The Fed raised the interest rates for the first time in nearly a decade. Overall this year has been another turbulent year for investors to say the least.
The following infographic shows some of the key events:
Click to enlarge
Source: Schroders
Two Decisive Factors That Are Crucial To Gain Higher Returns
Traditional Finance is based on the hypothesis that investors are totally rational and that they make their decisions based on all the available information. Behavioral Finance on the other hand is based on the evidence that real investors are not rational and that they are prone to behavioral biases. In lay man’s terms this simply means real investors are also humans that are usually susceptible to emotions, biases, knee-jerk reactions, manipulations, fear, greed, jealousy, etc.
The following chart shows the behavior of a typical investor:
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Source: Behavioural Finance and Mutual Fund Flows: An International Study, Deutsche Asset & Wealth Management
From the above report:
Figure 1 illustrates the importance of a consistent investment strategy. Had the investor remained invested throughout the whole cycle, he could have gained a higher return. And given that the investor first buys when the prices fall he would even have made an excess return if he had used a countercyclical strategy. But since the downturn was too severe for the investor, he jumped out of the boat when the sea was rough. This shows that an investor who could bear the short-term losses staying focused on his long-term investment goals mostly ends up with a better performance in the long term.
The authors identify two factors that are important in gaining higher returns – patience and loss tolerance. Patience is the most important attribute to have in abundance for success in equity investing. The ability to withstand short-term losses is also very important. However due to behavioral factors investors do not have a tolerance for losses. A classic text book case of this scenario played out during the Global Financial Crisis of 2008-09. Some investors panicked after the market tanked for months on end and when the bear market at the peak in early 2009, they sold out – stating never to set foot in the equity market again. This was a huge mistake to say the least. When the market swiftly roared back in the following months these same investors jumped back in to avoid losing out as stocks continued to rise. These investors lost twice by their actions – first when they sold their holdings at a loss during the trough and then missing out on the gains when stocks shot up from the depths of the dark period.
A Review of Exchange-traded Foreign Oil & Gas Sector Stocks
Oil prices have declined dramatically in the past year and continue to fall further. West Texas Intermediate crude is trading at around $36 a barrel compared to over $50 a while ago. Last week crude prices reached the lowest level in six years. A confluence of factors are attributed to the oil price collapse some of which include:
- Global supply glut
- Demand is still growing but supply-side pressures keep hurting the price
- OPEC decided to not cut production levels
- US shale oil producers are flooding the market
- Oil held in reserves including the strategic reserves held by the US and oil floating in storage ships on seas are at high levels
- Saudi Arabia not cutting production
Up until a few months ago it appeared that $50 was the floor for oil But now analysts that predicted $150 or even $200 a barrel a few years ago are predicting $35 or even $20 per barrel. In reality, nobody knows what the price of oil would be next year this time.
With that introduction of the current state of the oil market, lets take a look at the performance of the exchange-traded foreign oil sector stocks. The table below shows the year-to-date(YTD) price returns:
| Company | Symbol | Last Price in $ | YTD %Chg | |
|
SSN | 0.53 | 165.00% | |
|
TGS | 5.73 | 63.71% | |
|
PZE | 5.17 | 4.66% | |
|
TOT | 45.26 | -11.60% | |
|
E | 29.41 | -15.75% | |
|
STO | 14.06 | -20.16% | |
|
BP | 30.22 | -20.72% | |
|
CEO | 100.75 | -25.61% | |
|
SNP | 55.91 | -30.98% | |
|
RDS.A | 43.95 | -34.35% | |
|
SSL | 24.86 | -34.53% | |
|
RDS.B | 44.38 | -36.20% | |
|
PBR | 4.5 | -38.36% | |
|
YPF | 15.9 | -39.93% | |
|
PTR | 64.68 | -41.71% | |
|
PBR.A | 3.68 | -51.45% | |
|
CGG | 2.71 | -54.07% | |
|
EC | 6.5 | -62.03% |
Source; BNY Mellon
Three observations on the above table:
- Colombia’s Ecopetrol (EC) is the worst performer with a loss of 62%, Just recently the stock traded at about $13. Now it has plunged to $6.50.
- Petrobras (PBR) of Brazil is bogged down in the ongoing corruption scandal. Hence the stock price is depressed. It may take many months for the company to sort out the issues. In addition, the current crude oil prices does not help Petrobras.
