The following chart shows the extraction cost of oil by various methods:
Click to enlarge
Source: CIO View Special, Feb 2015, Deutsche Asset & Wealth Management
Middle East oil the cheapest while production in the Arctic Ocean is the most expensive.
Update (12/22/15):
Source: Oil and gas companies: the carbon risk, Schroders
International equities are leading U.S. stocks this year. For example, developed European markets are well ahead of American stocks at least so far this year. The year-to-date returns of some of the major equity markets are listed below:
S&P 500 Index: 2.39%
Canada’s S & P/TSX Composite: 2.1%
UK’s FTSE 100: 7.0%
France’s CAC 40: 19.1%
Germany’s DAX Index: 22.8%
Spain’s IBEX35 Index: 11.1%
China’s Shanghai Composite: 11.8%
India’s Bombay Sensex: 2.8%
Brzail’s Sao Paulo Bovespa: 3.9%
Data Source: WSJ
With major European markets such as Germany trouncing the U.S. this year, some investors may be wondering if foreign stocks are still attractive at current levels. Fundamentals show that foreign stocks have still room to run. Developed stocks especially are attractive even after the current run up. I came across an interesting article by David L. Ruff, CFA of Forward Management in which he lays out the arguments in favor of international stocks. From the article:
International equities are attractive now
Historical trends unfortunately don’t reveal much about exactly when international equities may once again outperform, but a variety of metrics, including yields, valuations and earnings, reveal international stocks to be attractive in the current climate regardless of their relation to U.S. equities. As shown in the chart below, dividend yields are higher abroad. Valuations also favor non-U.S. equities, with foreign markets trading at 45% to 50% discounts on a price-book basis. While profitability favors the U.S., non-U.S. returns on equity are also attractive. Earnings growth for Europe and Japan has overtaken the U.S. due to weakening in their currencies and lower oil prices will help foreign markets with greater hydrocarbon/commodity import exposure. These metrics highlight that it is unnecessary and even unfavorable to wait for outperformance as great opportunities exist in international equity markets right now.Key Metrics: U.S. vs. Non-U.S.
Country Dividend Yield 3-Year Dividend Growth Rate Price- Book Price-Earnings Enterprise Value/ EBITDA Latest Earnings Growth5 Return on Equity U.S.1 2.02% 18.8% 2.7x 17.6x 11.1x 7.4% 23.1% Non-U.S.2 3.19% 16.5% 1.5x 15.0x 8.4x 4.9% 17.3% Non-U.S. Developed3 3.33% 15.6% 1.5x 16.2x 8.7x 17.2% 16.8% Emerging Markets4 2.67% 20.6% 1.4x 12.1x 7.5x -7.2% 18.3% Sources: Morningstar, HFR and Forward, as of 01/15/14
Past performance does not guarantee future results.1 Based on iShares S&P 500 Index data
2 Based on iShares MSCI ACWI World ex-USA Index data
3 Based on iShares MSCI EAFE Index data
4 Based on iShares MSCI Emerging Markets Index data
5 Latest earnings seasons quarterly earnings year-over-year growth, 10/15/14-01/15/15
Investors willing to wait for five years or more can consider adding developed equities at current levels though additions in smaller chunks is better than a single investment.
Five stocks from developed countries in the MSCI EAFE Index are listed below for further research and potential investment:
1.Company: Singapore Telecom (SGAPY)
Current Dividend Yield: 4.20%
Sector: Telecom
Country: Singapore
2.Company: Westpac Banking Corp (WBK)
Current Dividend Yield: 5.12%
Sector:Banking
Country: Australia
3.Company: Enbridge Inc. (ENB)
Current Dividend Yield: 3.04%
Sector: Oil & Gas
Country: Canada
4.Company: Cathay Pacific Airways Ltd (CPCAY)
Current Dividend Yield: 1.48%
Sector: Airline
Country: Hong Kong
5.Company: Rogers Communications Inc (RCI)
Current Dividend Yield: 4.34%
Sector: Telecom
Country: Canada
Note: Dividend yields noted above are as of Mar 20, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.
Disclosure: No Positions
Emerging markets have been laggards in the past few years compared to their developed world peers. Among the developed stocks, U.S. stocks especially had a superb run last year compared to European stocks. However this year, the tables seem to have turned with European stocks outperforming American stocks so far.
