Some Observations on The Periodic Table of Emerging Markets 2004-2013

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The Callan Periodic Table of Investment Returns shows the annual returns for 20 years for many categories.It is a valuable tool to show the importance of diversification among asset classes. Similar to the Callan Table the following periodic table shows the annual returns for many single country emerging markets from 2004 thru 2013:

Click to enlarge

Best Periodic Table of Emerging Markets

Source: US Funds

Some observations from the above table:

  • Last year some of the traditional favorite emerging markets such as Brazil and Chile were the worst performers while Argentina was the top performer followed by South Africa. Note: The returns noted are the benchmark returns for the country. Brazil’s Bovespa was down 15.5% in 2013.
  • After peaking in 2009, Brazil has disappointed investors every year since with poor to average returns.
  • Mexican stocks has generally yielded good returns in each of the years shown.Even during the depth of the global financial crisis in 2008. Mexico was down only over 22% compared to worse returns for other emerging markets.
  • The performance Russian equity market is closely tied to the price of crude oil. As oil prices soared in 2009, Russian stocks generated a 125% return. However in 2013 as oil prices stabilized Russia yielded an average return of over 6%.
  • Other than Colombia and Peru, no country has been the best performer two years in a row for the period shown. This is why diversification between countries is important. In the past five years the best performing country was different each year.
  • The worst performing country in one year can become the best performing country the next year. In 2008, Russian stock collapsed with a loss of over 67%. But the following year they soared by around 125%. Hence this shows the extreme volatility of emerging markets and the need for diversification among countries.
  • Emerging markets can go from global investors’ top destination to just another emerging market quickly. For example, Chinese stocks ranked the best among emerging markets in 2007 but fell hard the following year in line with other BRIC countries like India and Russia. While in 2007 Chinese equities returned 66% since then their annual performance has been poor.The main reason for this dismal performance is that the Chinese economic growth slowed and investors’ appetite for Chinese stocks has decreased gradually over the years.

 Related ETFs:

  • iShares MSCI Emerging Markets Index Fund (EEM)
  • Vanguard Emerging Markets ETF (VWO)
  • iShares MSCI Brazil Index Fund (EWZ)
  • Market Vectors Russia ETF (RSX)
  • iShares FTSE/Xinhua China 25 Index Fund (FXI)
  • iShares S&P India Nifty 50 ETF (INDY)

For a better quality image you can download the pdf version of the above chart at the US Funds site.

Disclosure: No Positions

A Brief Review of Trade Between US and Russia

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usa russia flagThe U.S.and other Western countries have imposed a wave of trade sanctions against Russia in the past few months. The goal of these sanctions is to weaken the Russian economy.However since Russia is very rich in all types of natural resources it remains to be seen if these sanctions have any impact in the coming months and years. The effect of these sanctions may be insignificant particularly for the U.S. and Russia since the trade between the countries is low by global standards.

In 2013, the top five US trade partners were Canada, China, Mexico, Japan and Germany in that order. U.S. exports to Canada amounted to over $300.o billion in goods alone while imports from Canada totaled over $330.o billion. The U.S. imported over $440.0 B in goods from China last year. China imported about $122.0 B worth of goods from the U.S.

In comparison, Russia’s trade with the U.S. and vice versa was small. Russia ranked as the 23rd largest trade partner with the U.S. with total trade of just over $38.0 billion.

Here are a few other interesting facts on US-Russia trade:

  • U.S. goods exports to Russia totaled just over $11.0 billion in 2013.
  • U.S. imported goods totaling $27.0 billion.
  • Russia was the 28th largest export market for the U.S.
  • The top export categories were: Machinery, Vehicles, Aircraft , Electrical Machinery , and Optic and Medical Instruments.
  • U.S. exported agricultural products worth $1.2 billion. Some of the top categories were: poultry meat , tree nuts, soybeans, and live animals.
  • The five largest import categories were: Mineral Fuel (oil) , Iron and Steel, Inorganic Chemical (enriched uranium) , Fertilizers, and Precious Stones (platinum).

Sources: U.S. Census Bureau, Office of the United States Trade Representative

A Review of the Top Global Auto-Parts Makers

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German auto-parts maker ZF Friedrichshafen AG announced a bid to acquire US-based TRW Automotive Holdings Corp. (TRW) in a deal worth $12.0 billion last month. However the deal is being held due to the German firm’s negotiations with Robert Bosch GmbH, Germany’s largest auto-parts manufacturer, to exit a joint venture according to a recent report by Bloomberg. The merger of ZF and TRW would create the world’s second largest auto-parts company by sales just behind Stuttgart-based Bosch.

TRW is a major leader in car-safety technology while ZF is a top maker of transmissions, steering systems, clutches and axles.

In an article this week The Wall Street Journal reported that M&A deals in this sector could increase as other companies look for deals. From the article:

In a study to be published later this month, PricewaterhouseCoopers LLP will report that while deal sizes are shrinking slightly, far more transactions are getting done and that trend is expected to accelerate in 2014. European suppliers, are showing renewed vigor amid rising sales in their core markets, and Chinese suppliers—spending the most on R&D and growing fastest—are consistent drivers of deal activity.

Private-equity firms, meanwhile, remain active suitors (the biggest in 2014 was the purchase of Gates Corp. by Blackstone Group for $5.4 billion).

ZF’s deal is expected to further boost the appetite for strategic deals. In a note to investors, Morgan Stanley auto analyst Adam Jonas said certain suppliers “should prioritize and aggressively pursue acquisitions, especially in light of a potential TRW+ZF combination.”

Top Global Auto Parts Makers

Source: Auto-Parts Giants Hunt for Mergers, The Wall Street Journal, Aug 13, 2014

The top twelve global auto-parts makers by sales shown in the above chart are listed below with their ADR ticker, if available and current dividend yield:

1. Robert Bosch
Country: Germany

2. Company: Denso (DNZOY)
Current Dividend Yield:  1.30%
Country: Japan

3.Company: Magna International Inc (MGA)
Current Dividend Yield: 1.36%
Country: Canada

4.Company: Continental AG (CTTAY)
Current Dividend Yield: 1.68%
Country: Germany

5.Company: Aisin Seiki (ASEKY)
Current Dividend Yield: N/A
Country: Japan

6.Company: Hyundai Mobis 
Country: South Korea

7.Company: Faurecia (FURCY)
Current Dividend Yield: N/A
Country: France

8.Company: Johnson Controls, Inc.(JCI)
Current Dividend Yield: 1.86%
Country: USA

9.Company: ZF Friedrichshafen AG
Country: Germany

10.Company: Lear (LEA)
Current Dividend Yield: 0.82%
Country: USA

11. Company: TRW Automotive Holdings Corp. (TRW)
Current Dividend Yield: No Regular Dividends paid
Country: USA

12. Company: Yazaki Corp
Country: Japan

Some of the other US-based auto-parts suppliers are Johnson Controls, Inc.(JCI), O’Reilly Automotive Inc (ORLY) and Genuine Parts Company (GPC).

Note: Dividend yields noted above are as of Aug 15, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: DNZOY, CTTAY

Should You Invest In Korean Stocks Now?

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In an earlier article on South Korea stocks I have suggested that investors avoid them. This month the South Korean government announced tax policies that may force companies to spend their cash piles. Some companies may decide to pay increase their dividend payouts as a result of this policy change. In addition the government announced a stimulus package of $40.0 billion to stimulate the stagnant economy.

From an article in FT beyondbrics blog:

Investors are hopeful that the policy will help boost corporate dividends and resolve the so-called Korea discount, because low dividend yields have been seen as one of the biggest factors behind the low valuations of many Korean companies. The Kospi’s price-to-book ratio of 1.07 is about 48 per cent cheaper than that of the MSCI All-country World Index.

“Dividends have become an important factor for investors to consider because many Korean companies are no longer growing as fast as they used to,” said Oh Sung-sik, a fund manager at Franklin Templeton Investment. “If they have to pay additional taxes for future profits, many companies will opt for higher dividends rather than higher taxes.”

Big Korean companies including Samsung Electronics are facing growing pressure from investors to raise their dividends. The country’s dividend payout ratio stood at just 21.1 per cent of net income last year, compared with 34.6 per cent in the US, Japan’s 30.1 per cent and the world average of 40.2 per cent, according to data from Korea Exchange and KDB Securities.

Source: South Korea’s stock market on a roll as investors gripped by dividend fever, Aug 1, 2014, FT beyondbrics

Even after this announcement Samsung Electronics decided not to increase its interim dividend dashing investors hopes.

After reaching a recent peak of 2,093 the KOSPI Composite Index closed at 2,031 on Friday.

Korean companies have been traditionally stingy in paying out dividends to shareholders. As of Aug 6, the dividend yield for Korea was just 1.1% compared to around 2.4% for the S&P 500 according to FT market data. Many European markets have dividend yields much higher.

In summary it is better for investors to wait and see how companies react to the latest tax policy change. If companies decide to raise their dividend payouts then may be worth considering Korean equities.

The complete list of Korea ADRs trading on the US markets can be found here.

Related ETF:

  • iShares MSCI South Korea Capped (EWY)

Disclosure: No Positions

Caution Warranted on Frontier Markets

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Frontier market stocks have soared so far this year. Compared to emerging and developed markets the performance of frontier market stocks is exceptionally good year-to-date(YTD). As of Aug 6th, the MSCI Frontier Market Index increased by 19% YTD while the MSCI indices for Emerging and Developed Markets were up by only 6% and 2.2% respectively.

The chart below shows the performance of three iShares ETFs which can be considered as proxies for these markets:

Click to enlarge

Frontier-Emerging-Devloped ETFs YTD

Source: Yahoo Finance

The iShares MSCI Frontier 100 ETF (FM)shown in in blue above tracks the performance of the  MSCI Frontier Markets 100 Index. This index  is comprised of the 100 of the largest and most liquid constituents of the  MSCI Frontier Markets index. Last year the MSCI Frontier Markets 100 Index was up by over 26%.  In terms of country breakdown, Argentina, Kuwait,Nigeria,Qatar and UAE account for about 70% of this index. Financials amount to nearly 55% of the sector weightings in the index. The iShares Emerging markets ETF (EEM) and the iShares MSCI World ETF(URTH) are shown in red and green respectively.

On the individual country level many of the equity markets are up by double digits YTD. The YTD returns of some of the frontier markets are listed below:

Argentina: 52.6%
Egypt: 34.9%
Sri Lanka: 17.0%
Pakistan: 16.3%
Thailand: 17.1%

Source: The Wall Street Journal

From a recent article in the journal:

The attraction to these rapidly growing markets has been widespread. In June, Norway’s $886 billion sovereign-wealth fund, the largest in the world, jumped on the bandwagon toadd frontier markets to its investments.

The problem for many investors is that the opportunities in frontier markets are few and competition is fierce. Foreign ownership of many companies in the index has reached government limits already.

Ten stocks account for more than 35% of the MSCI Frontier index, according to MSCI data, and companies in Kuwait constitute nearly one-quarter of the overall index’s market capitalization. Nigeria accounts for one-fifth.

The total market capitalization of all stocks included in the MSCI Frontier Markets index is $109 billion, according to MSCI, compared with $4 trillion in the equivalent emerging-market index. Given the markets’ size, some investors worry about a potential, sudden race for the exits. With thin liquidity, executing sales quickly could drive frontier markets sharply lower, if buyers could be found at all, they say.

Fund managers say part of the reason frontier markets appear to have performed so well this year that some countries have been reclassified. Qatar and the United Arab Emirates were considered strong enough to be upgraded to emerging status in June, shrinking the realm of frontier markets and concentrating the flow of foreign cash into fewer countries.

Source: Frontier Boom Pushes Boundaries, Aug 7, 2014, The Wall Street Journal

Index provider MSCI upgraded Qatar and the United Arab Emirates to emerging market status as of May 30. So moving forward these countries will be removed from ETFs that mirror the MSCI index.

Despite the dramatic of frontier market equities investors need to be cautious about investing in these markets. Some of the risks of frontier markets include:

  • Political risk is a major factor in these countries. Political chaos and changes can occur almost overnight. During the 2011 revolution in Egypt, the benchmark index plunged and the market was closed for 8 weeks.
  • Stocks in frontier market exchanges can be highly illiquid. Very few percentage of the population participates in the equity market and hence trading volumes may be very tiny compared to the developed world markets. In times of market meltdowns there may not be a way out even if ones to sell their holdings.
  • Frontier markets in general are small in terms of market capitalization relative to emerging and developed markets. For example,
  • the total market capitalization of Vietnam’s stock market reached about $52.0 billion last month. This figure may be high for a country like Vietnam, but the market capitalization of many developed market exchanges are in the billions or even Trillions. The market capitalization of all stocks listed on the New York Stock Exchange exceeded 17.0 Trllions at the end of this year according to the World Federation of Exchanges.
  • Foreign investor participation in such markets is a double-edged sword. Because of high foreign investment these markets can soar but they can also fall hard when they pull out their investments. Since these markets are small a sudden flow of foreign capital can lead to major falls in equity prices.

Frontier markets, as the name implies, is still the wild west of the investing world. Hence investors should only allocate a tiny portion of their portfolio to such markets. In addition, it is better to invest in individual companies. Any investments should be made via an ETF or a mutual fund.

Disclosure: No Positions