Investors’ Home Bias in Select Countries is Falling

Posted by David Hunkar on 8 June 2013, 8:35 am

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:

Many foreign firms have higher dividend yields than their U.S. peers. For years, the S&P 500 has had a dividend yield of just around 2.00%.
Potential to earn higher returns from fast-growing emerging markets.
Diversification benefits since many foreign markets play to a different tune than U.S. markets.
Having all investments such as a home, cash savings, CDs, etc. in the U.S. may be not be the best idea should the U.S. dollar lose it hard currency status or the paper currency dollar plunges in value since it backed by nothing other than faith in Uncle Sam or some other calamity happens making U.S. assets unattractive to foreign investors.

Related ETFs:

iShares MSCI United Kingdom Index (EWU)
iShares MSCI Australia Index (EWA)
SPDR S&P 500 (SPY)

Disclosure: No Positions

The Largest Chinese Companies By Revenue 2012

Posted by David Hunkar on 8 June 2013, 6:56 am

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 Are Outperforming Emerging Markets This Year

Posted by David Hunkar on 5 June 2013, 3:21 am

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

Are Emerging Market Stocks Worth The Trouble?

Posted by David Hunkar on 4 June 2013, 5:21 am

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:

S&P 500: 14.3%
UK’s FTSE 100: 11.6%
France’s CAC 40: 8.4%
Germany’s DAX: 9.7%
China’s Shanghai Composite: 1.4%
India’s Bombay Sensex: 1.7%
Brzail’s Sao Paulo Bovespa: -12.2%
Chile’s Santiago IPSA: -4.8%
Mexico’s IPC All-Share: -4.0%

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:

Developed countries are projected to grow by just 1.2% this year compared to emerging market’s growth of 5.3% according to the IMF. Mark anticipates this trend to continue in the coming years also.
Emerging markets have foreign reserves higher developed markets.
The ratio of public debt to GDP has been declining in emerging markets while it has been increasing in the developed world.

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

Are U.S. Stocks Overvalued Now?

Posted by David Hunkar on 3 June 2013, 4:07 am

The U.S. equity market is one of the best performing market among developed countries so far this year. For example, the S&P 500 is up by 14.35% on price return basis and 15.37% on total return basis year-to-date. Financials have skyrocketed with the sector in the index up by over 20%. Healthcare and Consumer Discretionary sectors also have had a great with a return of 20% or closer to that. Telecoms and Utilities, usually considered as income plays for their slow and steady growth with high dividend payouts, are lagging the overall performance of the market.

Financials were the hardest hit during the global financial crisis. Less than a few years later their strong performance is surprising. As the market sentiment has improved stocks are continuing to soar higher confounding skeptics by ignoring negative news and focusing more on positive news and company-specific events. As a result many investors are wondering if U.S. stocks are overvalued now after the double digit gains in less than six months.

According to a report by Peter Buchanan of CIBC World Markets, U.S. stocks are not yet overvalued at least based on one measure. He states that the the ratio of stock market capitalization to GDP is still lower relative to two earlier highs.

This ratio shows the percentage of GDP that represents stock market value. It can be used to identify if a market is overvalued or undervalued. Any figure over 100% is considered as U.S. market being overvalued and a figure of around 50% is said to show that the market is undervalued. It should be noted however that this metric does not always work perfectly. For example, in 2000 it stood at 153% implying that the market was overvalued. Later the markets crashed. But in 2003 it was at around 130% and instead of falling, stocks went to reach all-time highs. So this measure must be used with caution.

From the CIBC report:

Click to enlarge

Beyond the raft of conventional metrics trotted out by analysts, like forward and Shiller trailing PEs, one interesting metric is the ratio of stock market capitalization to GDP. Publicly listed corporations play a greater role in the economy than they once did. Many listed corporations do more of their business overseas than in the past, and interest rates are also lower. While that complicates longer term comparisons, data for shorter intervals can still convey useful information. At 97%, that ratio today is still some ways from its highpoint of the last two cycles.

Source: Are Abenomics Beneﬁts in Abeyance?, The Week Ahead, June 3-7, 2013, CIBC World Markets

Investors willing to bet on further rise in U.S. stock prices can consider some of the companies listed below:

1.Company: Cullen/Frost Bankers Inc (CFR)
Current Dividend Yield: 3.11%
Sector: Banking

2.Company: T. Rowe Price Group Inc (TROW)
Current Dividend Yield: 2.00%
Sector:Capital Markets

3.Company:Consolidated Edison Inc (ED)
Current Dividend Yield: 4.31%
Sector:Multi-Utilities

4.Company:Airgas Inc (ARG)
Current Dividend Yield: 1.87%
Sector: Chemicals

5.Company:The Clorox Co (CLX)
Current Dividend Yield: 3.42%
Sector:Household Products

6.Company:PPG Industries Inc (PPG)
Current Dividend Yield: 1.59%
Sector: Chemicals

7.Company: Kellogg Co (K)
Current Dividend Yield: 2.84%
Sector:Food Products

8.Company: Quest Diagnostics Inc (DGX)
Current Dividend Yield: 1.94%
Sector:Health Care Providers & Services

9.Company:Ametek Inc (AME)
Current Dividend Yield: 0.56%
Sector:Electrical Equipment

10.Company: Church & Dwight Co Inc (CHD)
Current Dividend Yield: 1.84%
Sector:Household Products

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

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Investors’ Home Bias in Select Countries is Falling

The Largest Chinese Companies By Revenue 2012

Frontier Markets Are Outperforming Emerging Markets This Year

Are Emerging Market Stocks Worth The Trouble?

Are U.S. Stocks Overvalued Now?