- Integrated oil majors such as BP(BP), Total(TOT), Statoil(STO), Royal Dutch Shell – A Shares(RDS-A) and Royal Dutch Shell – B Shares(RDS-B) are better for dividend investors as they have strong cash flows to cover dividend payouts and should be able to wither this downturn in oil prices.
On a related note, an article at Fidelity notes that energy stock valuations are at a historical lows:
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Data shown represents price-to-book (P/B) ratio of energy stocks relative to the P/B ratio of the largest 1,500 U.S. stocks, weighted by market capitalization. Dotted lines: Relative P/B forecasts. Source: Corporate reports, Empirical Research Partners, as of Sep 30, 2015.
Source: 2016 outlook: energy, Fidelity
Though valuations are attractive for energy firms, plenty of risks remain should oil prices decline more. So caution is needed when picking stocks in this sector. Investors may want to avoid small risky Exploration & Production (E&P) companies and stick with large-cap firms with strong cash flows. Unlike the big guys smaller guys may get wiped out if the market deteriorates.
Disclosure; Long EC, PBR
A Look At The Top European Healthcare Companies
Europe is home to some of the world’s top healthcare firms. Though all European countries have national healthcare systems, healthcare is still a big business worth billions of Euros. Drug firms for instance sell their products at a significant margin to health agencies. In addition, many European drug firms have substantial presence in emerging and frontier markets which offer another source of revenue. Denmark’s Novo-Nordisk (NVO) is expanding its diabetes drug sales to China as diabetes is affecting more Chinese due to food and lifestyle changes. Germany’s Fresenius Medical (FMS) has a huge market in the kidney dialysis field in the U.S.
The STOXX® Europe 600 Health Care Index can be considered as a proxy for the European healthcare sector. The index has shot up an astonishing 98% in the past five years as shown in the chart below:
Click to enlarge
Note: Data is based on Euro price returns
The long-term return chart is also excellent.
Source: STOXX
The STOXX® Europe 600 Health Care Index is comprised of 40 components. Some of them trading on the US markets are listed below with their current dividend yields:
1.Company: Novartis AG (NVS)
Current Dividend Yield: 3.15%
Sector: Pharmaceuticals
Country: Switzerland
2.Company: Roche Holding AG (RHHBY)
Current Dividend Yield: 2.98%
Sector: Pharmaceuticals
Country: Switzerland
3.Company: Novo Nordisk A/S (NVO)
Current Dividend Yield: 1.37%
Sector: Pharmaceuticals
Country: Denmark
4.Company: Sanofi (SNY)
Current Dividend Yield: 3.85%
Sector: Pharmaceuticals
Country: France
5.Company: AstraZeneca PLC (AZN)
Current Dividend Yield: 4.21%
Sector: Pharmaceuticals
Country: UK
6.Company:GlaxoSmithKline (GSK)
Current Dividend Yield: 6.21%
Sector: Pharmaceuticals
Country: UK
7.Company: Fresenius Medical Care AG & Co (FMS)
Current Dividend Yield: 1.05%
Sector: Health Care Providers & Services
Country: Germany
8.Company: Novozymes A/S (NVZMY)
Current Dividend Yield: 0.96%
Sector: Health Care Providers & Services
Country: Denmark
9.Company: Smith & Nephew plc (SNN)
Current Dividend Yield: 1.86%
Sector: Pharmaceuticals
Country: UK
10.Company: Indivior PLC (INVVY)
Current Dividend Yield: 1.07%
Sector: Pharmaceuticals
Country: UK
Note: Dividend yields noted above are as of Dec 11, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.
Disclosure: Long INVVY
Investors looking to add healthcare stocks can use these stocks are the starting point for further research.
UK vs. Europe: Dividend Yield and Concentration Graphic
Dividends paid out by companies in the UK and Europe is concentrated among a few firms. In fact, only five large names generated 45% of all UK dividends in 2014 according to a report by Schroders. These companies were Royal Dutch Shell(RDS-A, RDS-B), HSBC(HBC), BP(BP), GlaxoSmithKline(GSK) and Vodafone(VOD).
A few of the European large companies drive the European dividends paid out to shareholders. The overall yield is lower than British yields but still the concentration is high.
The following infographic compares the dividend yields, concentration and sector yields of British and European firms:
Click to enlarge
Note: All data shown above are based on August end, 2015
Source: Europe v UK: How safe is your yield?, Schroders
Disclosure: No Positions