Foreign Bank Stocks May Be A Good Bet Now

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The banking sector was one of the hardest hit sectors during the global financial crisis. However the sector has rebounded strongly in most countries as the global economy recovered from the abyss of those dark days of the crisis. Banks wrote off billions of dollars of bad debt and cleaned up their balance sheets. Many weaker banks failed or were acquired and the better ones not only survived but have become bigger and stronger since. We can safely assume that the worst is over the sector and it is an opportune time to load up on banking stocks. For example, most European banks are in a better shape now than before and have the resources to weather another crisis, although a crisis of the magnitude of the recent financial crisis is unlikely to occur anytime soon. Hence investors looking to gain some exposure to this sector or higher dividend yields can consider some of the foreign bank stocks. Obviously not all banks are out of the woods yet and some are still struggling. Germany-based Commerzbank AG (CRZBY) is one such bank which is still far away from getting back to “normal” . Despit.e a 1:10 reverse in April the bank’s ADR share price is still down since the split. So its important to be selective

Ten randomly-selected foreign bank stocks are listed below with their current dividend yields for consideration:

1.Company:  Banco Santander- Chile (BSAC)
Current Dividend Yield: 3.07%
Country: Chile

2.Company:Royal Bank of Canada (RY)
Current Dividend Yield: 4.03%
Country: Canada

3.Company: HSBC Holdings PLC (HBC)
Current Dividend Yield: 4.29%
Country: UK

4.Company: Westpac Banking Corp (WBK)
Current Dividend Yield: 5.61%
Country: Australia

5.Company: Credicorp Ltd (BAP)
Current Dividend Yield: 2.01%
Country: Peru

6.Company: Nordea Bank AB (NRBAY)
Current Dividend Yield: 3.62%
Country: Sweden

7.Company: DBS Group Holdings Ltd(DBSDY)
Current Dividend Yield: 6.76%
Country: Singapore

8.Company: Societe Generale (SCGLY)
Current Dividend Yield: 1.15%
Country: France

9.Company: Australia and New Zealand Banking Group Ltd (ANZBY)
Current Dividend Yield: 5.04%
Country: Australia

10.Company: Deutsche Bank AG (DB)
Current Dividend Yield: 2.00%
Country: Germany

Note: Dividend yields noted are as of Oct 2, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long SCGLY, RY

Mexican Stocks Are Performing Better Than Brazilian Stocks

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Mexican stocks have been performing better than the Brazilian stocks since last year. While Brazil was adversely impacted due to the slowdown in the Chinese economy, currency exchange volatility and domestic political issues, Mexico has remained stable. The Mexican economy is more closely tied to the U.S. economy and hence Mexico has benefited from the improving U.S. economy. New political leadership implementing energy industry reform is also making the country more attractive for foreign investors.

The following chart shows the 5-year return of the iShares Mexico ETF against the iShares Brazil ETF(in red):

Click to enlarge

EWZ-vs-EWW-5-Years

Source: Yahoo Finance

The iShares Brazilian ETF has been flat in the time period shown while the Mexican ETF has grown by about 60%. Year-to-date also Mexico has outperformed Brazil.

Related ETF:

  • iShares MSCI Mexico Capped Investable Market Index Fund (EWW)
  • iShares MSCI Brazil Index (EWZ)

Disclosure: No Positions

Ten Brazilian Stocks To Consider For Dividend Income

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Global investors generally tend to invest in emerging market equities primarily for their price appreciation potential. The reasoning behind this theory is that the economies of these markets are still developing and they have plenty of room to grow in order to catch up with their developed world peers. Hence stocks should soar higher and higher every year. Instead of purely focused on price appreciation investors in emerging stocks may also want to consider them for their dividends since dividends form a significant portion of the long-term total returns for any market.

The concept of paying dividends to shareholders is becoming increasingly popular with companies in the emerging world also. For example, many Asian emerging companies  pay out a good portion of their earnings in dividends each year and have maintained the payout policy for years. In some countries, the government continues to be a major shareholder in the now publicly-listed but formerly fully state-owned companies. As a  result the management of these firms pay high dividends in order to keep the state happy.

Similar to developing Asia, many Latin American companies are also adopting the dividend culture. In countries such as Brazil, companies are required by law to pay dividends to their shareholders if they earn a profit. According to the Brazilian corporate law, companies are required to pay out a minimum of 25% of their adjusted net income in dividends at least on a yearly basis. This dividend is called as the mandatory dividend. Brazilian companies usually pay out more than the mandatory dividends. It should be noted however that dividends need not be paid if a corporation does have profits in a given year.

Brazilian stocks have been on a roller-coaster ride in the past few few years. The 5-year return for the Bovespa index is shown below. The index is down just over 14.0% year-to-date.

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Bovespa-5-years-return

Source: Yahoo Finance

Despite the volatility in the Brazilian equity market, investors looking to gain exposure to Brazil can consider some of the dividend-paying stocks for long-term investment. Ten stocks are listed below for further research:

1.Company: Ultrapar Participacoes SA (UGP)
Current Dividend Yield: 2.49%
Sector:Oil, Gas & Consumable Fuels

2.Company:Banco Santander Brasil SA (BSBR)
Current Dividend Yield: 3.74%
Sector:Banking

3.Company: Itau Unibanco Holding SA(ITUB)
Current Dividend Yield: 3.07%
Sector: Banking

4.Company: Companhia de Bebidas das Americas Ambev (ABV)
Current Dividend Yield: 3.60%
Sector:Beverages

5.Company:Braskem SA (BAK)
Current Dividend Yield: 3.68%
Sector: Chemicals

6.Company:CPFL Energia S.A. (CPL)
Current Dividend Yield: 4.56%
Sector:Electric Utilities

7.Company: Embraer SA (ERJ)
Current Dividend Yield: 1.05%
Sector:Aerospace & Defense

8.Company:Companhia Paranaense de Energia (ELPVY)
Current Dividend Yield: 8.17%
Sector:Electric Utilities

9.Company:Petroleo Brasileiro Petrobras SA (PBR)
Current Dividend Yield: 1.23%
Sector: Oil, Gas & Consumable Fuels

10.Company: Companhia Brasileira de Distribuicao (CBD)
Current Dividend Yield: 0.84%
Sector:Food & Staples Retailing

Note: Dividend yields noted above are as of Sep 27, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long ITUB, PBR

Who Benefits from Ultra-Low Interest Rates?

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The Global Financial Crisis (GFC) started in the U.S. in 2008 and by any measure has ended. As a result of the crisis the Federal Reserve slashed the Fed funds rate to almost 0% effectively handing out money to banks and other institutions for “free”. The Federal Reserve has kept the rate between 0 to 0.25% since December 2008. Even though we are now in Q3,2013, the Feds continue to maintain the ultra-low rates crushing savers in the process and encouraging speculation and asset price growth. The disastrous effect of this policy for the past five years has been felt by seniors and others that depend on income from their savings in fixed income instruments such as bank CDs.

Currently the interest rate for a 1-year and 5-year CDs are 0.65% and 1.33% respectively according to Bankrate.com data. Hence a senior citizen with a cash savings of one million dollars in a 5-year bank CD would earn a shocking $13,300 in interest per year before taxes. Obviously the majority of the population does not have that kind of money in the bank and hence the intense competition for low-paying service sector jobs remains high.

Here is an excerpt from “At 77 He Prepares Burgers Earning in Week His Former Hourly Wage” in Bloomberg:

It seems like another life. At the height of his corporate career, Tom Palome was pulling in a salary in the low six-figures and flying first class on business trips to Europe.

Today, the 77-year-old former vice president of marketing for Oral-B juggles two part-time jobs: one as a $10-an-hour food demonstrator at Sam’s Club, the other flipping burgers and serving drinks at a golf club grill for slightly more than minimum wage.

While Palome worked hard his entire career, paid off his mortgage and put his kids through college, like most Americans he didn’t save enough for retirement. Even many affluent baby boomers who are approaching the end of their careers haven’t come close to saving the 10 to 20 times their annual working income that investment experts say they’ll need to maintain their standard of living in old age.

For middle class households, with incomes ranging from the mid five to low six figures, it’s especially grim. When the 2008 financial crisis hit, what little Palome had saved — $90,000 — took a beating and he suddenly found himself in need of cash to maintain his lifestyle. With years if not decades of life ahead of him, Palome took the jobs he could find.

However not everyone is suffering from the low rates. According to an article in the recent edition of Bloomberg BusinessWeek American companies are highly benefiting from the Feds policy. The article states that corporate America saved $900 billion in interest in the past four years due to the low rates.

Click to enlarge

Feds-Gift

Source: Bloomberg BusinessWeek

For anyone curious to know why the Federal Reserve keeps rates so low for so long here is the answer straight from the feds themselves:

By law, the Federal Reserve conducts monetary policy to achieve maximum employment, stable prices, and moderate long-term interest rates. The economy is recovering, but progress toward maximum employment has been slow and the unemployment rate remains elevated. At the same time, inflation has remained subdued, apart from temporary variations associated with fluctuations in prices of energy and other commodities. To support continued progress toward maximum employment and price stability, the Federal Open Market Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In its September 2013 statement, the Committee indicated that it currently anticipates that a target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than half a percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

Source: Why are interest rates being kept at a low level?, The Federal Reserve

The unemployment rate stood at 7.3% in August according to the Bureau of Labor Statistics. Since it is well above 6.50%, we can expect the interest rates to remain for the foreseeable future.

Update:

Why U.S. uncertainty could mean ultra-low rates for years — or even ‘decades to come’ (Financial Post)

Which Emerging Markets Are Most Vulnerable To Capital Flight?

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Emerging market stocks have lagged the performance of developed stocks this year. While the S&P 500 is up 18.6% year-to-date most emerging markets are in the negative territory or have yielded meager returns.

A sampling of emerging market returns YTD are listed below:

China’s Shanghai Composite: -4.8%
India’s Bombay Sensex: 1.5%
Brzail’s Sao Paulo Bovespa: -11.8%
Chile’s Santiago IPSA: -11.4%
Mexico’s IPC All-Share: -6.4%

Until a few years ago investing in emerging equities seemed like a no-brainer with stocks in countries like Brazil, China, India, etc. yielding spectacular profits. However that is that the case anymore. For example, just last month currencies of many developing countries from Brazil to South Africa plunged dramatically with volatility in the equity markets soaring in tandem. As is normal foreign capital fled these markets worsening the situation. Fears of another major crisis like the 1997 Asian Financial Crisis seemed likely.

When the Federal Reserve decided to delay the winding down of asset purchases earlier this month, emerging market stocks started to recover. With some countries stabilizing their currency falls and a few positive economic stories coming out of China, emerging stocks may continue their run through the end of the year.

In general, investing in developing countries is not for the faint-hearted. As the events of the past few weeks illustrate the these markets can go darlings to pariahs of international capital almost overnight. Hence investors have to be very cautious in selecting emerging markets for investment opportunities as some countries are more vulnerable to capital flight than others.

From a recent article on FT’s beyondbrics blog:

The economies to the left of the chart – such as India and Indonesia – have big current account deficits and plug the gap with foreign capital. Countries to the left therefore have most to lose from capital inflows drying up. Those towards the top of the chart have seen their currencies depreciate since May, as investors have pulled out.

Click to enlarge

Capital-flight-Vulnerable-Countries

Source: Institute of International Finance (IIF)

Via  Who’s afraid of the big bad capital withdrawal?, beyondbrics

Related ETFs:

  • iShares MSCI Mexico Capped Investable Market Index Fund (EWW)
  • PowerShares India (PIN)
  • iShares MSCI Brazil Index (EWZ)
  • iShares MSCI South Africa Index Fund (EZA)
  •  iShares FTSE/Xinhua China 25 Index Fund (FXI)

Disclosure: No Positions