Differences and Similarities Between Major Frontier Market Indices

Posted by David Hunkar on 3 January 2015, 1:39 pm

Frontier markets refer to all markets that are not developed or emerging. These markets include places like Ecuador, Nigeria, Namibia, Iran, etc. The following map shows the countries that are considered as frontier markets by the global investment community:

Click to enlarge

Source: WSJ Graphics

According to a research report by Ben Garland and Kelvin Dell of Blackrock, index providers classify countries as developed, emerging or frontier based on three factors: economic development, market size and liquidity and accessibility to international investors. Frontier markets are characterized by the lowest of these factors relative to the developed and emerging equity markets.

The frontier universe is comprised of 40 countries. However the assignment of a market as frontier differs between the index providers as the table below shows:

Click to enlarge

Source: Crossing the Frontier, Blackrock

NOTE: In Septmeber 2014, FTSE downgraded Morocco from “secondary emerging market” to frontier market status and excluded Argentina from the Frontier Markets index.

Among the four index providers the index by MSCI is the most widely used.In May 2014, MSCI upgraded Qatar and UAE to emerging market status. After this reclassification the regional allocation of the index looks like shown below:

At a global level frontier markets are tiny in terms of global market capitalization.

The main competition to the MSCI index is the index created by FTSE. For example, in 2013 Vanguard switched their benchmark indices from MSCI to FTSE. I wrote an article comparing the key differences between MSCI and FTSE indices at that time.

Below are some of the differences and a few similarities between the MSCI Frontier Markets Index and FTSE Frontier Markets Index:

The MSCI index has 26 countries in the index but FTSE has only 24. Both the indices give big weightage to Nigeria and middle eastern markets.
Despite a high standard of living and a GDP per capita of $48,000 in 2013, Kuwait is assigned the frontier market status by both MSCI and FTSE because of strict foreign ownership limits in Kuwaiti companies and underdeveloped operational infrastructure.
The evolving markets of Vietnam and Bangladesh are both included in the MSCI and FTSE indices.
Natural resources plays a major in many of the frontier markets. For instance, Nigeria is a major oil producer, Argentina is a major food producer, Ukraine producers iron ore, Zambia is a major copper producer and Vietnam is a leading coffee exporter.
With respect to small economies, the FTSE Index includes countries such as Bulgaria, Botswana, Cyprus and Macedonia while the MSCI Index includes Kuwait, Morocco, Lebanon and Ukraine.
The top 10 markets in the FTSE index is dominated by Nigerian and Qatari companies while the top 10 of the MSCI index is concentrated in Nigerian and Kuwaiti firms.
The selection criteria between MSCI and FTSE varies. From an article in The Wall Street Journal: ” The differences between the two company’s country choices are primarily the result of the selection criteria they use. MSCI considers a country’s accessibility for international investors, the liquidity of its market and its economic growth. In FTSE’s case, for a country to be classified as frontier it needs to meet some crucial points: a formal stock market, few restrictions on capital repatriation and low occurrence of failed trades.”

Sources:

FTSE’s New Frontier Indices Take Aim at MSCI Standard, Sept 11, 2014, The Wall Street Journal

New FTSE Frontier Markets Index is not very good, here is why, Sept 18, 2014, Investment Frontier

Related ETFs:

Guggenheim Frontier Markets ETF (FRN)
iShares MSCI Frontier 100 ETF (FM)
PowerShares MENA Frontier Countries ETF (PMNA)
Market Vectors Africa ETF (AFK)

Disclosure: No Positions

On The Relationship Between Economic Growth and Stock Market Returns

Posted by David Hunkar on 2 January 2015, 8:54 am

One of the myths among investors is that economic growth influences the growth of equity markets.However this is not true. Study after study has confirmed that there is no relationship between economic growth and equity markets growth. This is because stocks can rise for a multitude of reasons which have nothing to do with economic growth.

For example, last year among the BRIC countries, equity markets in China and India were among the best performing markets in the world. But their economic growth were relatively muted compared to their previous years. Despite the average growth, stocks rose relentlessly. Various factors such as P/E expansion, investors’ hopes on economic reforms, political changes, flow of foreign portfolio investments into the equity markets, etc. all played a role in the excellent performance of stocks in those markets.

Nick Mustoe, Chief Investment Officer of Invesco Perpetual wrote in an article that in the 2002 book ‘Triumph of the Optimists’ by Elroy Dimson, Paul Marsh and Mike Staunton, London Business School showed there exists no relationship between economic growth and stock market returns. The 2014 edition of Credit Suisse Global Returns Yearbook also confirmed this theory as shown in the chart below:

Click to enlarge

Source: Credit Suisse Global Returns Yearbook, February 2014 via Global Equities: a long-term investment strategy, 12 November 2014, Invesco Perpetual

Some investors may prefer to developed Europe as a result of the poor performance of equity markets last year and ongoing sluggish economic growth. They may be missing out on potential investment opportunities. As shown above, stocks can still rise even if economic growth remains anemic and no market has consistently ranked the best market year after after.

