Does Market Timing Work In Emerging Markets?

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One of the equity strategy topics that I discuss here often is the concept of ‘Market Timing’. This involves simply buying stocks when the market is down and then selling them when the market is at the top. Sounds simple. But if it were that easy then everyone would be a millionaire. In reality, timing the market does not work for almost all investors. Even professional fund managers who manage other people’s money for a living with teams of experts, sophisticated computer models and other better information fail miserably trying to time the market. So for retail investors it goes without saying that they should not time the market. In fact, the time in the market is more important than timing the market,

For example, investors who panicked and sold out at the trough of the global financial crisis of 2008-09 ended up with losses.On the other hand, those who stayed put and did not take a single portfolio action (i.e. either buying or selling) are now sitting on nice gains as the S&P 500 has more than doubled since then. Using the concept of market timing, early 2009 would have been an excellent time to buy stocks at dirt cheap prices. However majority of the investors including myself did not have the guts to invest any new money in the market. I remember reading about one French fund manager who was vacationing somewhere in Thailand in early 2009 and had watched the market crashing to new lows. He had the instinct to immediately plough millions of dollars of his firm’s assets into top-quality stocks at low prices. Many years later he recalled how his fund holdings had soared in value as markets recovered all those losses and then moved even higher. However managers such as this one are very very rare indeed.

Going to market timing, the easiest thing for most retail investors to build a diversified portfolio and hold it for the long-term. In fact, market panics like earlier this year’s collapse are a great time to pick up additional stocks if one has the funds to invest and has identified stocks to buy. Some of my earlier articles on market timing can be found here and here and here and here and here.

Timing the market does not work in any market. Emerging markets are no exception. In fact, emerging markets by definition are more volatile and it is foolish to time the markets in emerging equities. It is not uncommon for individual stocks in emerging countries to soar or decline by 10% or more in a single day. Similarly markets as a whole tend to fall fast and soar high almost overnight.

I came across an fascinating article that shows how market timing does not work in emerging markets also.

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Market Timing in Emerging Markets

From the article:

‘Time In’ the markets. Missing just a few of the best performing trading days can be significantly detrimental to returns. Total returns for the MSCI EM Index since 1/3/2000 until 10/30/2015 has been 151%, but this number falls sharply if the best daily returns are excluded. As the chart shows, if the 16 best trading days out of 4,131 total days were missed, the total return of the MSCI EM Index drops to below zero. Missing the best 25 days brings investors significantly below zero. We believe that investors should consider that ‘timing’ the markets is not as important as ‘time in’ the markets.

Source: Market Timing vs. Time in the Market, Emerging Global Advisors, LLC

Related ETFs:

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

Disclosure: No Positions

The World’s Best Developed Markets Banks 2016

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Every year Global Finance magazine publishes the list of world’s best banks. This years ranking was published recently. The full list of banks and additional details will be released in May. From the press release:

Global Finance, founded in 1987, has a circulation of 50,050 and readers in 180 countries. Global Finance’s audience includes senior corporate and financial officers responsible for making investment and strategic decisions at multinational companies and financial institutions. Global Finance also targets the 8,000 international portfolio investors responsible for more than 80% of all global assets under professional management.

Its website — GFMag.com — offers analysis and articles that are the heritage of 29 years of experience in international financial markets. Global Finance is headquartered in New York, with offices around the world. Global Finance regularly selects the top performers among banks and other providers of financial services. These awards have become a trusted standard of excellence for the global financial community.

The following are the World’s Best Developed Markets Banks 2016:

S.No.CountryWinner
1AustriaErste Bank
2BelgiumKBC
3CyprusHellenic Bank
4DenmarkDanske Bank
5FinlandPohjola Bank
6FranceCredit Mutuel
7GermanyCommerzbank
8AndorràCrèdit Andorrà
9GreeceEurobank Ergasias
10IcelandLandsbankinn
11IrelandBank of Ireland
12ItalyIntesa Sanpaolo
13LuxembourgBanque et Caisse d’Epargne de l’Etat
14MaltaBank of Valletta
15NorwayNordea
16PortugalBanco Santander Totta
17SpainCaixaBank
18SwedenSEB
19SwitzerlandZürcher Kantonalbank
20The NetherlandsING
21UKSantander
22CanadaRoyal Bank of Canada
23USWells Fargo
24BermudaButterfield Bank
25AustraliaWestpac
26Hong KongBank East Asia
27New ZealandWestpac New Zealand
28SingaporeOversea-Chinese Banking Corp
29IsraelBank Hapoalim

Download: The World’s Best Developed Markets Banks 2016 (in Excel)

Source: Global Finance Names The World’s Best Banks 2016, Global Finance

This year’s list includes a few surprises. One of the four super-banks, US-based Wells Fargo(WFC) is the best bank in the US. This is not surprising since the bank has been a consistent performer and is well known for strong customer relationships with many customer’s having multiple products with the bank. Royal Bank of Canada(RY) is the best bank north of the border.Royal Bank is the most profitable bank in Canada and has an excellent track record in terms of shareholder returns.

In developed Europe, ING Groep (ING) is the top bank in Holland. After the financial crisis, ING has made many smart moves including divesting units such as ING Direct and is now on a recovery mode. In Germany, Deutsche Bank is in chaos and has suspended its dividends. So competitor Commerzbank (CRZBY) is the best bank according to Global Finance. Commerzbank’s share collapsed during the financial crisis due to its high exposure to the shipping industry and is now slowly recovering. It is interesting that Spain-based Santander (SAN) is the best bank in the UK. All the British banks are still suffering and most investors are avoiding them at all costs. It may take many decades for British banks to regain their former glory.

Australia’s Westpac(WBK) is the top bank in both the domestic market and New Zealand.

Also see: Bloomberg: The World’s Strongest Banks 2015, Aug 1, 2015 TFS

Disclosure: Long WBK, RY, ING, SAN

Professor John Ross: Economic ‘Hard Landings’ Were Only in Western Economies and Not in China

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Professor John Ross is Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China and runs a blog called Key Trends in Globalisation. His work regularly appears in Chinese and Western media.

In an article posted yesterday he argues that economic hard landings have occurred in the past in Western economies and not in China. In addition , he predicts they will not happen in China. In the Western media, we constantly hear about pundits worrying about the state of the Chinese economy. In the past few years, with the collapse in commodity markets not a day goes by without some guy blaming China for everything. If one were to believe all this non-sense it would appear that China is the cause of all the problems that plague western economies when in reality most of them self-inflicted issues. Here is Mr.Ross quoting billionaire  George Soros in the introduction to this article:

The media outside China periodically carries predictions of a China ‘hard landing’. For example George Soros grabbed headlines earlier this year by declaring of China: ‘A hard landing is practically unavoidable.’ Soros himself has an inaccurate record of investing in Communist Party led, and ex-Communist, countries such as Russia and China – having lost approximately $1 billion in Russia’s Svyazinvest telecommunications company. But similar claims regularly appear in other media.

To anyone dispassionately examining the facts these claims are extremely curious – as they are clearly the exact reverse of reality.  The facts show the only real modern serious economic ‘hard landings’ were not in China but in so called ‘Western’ economies – for example the US after 2007, Japan after 1990, Russia after the introduction of capitalism in 1991. China’s economy for example has not suffered a year of negative growth for at least half a century – in contrast to every major Western economy. Therefore, the real question which has to be explained, and which is examined here, is why do Western economies suffer ‘hard landings’ but China doesn’t?

Using the example of U.S. , Japan and Russia, Mr.Ross demonstrates how the economies have had hard landings. From the article:

What causes a Western economy’s ‘hard landing’?

A seriously erroneous assumption is sometimes repeated in parts of the media that because consumption is the largest percentage of GDP it must be consumption which is the decisive influence in business cycles – including in ‘hard landings’. This is simply an elementary arithmetic error. Fluctuations in investment are so much more extreme than changes in consumption that although investment is a smaller proportion of the economy it is investment changes which dominate large scale economic downturns. This will be demonstrated in the three largest modern economic ‘hard landings’ – the US ‘Great Recession’ after 2007, Japan’s prolonged stagnation after 1990, and Russia after 1991. Analysing these three cases clearly demonstrates that the same mechanism operated in each – and also shows why China has not and will not have any serious hard landing.

The entire article is worth a read.

Source: 

Why do Western economies have hard landings but China doesn’t? by Professor John Ross Key Trends in Globalisation

South Africa’s FTSE JSE All Share Index: Revenue Exposure by Country

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The FTSE/JSE All Share Index is the benchmark index of the South African equity market. According to the index provider FTSE:

The FTSE/JSE All-Share Index represents 99% of the full market capital value i.e. before the application of any investability weightings, of all ordinary securities listed on the main board of the JSE, subject to minimum freefloat and liquidity criteria.

Currently there are 163 constituents in the index and the dividend yield is 3.23% in the domestic currency. The Top 10 holdings account for 56% of the index. The top three sectors represented in the index are: Food & Beverage, Personal & Household Goods and Basic Resources.

Global Exposure of South African firms:

Similar to the FTSE 100 index of the UK, many South African firms in the FTSE/JSE All Share index earn a high portion of their revenues from overseas. In fact, according to a report by Factset only 45% of the total 5,387 billion rand revenue of the firms in the index is earned locally. This shows the global exposure of major South African firms.

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South African Firms Global Exposure

Source: Tethered South African Investors Seek Gains Beyond Borders, FactSet

From an investment standpoint, though only some sectors are heavily dependent on the local economy. For example, resource companies such as those in mining have major operations within the country. But large South African banks such as Nedbank (NDBKY) or Standard Bank (SGBLY)on the other hand have substantial presence in other African countries. So their performance is not totally dependent on the state of the South African economy.

The Top 10 Constituents of the FTSE JSE All Share Index are shown below:

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Top 10 FTSE JSE Components

Source: FTSE

The full list of South African ADRs trading on the US markets can be found here and also check out the historical performance of the index.

Disclosure: No Positions

You may also like:

  1. South Africa’s FTSE/JSE All-Share Index Returns By Year 
  2. A Review FTSE/JSE All-Share Index of South Africa (TFS, Mar 2014)
  3. JSE All Share Index, SA Shares
  4. Graphic: 50 years of the FTSE All-Share index, The Telegraph
  5. Monthly Closing Values of FTSE JSE All Share Index 2002 Thru 2017 (in E

Three Charts On The Food Grown By Developing Countries

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Developing countries are home about 80% to the world’s population. For example, the population of China and India alone are approximately 1.35 bn and 1.25 bn respectively. According to a research report John McArthur and Krista Rasmussen of Brookings, 98% of world’s hungry people live in the developing countries. 78% of the harvested croplands are also in these countries.

1.The following chart shows the types of food grown in developing countries:

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Crops with areas Harvested

Data Source: Authors’ calculations based on FAO data

Cereals are the most common crop grown in most of the countries. Argentina and Brazil are large growers are oil crops like soy.

2. The type of cereal grown by region:

Predominant Cereal

Geography plays an important role in determining the type of cereal grown. Wheat is grown mainly in Europe and Central Asia while rice is the top cereal grown in tropical environments like South and South East Asia.

3. Cash crops grown by region:

The majority of the cash crops grown mostly in certain parts of the emerging world. For instance, Latin American and the Caribbean are major producers of sugar, coffee, and cocoa. A few West African countries thrive in the production of cocoa which is used in the manufacture of chocolates. Countries in the South East Asia such as Malaysia are major producers of oil palm which is used as a substitute for vegetable or peanut oil.

Lead cash crop

Source: Where does the world’s food grow? by John McArthur and Krista Rasmussen of The Brookings Institution