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

Ten European Consumer Goods Stocks To Consider

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The S&P 500 is up 19.9% year-to-date as of September 20th. Many of the European markets are also up by double digits YTD but they are still lower the U.S. market. Here are the YTD returns of major European indices:

  • France’s CAC 40: 15.5%s
  • Germany’s DAX Index: 14.0%
  • Spain’s IBEX 35 Index: 12.3%
  • UK’s FTSE 100: 11.8%

Despite the strong rises European stocks especially stocks in the consumer goods sector have more room to run. This is because of the economic recoveries currently underway in the continent. Unlike in the past no new sovereign debt crisis or other crises are on the horizon. The economies of Portugal, Ireland, Italy, Greece and Spain (PIGGS) are not the abyss and are actually in transition mode. The banking sector in these and other countries are in much better shape than before. Economic growth will lead to higher job growth and consumption. Consumer goods companies are bound to profit from this growth. Another advantage held by European multinational firms is that they have a strong presence in former colonies and generate a significant portion of their revenue from those markets.

The chart below shows the 5-year return of the Euro STOXX Consumer Goods Index:

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European-Consumer-Goods-Index-5-Yr-Return

 

Source: STOXX

Ten European consumer goods stocks are listed below for consideration:

1. Company:adidas AG (ADDYY)
Current Dividend Yield: 1.61%
Country: Germany

2.Company:Unilever NV (UN)
Current Dividend Yield: 3.34%
Country: The Netherlands

3.Company:Nestle SA (NSRGY)
Current Dividend Yield: 3.10%
Country: Switzerland

4.Company: Danone SA (DANOY)
Current Dividend Yield: 2.43%
Country: France

5. Company:Henkel AG (HENKY)
Current Dividend Yield: 1.37%
Country: Germany

6.Company:Heineken NV (HEINY)
Current Dividend Yield: 1.69%
Country: The Netherlands

7. Company:Coca Cola HBC AG (CCH)
Current Dividend Yield: 6.06%
Country: Switzerland

8. Company:Compagnie Generale des Etablissements Michelin SCA (MGDDY)
Current Dividend Yield: 2.85%
Country: France

9. Company:Diageo PLC (DEO)
Current Dividend Yield: 2.24%
Country: The UK

10. Company:Koninklijke Ahold NV (AHONY)
Current Dividend Yield: 3.29%
Country: The Netherlands

Note: Dividend yields noted are as of Sep 20, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long HENKY

Knowledge is Power: Future of Blackberry, Job Losses, Central Europe Edition

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Absolute Majority? Merkel Wins Easy Re-Election (Der Spiegel)

Does BlackBerry have a future? (CBC)

Finding cheap shares ready to move on up: How finance professor Josef Lakonishok turned his theory into a $70bn practice (This is Money)

Containing costly job losses (OECD Observer)

Hi-Fis and Low Gears: Manufacturing’s Bounce in the U.S. (IMF Direct Blog)

The American Myth of Cheap Oil and Gas (Bloomberg)

Why pessimism on emerging markets means it is time to buy (Trustnet)

10 retirement stocks to buy now (Canadian Business)

Central Europe: not such emerging markets after all (beyondbrics)

The American Dream, RIP? (The Economist)

Water Falls

 

New ADS: Volaris, A Discount Airline From Mexico

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Mexico-based  ultra-low-cost airline Controladora Vuela Compañia de Aviación, S.A.B. or Volaris (VLRS) listed its American Depositary Shares (ADSs) on the NYSE on September 18, 2013.  The company priced the IPO at $12.00 per ADS for a total of about 26 million shares. Each ADS represents 10 ordinary shares.

Volaris

Here is a brief overview of Volaris:

  • The company was first formed in 2003 to serve the Mexican market.
  • The first flight flew from Toluca to Tijuana in March, 2006.
  • Today the airline operates 80 routes in Mexico and the U.S. with about 43 aircraft.
  • Volaris operates 203 flight segments daily on routes that connect 30 cities in Mexico and 10 cities in the United States.

After opening at $12.76 on listing day the stock closed at $13.83 on Friday. Investors may want to keep an eye on Volaris as the Mexican economy is performing better and the company has lots of potential for growth.

More information can be found on the investor relations site here.

Some of the other Latin American airlines that trade on the NYSE include Panama-based Copa Airlines (CPA), GOL Linhas  (GOL)and Chilean airline LATAM Airlines Group S.A.(LFL).

Disclosure: No Positions

Update: MTR Corporation, Hong Hong’s Metro Train Operator

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In January 2012, I wrote a short article on MTR Corporation, the leading railway operator in Hong Kong. Compared to the subway systems in places like London, New York and Washington DC, MTR seems to the best. The Tube in London is clean but expensive. The DC subway system is clean but stupidly complex with its weird fare system. Many would agree that the morons that came up with the fare system in DC are third-rate crooks just like the politicians that infest that great city above. It is a disgrace that the nation’s capital metro is so pathetic. The New York subway is very cheap to get around with good connections but it is dirty and many stations look like dark dungeons. The system badly needs a complete makeover top to bottom.

The Wall Street Journal recent published an interesting article on the Hong  Kong metro train operator. From the article:

MTR stands apart from its rivals for other reasons. The company is publicly traded and consistently profitable without any direct government support. Those earnings come from another unique characteristic: MTR profits from developing the land above and around its stations, allowing it to benefit from Hong Kong’s booming real-estate market. That land comes from the Hong Kong government, amounting to an indirect subsidy.

The rail operator is 77%-controlled by the government, meaning it is ultimately owned by Beijing, though Hong Kong retains its own government and legal system. MTR made an underlying profit of 4.25 billion Hong Kong dollars (US$548 million) in the first half of 2013, up 5.1% from a year earlier. Just 10% of the profit came from overseas.

MTR’s biggest selling point is its own operations. It has consistently delivered a 99.9% on-time rate while carrying 5.1 million people on an average weekday, ranking it as the world’s 10th-busiest subway system. Despite a relatively modest scale, with tracks spanning about 120 miles, it carries roughly the same number of people as systems in London and New York, which have more than 200 miles of track.

The trains are clean and appear as often as every two minutes at major stations during rush hour. In the past year, MTR added 1,200 train trips a week to ease crowding, a chronic complaint.

Source:  Hong Kong’s Subway System Wants to Run the World, The Wall Street Journal, Sept 18, 2013

MTR trades on the OTC market as an unsponsored ADR with the ticker MTRJY. On Friday the stock closed at $39.51.

Click to enlarge

Hong Kong Metro Map (Source: MTR Site)

Hong Hong Metro Map

You can download the pdf version of the above map here.

Disclosure: No Positions