Ten stocks from developed Europe are listed below with their current dividend yields for further research:

1.Company: Nordea Bank AB (NRBAY)
Current Dividend Yield: 5.14%
Sector: Banking
Country: Sweden

2.Company:Air Liquide (AIQUY)
Current Dividend Yield: 2.56%
Sector: Chemicals
Country: France

3.Company: Autoliv Inc (ALV)
Current Dividend Yield: 2.04%
Sector: Auto Parts
Country: Sweden

4.Company:SABMiller PLC (SBMRY)
Current Dividend Yield: 0.99%
Sector:Beverages
Country: UK

5.Company:Enel SpA (ENLAY)
Current Dividend Yield: 3.99%
Sector: Integrated Oil
Country: Italy

6.Company: Technip (TKPPY)
Current Dividend Yield: 4.34%
Sector: Energy Equipment & Services
Country: France

7.Company: UBS AG(UBS)
Current Dividend Yield: 1.65%
Sector: Banking
Country: Switzerland

8.Company: Fresenius Medical Care AG & Co (FMS)
Current Dividend Yield: 1.42%
Sector: Health Care Providers & Services
Country: Germany

9.Company: Edp Energias De Portugal SA (EDPFY)
Current Dividend Yield: 6.49%
Sector: Electric Utilities
Country: Portugal

10.Company: Siemens AG (SIEGY)
Current Dividend Yield: 3.65%
Sector:Industrial Conglomerates
Country: Germany

Note: Dividend yields noted above are as of Dec 31, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long TKPPY

Chart: U.S. Oil Production To Imports, 1973 To 2013

Posted by David Hunkar on 1 January 2015, 1:27 pm

Crude oil prices plunged by 46% in 2014. Yesterday oil futures for February delivery closed at $53.37 a barrel on the NYMEX. Gasoline prices have followed crude oil and have declined dramatically in the past few months and is now selling for less than $2.0 a gallon.

The chart below compares U.S. oil production to imports from 2973 to 2013:

Click to enlarge

Source: Changing Markets Economic Opportunities from Lifting the U.S. Ban on Crude Oil Exports by Charles Ebinger and Heather L. Greenley, September 2014, The Brookings Institution

From 1980s tru 2006, U.S. production of oil declined steadily.However from 2008 production has consistently increased even as imports of crude oil and related products fell after peaking in 2005.

U.S. oil producers increased production as oil prices continued to stay high in the past few years. Since prices are down by about half it remains to been if many of these producers reduce or shut down their operations.It is highly likely that some of the smaller producers may go bankrupt unlike the major integrate firms like ExxonMobil(XOM), Chevron(CVX), etc.

Oil production in the U.S. rose by nearly 2.5 million barrels per day from 2008 to 2013 from shale and convention sources. From an article today in Bloomberg:

Crude Production

Crude production accelerated to 9.14 million barrels a day through Dec. 12, the fastest rate in weekly data that started in January 1983, EIA data show. It was 9.12 million last week.

“The real story is the shale revolution and the fact that Saudi Arabia, the 500-pound gorilla, refuses to be the one to make the cut to support prices,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “Everyone is fighting for market share here.”

OPEC, which pumps about 40 percent of the world’s oil, produced 30.24 million barrels a day in December, according to a Bloomberg survey, down from 30.36 million in November. The group decided to maintain its output quota at 30 million barrels a day at a Nov. 27 meeting in Vienna.

“In the near term, and by that I mean 30 to 60 days, crude will be under a lot of pressure,” Dan Heckman, Kansas City, Missouri-based national investment consultant at U.S. Bank Wealth Management, said by phone. His firm oversees about $120 billion. “It will take time to work off this inventory glut.”

Source: Oil Caps Biggest Yearly Slump Since 2008 Amid Supply Glut, Jan 1, 2015, Bloomberg

From an investment perspective it is wise to stay away from small oil companies and nibble at major players as stock prices have declined strongly in recent months.

Related ETF:

United States Oil ETF (USO)

Disclosure: No Positions

The British Stock Market Performs Best Under Conservative Prime Ministers

Posted by David Hunkar on 31 December 2014, 3:21 am

The UK General election will take place in May next year. The contest will be mainly between the Conservatives and Labour. Though the radical U.K. Independence Party (UKIP) is growing in popularity among the general public it is highly unlikely to gain any significant number of votes.Ultimately either the Conservative or Labour party will win the elections as has been the tradition in the island country.

Equity markets in the developed world generally tend to have political preference. In the UK, stocks perform better when the conservative party is in power according to historical data. This is hardly surprising since the Labour (or “Labor” in U.S. English) policies have historically been anti-business. For example, Labour’s Ed Miliband has proposed levies on banks and price freezes by utilities. Clearly his plans will negatively impact firms operating in the financial and utility industries.

The table below shows the returns of the FTSE All-Share Index under the last nine Prime Ministers:

Prime Minister and Party	FTSE All-Share Index Return
Margaret Thatcher, Conservative (1979-90)	271%
John Major, Conservative (1990-97)	107%
James Callaghan, Labour (1976-79)	67%
David Cameron, Conservative (2010-2014)	38%
Edward Heath, Conservative (1970-74)	22%
Tony Blair, Labour (1997-2007)	20%
Harold Wilson, Labour (1964-1970)	9%
Harold Wilson, Labour (1974-76)	9%
Gordon Brown, Labour (2007-2010)	-19%

Data Source: Thomson Datastream, AJ Bell Research

Source: World Investment Outlook 2015, AJ Bell

Of the top five best runs in the FTSE All-Share Index, four have come under the Conservative Prime Ministers. During the ‘Iron Lady’ Margaret Thatcher’s administration, the index soared by 271% as the economy took off when she privatized most of the state-owned industries that were plagued by inefficiencies and labour strikes.Under the current prime minister David Cameron, the index has had an excellent 38% return.

The all four worst runs came during labour rule including most recently when Gordon Brown ran the country.

From an investment point of view, it is a good idea to keep an eye on the upcoming election and be ready to take advantage of potential investments or adjust investments as needed.

Related ETF: