Are Frontier Markets The Next Emerging Markets?

Posted by on

Frontier markets are the wild west of the investing universe. These markets include countries like Côte d’Ivoire, Kazakhstan, Bangladesh, Nigeria, Qatar, Tunisia, etc. The equity markets in some of these countries have performed well in recent years which is attracting investors’ attention. In a recent article I discussed about these markets and suggested that investors should not into dive into them now.

Investing in frontier markets is not for the faint-hearted due to many risks including political, economic, currency, lack of transparency, etc. Many of these countries will remain as frontier markets for the foreseeable future. While a few of these markets may graduate to emerging market status most of them will not. Investors’ enthusiasm for frontier markets is evident with their rising interest in ETFs for these markets. However this enthusiasm may be misplaced.

From the article Are Frontier Markets Ready for Prime Time? in Bloomberg BusinessWeek:

Even so, the frontier represents 30 percent of the world’s population, crammed into some of its fastest-growing economies. Nourished with enough stability and free-market reforms, and the noblesse largesse of foreign investors, frontier markets are primed to go more mainstream, especially with ETFs like the fledgling iShares MSCI Frontier 100 (FM) now casting for talent. Seeded with just $10 million when it launched in September, the offering has since swelled to $54 million in assets. The question now is how well this fund, and rival Guggenheim Frontier (FRN), can track the momentum of these scattered tiny markets, all while taking in Western money in an orderly fashion.

The average trading volume in the iShares MSCI Frontier 100 ETF (FM) has more than doubled since its launch last year.

Despite their going popularity, frontier markets are still tiny relative to global equity markets. As of late last year, frontier markets represented less than 1% of the global market based on three indices that track them per a research report by Vanguard. Hence the majority of global equity opportunities are in the developed and emerging world.

Click to enlarge

Size-of-Equity-Markets-1

In terms of percentage of global market capitalization also, frontier markets are very small compared to emerging markets.

Frontier-vs-Emerging-Markets-Market-Cap-2

Frontier markets have always lagged emerging markets in market capitalziation at every period in history. For example, while in 1990 emerging markets acocunted for 2% of global market cap as of September 2012 Frontier markets accoutned for just 0.36%.of the global market. After 10 years, emerging markets had grown to 6% of the global market in 2000. But frontier markets have never crossed 0.54% at any point in history.

Source: Exploring the next frontier: A review of frontier equity markets, Vanguard Group

Related ETFs:

  • iShares MSCI Frontier 100 Index (FM)
  • Vanguard FTSE Emerging Markets ETF (VWO)
  • iShares MSCI Emerging Markets Index (EEM)

Disclosure: No Positions

Thailand’s SET Index Reached 19-Year High

Posted by on

The SET index of Thailand equity market reached a 19-year high this week according to an article in The Wall Street Journal.  The Thai bhat also reached its highest level in 5 years. It is interesting that Thailand’s economy is doing so well considering that the country seems to have a shaky political system with the famous “Red-Shirt” political protests that occurred in 2010.

From the Journal article:

Click to enlarge

Thailand-WSJ-Graphic

Moreover, there is broad appeal in Thai assets as the economy strengthens and the government sticks to investor-friendly policies. The economy expanded 6.4% last year, as activity bounced back from damaging floods in 2011, and analysts say growth will likely remain healthy this year, buoyed by a corporate tax-rate cut and government support for first-time car buyers.

Fitch Ratings this month raised the nation’s credit rating a notch to triple-B-plus, while the central bank signaled this week that there is no need for concern over the baht’s recent rise, giving investors the green light to keep buying.

“The medium-term fundamentals remain positive with strong foreign direct investment flows,” said Guan Yi Low, investment director for fixed income with Eastspring Investments, which manages around $94.4 billion in assets across Asia. “We believe the pace of [baht] appreciation is likely to continue.”

