA)
Current Dividend Yield: 2.15%
Sector: Auto Components

Note: Dividend yields noted above are as of July 19, 2018. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long CTTAY, GIS, EC and MGA