With the poor performance of emerging stocks recently some investors may be tempted to dump them altogether now and move their assets to developed stocks. This strategy is not a wise for many reasons. Before we get to those, lets take a quick look at the annual return of emerging market stocks as represented by the MSCI Emerging Markets Index:
| Year | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 |
|---|---|---|---|---|---|---|---|
| Return | -2.19% | -2.60% | 18.22% | -18.42% | 18.88% | 78.51% | -53.33% |
Source: MSCI
Since the Global Financial Crisis, emerging stocks returned double digit growth in 2009, 2010 and 2012. But more recently in 2013 and 2014, they performed poorly with negative returns of 2.60% and 2.19% respectively.
Despite losing money in the past two years, emerging stocks still have a place in equity portfolios. The following are a few reasons to hold emerging stocks now:
1. Some emerging markets have strong and growing economies and their equity markets would soar accordingly. For example, last year India was one of the top performing markets in the world while Brazil was not. So one way to profit from growing emerging economies is have to some investments in those countries.
2. Emerging companies have decent dividend yields. More importantly, many are raising their payouts to shareholders as they try to attract domestic and international investors. Even in South Korea, where companies are not known for shareholder-friendly dividend policies recent tax policy changes may make them share more earnings with investors. In terms of emerging dividend yields, the MSCI Emerging Markets Index has a yield of 2.60% as of Feb, 2015. This is better than say the average yield on the S&P 500 which is about 2%. But this does not mean emerging stocks are better than stocks. It simply means that certain developing countries such as those included the MSCI index have firms that pay good dividends. The key is to do research and identify them.
3. One important reason to hold emerging stocks is the concept of diversification means owning laggards. From an article I wrote in December last year quoting Seth J. Masters,Chief Investment Officer of Bernstein Global Wealth Management:
After leading globally in 2013, in 2014 through November the US stock market beat developed international stock markets by 15.5 percentage points in US dollar terms; it beat emerging markets by 11.5 percentage points, as shown in the first Display, below. This outperformance by US stocks has some investors ready to throw in the towel on global investing.
Click to enlarge
We think selling an asset after a stretch of lagging performance is a bad decision. Often, the lagging asset may be more attractive looking ahead. And that’s what we’re seeing in developed international stocks markets, where valuations are more attractive than in the US stock market.
Since 1990, non-US stock markets have outperformed the US market more than half the time. Since no one can be certain just when this will occur, we think it’s wise to own stocks in all regions.
Investors not already having exposure to emerging market equities can consider adding the following stocks in a phased manner:
1.Company:Taiwan Semiconductor Manufacturing Co Ltd (TSM)
Current Dividend Yield: 2.02%
Sector: Semiconductors & Semiconductor Equipment
Country:Taiwan
2.Company:Empresa Nacional de Electricidad SA (EOC)
Current Dividend Yield: 2.53%
Sector:Electric Utilities
Country:Chile
3.Company: HDFC Bank Ltd (HDB)
Current Dividend Yield: 0.56%
Sector: Banking
Country: India
4.Company:Banco Santander- Chile (BSAC)
Current Dividend Yield: 4.65%
Sector: Banking
Country: Chile
5.Company:Bancolombia (CIB)
Current Dividend Yield: 3.76%
Sector: Banking
Country: Colombia
6.Company: Standard Bank Group Limited (SGBLY)
Current Dividend Yield: 3.84%
Sector: Banking
Country: South Africa
7.Company: Embraer SA (ERJ)
Current Dividend Yield: 1.65%
Sector: Aerospace & Defense
Country: Brazil
8.Company: PetroChina Co Ltd (PTR)
Current Dividend Yield: 4.84%
Sector: Oil
Country: China
9.Company: Malayan Banking Berhad (MLYBY)
Current Dividend Yield: 6.64%
Sector: Banking
Country:Malaysia
10.Company:Philippine Long Distance Telephone Co (PHI)
Current Dividend Yield: 5.59%
Sector: Telecom
Country: Philippines
Note: Dividend yields noted above are as of Feb 20, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.
Disclosure: Long BSAC
You may also want to check out:
Emerging Market Equities in 2015 – the ugly, the bad and the good, March 15, 2015, Fidelity UK
The FTSE 100 Index closed at 7,022 yesterday. It has taken UK’s benchmark index to cross the 7,000 level. Almost 17 years ago the FTSE first reached 6,000. Though the index has reached a milestone, the performance is not that great compared to the S&P 500. U.S. stock have outperformed the FTSE 100 by a wide margin in the past five years as shown in the chart below:
Data Source: Datastream from 19.3.10 to 19.3.15, total returns in local currency terms.
Source: Why no-one should be celebrating 7,000 on the FTSE 100 by Tom Stevenson, Fidelity UK
From the article:
The numbers are quite startling. Between 1984 and the day in 1998 when the FTSE 100 exceeded 6,000 for the first time, the 500% rise in the UK market was bettered by the US but not massively so. Over that same period, the S&P 500 rose by 572%.
Since 1998, however, the total return since 1984 has risen to only 596% for the FTSE 100 but to a massive 1,127% for the S&P 500. We look like New York’s country cousins today.
This is surprising when you consider how global markets move, on a day to day basis, in lockstep. A bad day on Wall Street is invariably a bad day in the City too and vice versa.
The reason for the long-term divergence is simple enough to understand, though. It reflects the different make-up of the two markets. The FTSE 100 is increasingly neither a play on the UK economy nor even global growth. It is today more and more a reflection of the outlook for a handful of sectors like mining, oil and gas and banks, none of which are exactly flavour of the month.
The US, by contrast, is home to the industries of tomorrow, notably technology and healthcare. Looked at through the prism of Apple and Google, it is perhaps unsurprising that Wall Street has powered ahead.
Here are a few additional points to remember:
About three-fourths of the revenues of the firms in the FTSE 100 come from overseas. For example, mining is a major sector in the index and the miners have not been performed well in recent years due to the decline in commodity markets. Some of the emerging markets have also been in doldrums hurting the earnings of FTSE 100 firms.
Oil&Gas, Personal and Household goods and banks are the three largest sectors in the index. The Personal and Household goods sector has been adversely by emerging markets and British banks are still suffering from the effects of the global financial crisis. Even Standard Chartered, HSBC(HSBC) and Barclays(BCS) which seemed to be strong during the crisis have seen their share prices fall recently.
Though the FTSE 100 is often used as the benchmark index it is similar to the Dow.Both indices do not represent their respective markets. The FTSE 250 is a better representation of the British economy.
Related ETFs:
Disclosure: No Positions
China and India rank the first and second in terms of population.Each country is home to more than one billion people. While India is a democratic country with a multitude of political parties China is a communist country with only the communist party allowed to exist.
The economic system in China is unique and is called as “Market Socialism” which is a mixture of capitalism and socialism. While China allows private enterprises the state plays a major role in the regulation of the market.
India and China have two of the largest and fastest growing markets among the emerging countries. However China is ahead of India economically and India is playing catch up. Frederic Neuman of HSBC wrote in an article in FT beyondbrics that India has done well so far but has more work to do. From the article:
Click to enlarge
Chart 1 (above) makes an easy comparison. It shows the size of the Chinese and Indian economies in trillions of US dollars (the former is over four times as large as the latter). But here’s the twist: we date the respective lines from when officials adopted reforms in earnest (China in the early 1980s, India only in the early 1990s). Note two things. First, India is actually a little ahead of China at the same stage of the development process. Two, in truth, this counts for little because the main “growth spurt” only came thereafter. In other words: India will need to pick up speed in the coming years, ideally raising growth to double digits. Challenging stuff.
Source: Guest post: can India repeat China’s ascent?, Jan 19, 2015, FT beyondbrics
From a related article in Fidelity UK:
Perhaps one of the most exciting things about India right now is the ambition of the government. It’s thinking big, in terms of infrastructure development and all manner of business reforms.
Take plans to fast-track the regeneration of the country’s vast inland waterways network. The rejuvenation could create vast numbers of jobs, bring trade to poorly linked towns and raise the competitiveness of companies. This is appealing in a country renowned for its overloaded road and rail networks. New inland routes for cargo ships have been mooted as well as new ports and floating hotels1.
The pro-business government’s problem, of course, is age-old and that’s its ability to press reforms and infrastructure programmes through a democratic parliamentary system. It’s a difficulty shared with Japan but not so much China.
Source: How fast can India grow? by Graham Smith, Fidelity UK