Source: Thailand’s Broad Appeal Bolsters Its Currency,  The Wall Street Journal, Mar 21, 2013

Some interesting economic facts of Thailand:

  • Population: 67.0 million
  • Economy Type: Free-market Economy
  • GDP: $646.0 billion (in 2012 based on Purchasing Power Parity)
  • Unemployment Rate: 0.20% in 2012 (estimate)
  • Budget: A deficit of 2.4% of GDP in 2012 (est)

A brief overview of the economy:

With a well-developed infrastructure, a free-enterprise economy, generally pro-investment policies, and strong export industries, Thailand achieved steady growth due largely to industrial and agriculture exports – mostly electronics, agricultural commodities and processed foods. Bangkok is trying to maintain growth by encouraging domestic consumption and public investment. Unemployment, at less than 1% of the labor force, stands as one of the lowest levels in the world, which puts upward pressure on wages in some industries. Thailand also attracts nearly 2.5 million migrant workers from neighboring countries. Bangkok is implementing a nation-wide 300 baht per day minimum wage policy and deploying new tax reforms designed to lower rates on middle-income earners.

Source: CIA’s World Factbook site

None of the Thai companies are listed on the organized US stock exchanges. The best way to invest in Thailand stocks is via the iShares MSCI Thailand Investable Market Index Fund (THD).

The 5-year performance of the iShares Thailand ETF:

Click to enlarge

Thai-ETF-5-Year-Return

Source: Yahoo Finance

The fund has just over $1.0 billion in assets and the number of holdings is 92. This ETF is highly concentrated with Financials accounting for 40% of the portfolio and the top 10 holdings amounting to about 50% of the fund.

Disclosure: No Positions

Update(Nov 28, 2015):

 

Long-term return chart of Thailand SET Index:

Click to enlarge

Thai Stock Market Performance

 

Source: Franklin Templeton 

 

Dividend Stocks Return: U.S. vs. Canada, Australia

Posted by on

The dividend yield of the U.S., Canadian and Australian equity markets as of March 18, 2013 was 2.1%, 3.0% and 4.2% respectively according data provided by The Financial Times.Generally U.S. equities tend to have lower dividend yields than foreign equities.

Recently I came across an article by Jonathan Jacob in Canadian Investment Review in which he discussed about how Canada outperformed the US. on dividend stocks. So I wanted to check the performance of U.S. dividend stocks against Canadian and Australian dividend stocks over different periods. In order to do this comparison, I used the MSCI High Dividend Yield indices.This index is composed of high dividend yielding stocks within an MSCI country index.

Click to enlarge

MSCI-HDY-Index-Comparison

Data Source: MSCI

Note: The returns shown in the chart above are total returns and based on US dollars.

Australian income stocks beat U.S. stocks in all the periods shown above. In the past 10 years, the U.S. stocks returned 9.4% but Australian stocks outperformed this by a wide margin with a return of  17.7%. In the 5-year period also the difference in returns is significant. Though Canadian dividend stocks have lagged over the past one year, in the five and ten year periods they have yielded higher returns than U.S. dividend stocks. Please note that the returns mentioned here do not take into consideration withholding taxes on dividends paid by Australian and Canadian companies in the respective MSCI indices.

One key takeaway from this post is that U.S. investors can earn higher total returns especially in the long-term by investing in Canadian and Australian dividend stocks.

Related ETFs:

SPDR S&P 500 ETF (SPY)
iShares MSCI Canada Index Fund (EWC)
iShares MSCI Australia Index Fund (EWA)

Disclosure: No Positions

How To Invest In Preferred Stocks?

Posted by on

One way to invest in preferred stocks is via ETFs. Three ETFs that invests in these types of stocks are listed below with their current distribution yields.

Preferred stocks are type of security that are both stocks and bonds. They get higher priority than common stocks when a company is liquidated and its assets sold and distributed to creditors.

Here is a definition from Wikipedia:

Preferred stock (also called preferred shares, preference shares or simply preferreds) is an equity security which may have any combination of features not possessed by common stock including properties of both an equity and a debt instruments, and is generally considered a hybrid instrument. Preferreds are senior (i.e. higher ranking) to common stock, but subordinate to bonds in terms of claim (or rights to their share of the assets of the company).[1]

Three ETFs to invest in preferred stocks:

1.Company: PowerShares Financial Preferred Portfolio (PGF)
Current Distribution Yield: 6.25%

2.Company: PowerShares Preferred Portfolio (PGX)
Current Distribution Yield: 6.39%

3.Company: iShares S&P U.S. Preferred Stock Index Fund (PFF)
Current Distribution Yield: 5.97%

Note: Distribution yields noted are as of Mar 18, 2013

These ETFs have higher yields than common stock ETFs. However there is one disadvantage with the preferred stocks and these funds. The dividends paid by the preferred stocks may not always be qualified dividends. Hence as ordinary dividends they will be subject to higher taxes. So before investing in these ETFs investors should carefully analyze them.

