Time for a change of approach in Europe?, Invesco Perptual
The problem with tennis in America, DNA
American decline has been exaggerated: Olive, The Star
Cable companies as robber barons (The Guardian)
Why you should ignore the “slowdown” in emerging markets (Trustnet)
What Silicon Valley can teach Canadian businesses about ‘lean innovation’ (Financial Post)
Singa lion, Singapore
One of the traits common to most investors worldwide is the concept of “home bias” with respect to investments. Home bias simply means investors prefer to invest in their home countries than in foreign countries since they may be more familiar with the companies located in their countries than abroad. However following this strategy may not be the best option for investors. For example, thousands of companies exist in other countries whose stocks may offer the potential for higher returns than the ones in home countries. According to the latest World Federation of Exchange data, the total number of listed globally is over 45,000. But in the NASDAQ and NYSE, just over 4,000 domestic companies are listed. Investors who confine themselves to the U.S. are more likely to miss out on the investment opportunities on the remaining 40,000+ companies.
The problem of home bias has been reducing in Australia, US and the UK in recent years as more investors venture abroad according to an article by Nick Armet of Fidelity Investments, UK. I believe the advent of ETFs and other tools that provide easy access to far flung markets is also contributing to investors’ interest in foreign stocks.
From the Fidelity article:
Mere exposure could help to explain the puzzle of home bias in investment. This relates to the marked preference many investors display towards domestic stocks. This is despite the fact international markets could offer better alternatives as well as improved portfolio diversification.
The chart below shows the extent of home bias in the US, UK and Australia. Home bias has fallen over the last decade showing an increased preparedness to invest internationally, but it remains a significant issue. Given the large weight of the US in the world equity market, investors there have more justification for large domestic weightings but they are still guilty of favouring their domestic market. In the UK and Australia, investors’ heavy domestic bias gives rise to even larger overweights to domestic equities given the lower weighting of these markets in terms of global market capitalisation.
Click to enlarge
A range of academic studies support this finding. Coval and Moskowitz showed that home bias can apply within domestic markets, with investors exhibiting a preference for locally headquartered firms.2 Gur Huberman found the shareholders of regional utility companies tended to live in the service areas of those companies.3
The impact of home bias is felt in other asset classes too. Real estate investors have historically tended to prefer local or regional markets. Financial institutions tend to favour their own sovereign government bonds. Investors seeking inflation protection prefer domestic inflation linked bonds despite evidence that global portfolios of inflation linked securities can provide both protection and greater opportunity for managers to add value. There can be other valid reasons for such preferences, yet there can be little doubt familiarity is at play here.
Note:
2. Coval, Josua D. and Moskowitz, Tobias J. (1999) “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 1999, 54(6), pp. 2045-73.
3. Huberman, G. (2001). ‘Familiarity Breeds Investment’. Review of Financial Studies 14 (3): 659–680
Source: Familiarity breeds investment, Fidelity Investments, UK
For US investors , some of the advantages of investing in foreign stocks include:
Related ETFs:
Disclosure: No Positions
The largest Chinese firms by revenues from the Fortune Global 500 list for 2012 are listed below:
Country Rank Company Global Rank City Revenues($ millions)
1 Sinopec Group 5 Beijing 375,214
2 China National Petroleum 6 Beijing 352,338
3 State Grid 7 Beijing 259,142
4 Industrial & Commercial Bank of China 54 Beijing 109,040
5 China Construction Bank 77 Beijing 89,648
6 China Mobile Communications 81 Beijing 87,544
7 Agricultural Bank of China 84 Beijing 84,803
8 Noble Group 91 Hong Kong 80,732
9 Bank of China 93 Beijing 80,230
10 China State Construction Engineering 100 Beijing 76,024
11 China National Offshore Oil 101 Beijing 75,514
12 China Railway Construction 111 Beijing 71,443
13 China Railway Group 112 Beijing 71,263
14 Sinochem Group 113 Beijing 70,990
15 China Life Insurance 129 Beijing 67,274
16 SAIC Motor 130 Shanghai 67,255
17 Dongfeng Motor Group 142 Wuhan 62,911
18 China Southern Power Grid 152 Guangzhou 60,538
19 China FAW Group 165 Changchun 57,003
20 China Minmetals 169 Beijing 54,509
21 CITIC Group 194 Beijing 49,339
22 Baosteel Group 197 Shanghai 48,916
23 China North Industries Group 205 Beijing 48,154
24 China Communications Construction 216 Beijing 45,959
25 China Telecommunications 221 Beijing 45,170
26 China Resources National 233 Hong Kong 43,440
27 Shenhua Group 234 Beijing 43,356
28 China South Industries Group 238 Beijing 43,160
29 Ping An Insurance 242 Shenzhen 42,110
30 China Huaneng Group 246 Beijing 41,481
31 Aviation Industry Corp. of China 250 Beijing 40,835
32 China Post Group 258 Beijing 40,023
33 HeBei Iron & Steel Group 269 Shijiazhuang 38,722
34 Jardine Matheson 275 Hong Kong 37,967
35 China Metallurgical Group 280 Beijing 37,613
36 People's Insurance Co. of China 292 Beijing 36,549
37 Shougang Group 295 Beijing 36,117
38 Aluminum Corp. of China 298 Beijing 35,839
39 China National Aviation Fuel Group 318 Beijing 34,352
40 Wuhan Iron & Steel 321 Wuhan 34,260
41 Bank of Communications 326 Shanghai 33,872
42 Jizhong Energy Group 330 Xingtai 33,661
43 China United Network Communications 333 Shanghai 33,336
44 China Guodian 341 Beijing 32,580
45 Jiangsu Shagang Group 346 Zhangjiagang 32,097
46 China Railway Materials 349 Beijing 31,991
47 Huawei Investment & Holding 351 Shenzhen 31,543
48 Hutchison Whampoa 362 Hong Kong 30,023
49 China National Building Materials Group 365 Beijing 30,022
50 Sinomach 367 Beijing 29,846
51 China Datang 369 Beijing 29,603
52 Lenovo Group 370 Beijing 29,574
53 China Ocean Shipping 384 Beijing 28,797
54 Power China 390 Beijing 28,289
55 COFCO 393 Beijing 28,190
56 Henan Coal & Chemical 397 Zhengzhou 27,919
57 ChemChina 402 Beijing 27,707
58 Tewoo Group 416 Tianjin 26,411
59 China Electronics 425 Beijing 26,023
60 Zhejiang Materials Industry Group 426 Hangzhou 25,833
61 China Huadian 433 Beijing 25,270
62 China Shipbuilding Industry 434 Beijing 25,145
63 Shandong Weiqiao Pioneering Group 440 Shandong 24,906
64 Shanxi Coal Transportation & Sales Group 447 Taiyuan 24,533
65 China Pacific Insurance (Group) 450 Shanghai 24,429
66 China Power Investment 451 Beijing 24,400
67 Shandong Energy Group 460 Jinan City 24,131
68 Ansteel Group 462 Anshan 24,089
69 Zhejiang Geely Holding Group 475 Hangzhou 23,356
70 Greenland Holding Group 483 Shanghai 22,873
71 Xinxing Cathay International Group 484 Beijing 22,832
72 Kailuan Group 490 Tangshan 22,519
73 China Merchants Bank 498 Shenzhen 22,094
Source: Fortune Global 500, Fortune
Frontier markets which includes countries such as Pakistan, Nigeria, Kenya etc. are outperforming emerging markets so far this year according to a report in FT beyondbrics blog quoting Citi research.
The chart below shows how many frontier countries are beating emerging countries:
Click to enlarge:
Source: Frontier markets: handle with care, FT beyondbrics
From the report:
The MSCI Frontier Market index has gained 13.31 per cent in the first five months of the year – its best start since the index was created five years ago. By contrast, the MSCI Emerging Markets index has fallen 4.4 per cent for the year to the end of May. As analysts at Citi noted: “You have to go back to 2005 to find a year in which FM thrashed EM so decisively.”
It should be noted that most frontier markets are not suitable for ordinary retail investors since they are highly risky and accessing information on frontier companies is not easy. The best way to invest in these markets is via an ETF or a mutual fund. Individual stocks are not the way to access these markets.
The two large Frontier Market ETFs are iShares MSCI Frontier 100 Index Fund (FM) and Guggenheim Frontier Markets ETF (FRN). Both the ETFs are not too big with assets of over $100 million only.This shows investors are not piling into these markets yet. The iShares fund has about 26% of the assets in Kuwait.
Disclosure: No Positions
Emerging equity markets are lagging the performance of developed markets this year. The year-to-date price returns as of May 31st of some of the major emerging and developed indices are listed below:
As economic growth in China slowed and the demand for commodities decreased in the past few months, emerging markets which are dependent on commodity exports were deeply affected. Other factors such as high inflation, fiscal issues, political instability, slow progress of economic reforms, lackluster economic growth, labor issues, etc. have negatively impacted the performance of emerging markets such as India, Russia, Mexico, South Africa, etc.
More recently the currencies of emerging countries have experienced sharp declines with rising fear of a meltdown in the equity markets. So far the plunge in currency prices has not severely hit the equity markets of these countries.
From a May 31st article by Ambrose Evans-Pritchard in The Telegraph:
South Africa’s rand punched through the psychological barrier of 10 to the dollar as investors flee countries with big current account deficits, deemed most at risk. The country’s central bank said it would take action to stem the fall in the rand if moves became “abrupt and disorderly”.
The Johannesburg Stock Exchange says foreigners have withdrawn €1.1bn (£940m) from South African bonds over the past 10 days. The Turkish lira fell to the lowest in 17 months against the dollar, though it has just been upgraded to “investment” quality by Moody’s. The Thai baht fell to a one-year low, a pattern seen in much of emerging Asia.
Bond yields have spiked sharply in Turkey, South Africa, Mexico and Hungary, rippling through down corporate spreads. Yields on 10-year Polish bonds have jumped 60 basis points to 3.60pc in May as even the strongest are drawn into the turmoil. “This is the end of the bull market,” said Benoit Anne from Societe Generale. “I am now throwing in the towel. We are out of virtually all our emerging market bonds.”
Mr.Ambrose noted that of the $8.0 Trillion foreign capital invested in these markets outflows have been tiny so far.
Source: South African rand leads emerging market rout, The Telegraph, May 31, 2013
An article in Bloomberg today echoed similar sentiment on the state of emerging markets. From the article:
The worst month in a year for emerging-market currencies will prove to be more than a momentary bout of weakness to strategists at firms from UBS AG to Societe Generale SA who see the Federal Reserve weaning investors off its extraordinary stimulus.
South Africa’s rand led declines among the 24 developing-nation currencies tracked by Bloomberg last month, tumbling 11.3 percent. JPMorgan Chase & Co.’s Emerging MarketsCurrency Index (FXJPEMCI) fell 3.3 percent, the most since it slipped 7 percent in May 2012. Only China’s yuan gained, rising 0.51 percent.
“For these emerging-market currencies, this is the beginning of a trend that perhaps is going to be longer and deeper in terms of a correction,” Tom Levinson, a currency strategist in Londonat ING Groep NV, the largest Dutch financial-services firm, said in a May 31 phone interview.
Source: Emerging Market Dominoes to Fall as SocGen Sees Rout, Bloomberg
I recently came across an interesting article by emerging markets guru Mark Mobius of Franklin Templeton Investments. He discussed the results of a 2013 Global Investor Sentiment Survey (GISS) conducted by his firm and the case for emerging markets. The key findings of the survey:
According to the GISS, 58% of investors residing in developed markets believe their local stock market will be up this year, but investors in emerging markets were even more upbeat – 66% believed their local stock market would post a bullish performance in 2013. Similarly, investors residing in emerging markets expected higher returns on their investments, with an average return expectation of 12% this year and 18% over the next 10 years. Those in developed markets expected a 7% average return in 2013, and 10% over the next 10 years.
Supporting his theory on emerging markets, he quoted three important factors:
The following chart compares the performance of Emerging Markets against Developed Markets using the respective MSCI indices (Price with Gross Dividends in US $ terms):
Click to enlarge
Source: Investors Living in Emerging Markets are a Bullish Bunch!, Investment Adventures in Emerging Markets, Franklin Templeton Investments
Though their equity markets have soared, most countries in the Europe and even the U.S. are not completely out of the woods yet. For example, though unemployment rate is declining in the U.S. the pace of job growth is not robust yet as employers are still reluctant to take risks. Similarly most governments across the pond seem to be mired in policy paralysis unable to find meaningful solutions to the problems plaguing their economies. Though outside of the Euro zone, the British government has not fixed the banking system despite giving billions in bailouts at the depth of the financial crisis.
Developing countries have many positive factors including the rise of middle class, growing consumption of goods and services, rising wages, etc. in addition to the ones mentioned by Mr.Mark Mobius above. Hence investors need not completely avoid these countries despite the current turmoil. Investments in the mining sector can be avoided. However sectors closely tied to the domestic economy such as banking, consumer goods, utilities, oil, etc. can be considered for potential opportunities.
To get started, ten emerging market stocks from ten different countries with their current dividend yields are shown below:
1.Company: Vina Concha y Toro (VCO)
Current Dividend Yield: 1.78%
Sector: Beverages
Country: Chile
2.Company: Ultrapar Participacoes SA (UGP)
Current Dividend Yield: 2.33%
Sector: Oil, Gas & Consumable Fuels
Country: Brazil
3.Company: Sanlam Limited (SLLDY)
Current Dividend Yield: 5.05%
Sector: Insurance
Country: South Africa
4.Company: HDFC Bank (HDB)
Current Dividend Yield: 0.70%
Sector: Banking
Country: India
5.Company: Telekomunikasi Indonesia (TLK)
Current Dividend Yield: 2.49%
Sector: Telecom
Country: Indonesia
6.Company: China Petroleum & Chemical (SNP)
Current Dividend Yield: 4.21%
Sector: Oil and Gas Producers
Country: China
7.Company:Coca-Cola FEMSA S.A.B de C.V. (KOF)
Current Dividend Yield: 0.82%
Sector:Beverages
Country: Mexico
8.Company: Ecopetrol SA (EC)
Current Dividend Yield: 6.36%
Sector: Oil and Gas Producers
Country: Colombia
9.Company: Malayan Banking Berhad (MLYBY)
Current Dividend Yield: 3.20%
Sector: Banking
Country: Malaysia
10.Company: Gazprom (OGZPY)
Current Dividend Yield: 7.39%
Sector: Oil and Gas Producers
Country: Russia
Note: Dividend yields noted are as of May 31, 2013. Data is known to be accurate from
sources used.Please use your own due diligence before making any investment decisions.
Disclosure: No Positions
