Time To Invest In British Stocks ?

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British equities are lagging in performance over their developed world peers so far this year. The FTSE 100 is up only 9.4% while the S&P 500, Germany’s DAX and France’s CAC-40 are up by 18.5%, 13.3% and 14.4% respectively.The following chart shows the year-to-date performance of FTSE 100 (in blue) against these three major indices:

Click to enlarge

FTSE100-vs-Other-Indices

Source: Yahoo Finance

Up until mid-August the FTSE tracked or performed better than DAX and the CAC-40 indices. However when emerging markets started to fall due to the sudden depreciation of their currencies against the dollar and other economic issues, the FTSE followed. This is because unlike the DAX and CAC-40, the FTSE 100  is composed of companies that have high exposure to emerging countries. In fact, some major companies in the index generate over half of their annual revenues from emerging countries. So as emerging markets started to unravel the FTSE 100 was more impacted than the DAX and CAC-40.

The top five constituents of the FTSE 100 are:

1.HSBC Holdings  – Banking

2. Vodafone Group  – Mobile Telecom

3. BP – Oil & Gas Production

4. GlaxoSmithKline  – Pharmaceuticals & Biotechnology

5.Royal Dutch Shell A  –  Oil & Gas Production

All the above five firms are global multinationals with a strong presence in developing countries. For example, Vodafone  was able to offset growth decline in European countries with strong growth in developing countries such as India, Turkey and Ghana.

As emerging markets have stabilized in recent weeks the sell-off in British stocks looks overdone and they are poised for a rebound. Hence investors looking to add some exposure to emerging markets can consider adding some of the major British companies at current levels. An added advantage for U.S. investors in British stocks is that the withholding tax rates on dividends paid out by U.K. corporation is 0%. However dividends paid by U.K. REITs are taxed at 20%.

Ten British stocks trading on the U.S. markets are listed below to consider with their current dividend yields:

1.Company: Vodafone Group PLC (VOD)
Current Dividend Yield:4.43%

2.Company: HSBC Holdings PLC (HBC)
Current Dividend Yield: 4.29%

3.Company: British American Tobacco PLC(BTI)
Current Dividend Yield: 3.97%

4.Company: GlaxoSmithKline (GSK)
Current Dividend Yield: 4.70%

5.Company: BP PLC (BP)
Current Dividend Yield: 5.05%

6.Company: AstraZeneca PLC (AZN)
Current Dividend Yield: 5.41%

7.Company: Diageo PLC (DEO)
Current Dividend Yield: 2.27%

8.Company: Aviva PLC (AV)
Current Dividend Yield: 3.35%

9.Company: Barclays PLC (BCS)
Current Dividend Yield: 2.30%

10.Company: Bhp Billiton PLC (BBL)
Current Dividend Yield: 3.89%

Note: Dividend yields noted are as of Oct 4, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

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.

Click to enlarge

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)