Disclosure: No Positions

The 32 Largest German Companies By Revenue 2012

Posted by on

** UPDATE ** 

For the latest list checkout : The Top German Companies By Revenue 2016 (TFS)

______________________________________________________________________________________________

Germany has the largest economy in Europe and is a key member of the European Union. Unlike other European countries the German economy weathered the recent European crisis well and the country helps rescue other debt-ridden EU members. Germany is in the news this week due to its strict and harsh bailout conditions imposed via the EU on the tiny island country of Cyprus.

With a strong manufacturing base and an export-oriented economy Germany is considered as the powerhouse of Europe. Germany was also a pioneer in many innovative policies long before other developed countries.For example,  Kaiser William I also known as the Chancellor Bismarck introduced the pension system for older workers in the late 1880s. This program was later emulated by other countries.

Here are some interesting facts about Germany:

  • In 2011, Germany’s population was about 82 million.
  • Public debt as a share of GDP was about 82.0% in 2012.
  • The unemployment rate stood at about just 6.0% in January of this year.
  • The nominal GDP was $3.6 Trillion in 2011 making Germany the fourth largest economy in the world behind the U.S, China and Japan.
  • Last year Germany exported goods valued at over one Trillion Euros.
  • Germany is a net exporter.

Source: DeStatis

Germany continues its centuries-old  tradition of excellence in engineering and science. As a result today the country is home to some of the leading companies in the world such as BASF, BMW, Volkswagen, Bayer, etc.

Thousands of small and medium-sized companies called as the Mittelstand firms thrive in Germany. But at a global level large scale German multinationals dominate. For example, some of the top world-class companies are found in the Fortune Global 500 ranking.

The German firms in the Fortune Global 500 list for 2012 are shown below:

Country RankCompanyGlobal RankCityRevenues($ millions)
1Volkswagen12Wolfsburg221,551
2E.ON16Dusseldorf157,057
3Daimler21Stuttgart148,139
4Allianz28Munich134,168
5Siemens47Munich113,349
6BASF62Ludwigshafen102,194
7BMW69Munich95,692
8Metro72Dusseldorf92,746
9Munich Re Group76Munich90,137
10Deutsche Telekom89Bonn81,554
11Deutsche Post98Bonn76,307
12Deutsche Bank104Frankfurt74,425
13Robert Bosch110Stuttgart71,600
14ThyssenKrupp122Essen68,791
15RWE124Essen68,345
16Landesbank Baden-Württemberg128Stuttgart67,431
17Deutsche Bahn179Berlin52,808
18Bayer187Leverkusen50,790
19Continental241Hanover42,416
20Lufthansa Group248Cologne41,220
21Franz Haniel272Duisburg38,023
22Heraeus Holding293Hanau36,406
23DZ Bank334Frankfurt33,279
24Edeka Zentrale342Hamburg32,531
25Phoenix Pharmahandel363Mannheim30,023
26Commerzbank377Frankfurt29,236
27Energie Baden-Wirttemberg420Karlsruhe26,126
28TUI453Hanover24,356
29Marquard & Bahls455Hamburg24,258
30Fresenius479Bad Homburg22,973
31KFW Bankengruppe491Frankfurt22,496
32Bertelsmann492Getersloh22,427

Source: Fortune

As most of the German companies do not trade on the organized US exchanges the simple and easy way to invest in them is via the iShares Germany ETF (EWG).  The fund has $3.5 billion in assets and financials account for less than 17% of the portfolio.

Disclosure: Long E.ON(EONGY), RWE (RWEOY) and Fresenius(FMS)

Related Links: