Are Australian Cyclical Stocks Cheap Now?

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The Australian economy remained strong during the global financial crisis relative to other developed countries. The IMF has projected Australia’s GDP to grow 3% this year. The country’s economy is closely tied with China’s since Australia is one of the largest commodity exporters to China. As fears of a hard-landing in China turned out to be incorrect for the most part, Australia’s economy is steady and growing although at  a slower pace than before. The unemployment rate remained steady in January at a seasonally- adjusted rate of just 5.4%.

According to an article by  Roy Maslen, Chief Investment Officer—Australian Value Equities, AllianceBernstein, Australian cyclical stocks offer once-in-a-generation value opportunities at current levels.

From  the article:

In Australia, the crowded equities trade since 2010, driven by fear of the global economic outlook and the sovereign debt crisis in Europe, has been in defensive stocks such as consumer staples, healthcare and property. As investors drove up valuations of these stocks, a lot of Australian cyclical companies—many of which have very strong balance sheets and cash flows—have become unusually cheap. Consequently, the value opportunity in Australian equities, expressed as the “value spread” or discount of the cheapest 20% of stocks to the most expensive 20% of stocks, is close to record highs (Display).

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Australia-Value-Opportunities-Chart

Source: Finding Value in Australian Equities, AllianceBernstein Blog on Investing

Five Australian stocks from different sectors trading on the US markets are listed below with their current dividend yields:

1.Company: Westpac Banking Corp (WBK)
Current Dividend Yield: 5.44%
Sector: Banking

2.Company: National Australia Bank Ltd (NABZY)
Current Dividend Yield: 6.00%
Sector: Banking

3.Company: Australia and New Zealand Banking Group Ltd (ANZBY)
Current Dividend Yield: 5.15%
Sector: Banking

4.Company: BHP Billiton Ltd (BHP)
Current Dividend Yield: 3.02%
Sector: Metals & Mining

5.Company: Telstra Corp Ltd (TLSYY)
Current Dividend Yield: 6.12%
Sector: Telecom

Since most of the Australian firms are not listed on the organized US exchanges, the best way to gain exposure to the country’s cyclical sector is investing via the iShares MSCI Australia ETF (EWA). This ETF has 73% of the portfolio assets in cyclicals. With about $3.0 billion assets the fund’s dividend yield was about 5.18% at the end of January.

Note: Dividend yields noted are as of Feb 28, 2013

Disclosure: No Positions

Related:

Is Australia an Insulated Safe-Haven Investment? (Aug 30, 2012),  Charles Schwab & Co.

A Note On Spanish Banks’ Exposure To Latin America

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The Spanish banking sector has been hit hard in the past few years due to the Global Financial Crisis and then the European Sovereign Debt Crisis. Bank stocks in Spain have recovered from the March 2009 lows although they are nowhere near their pre-crisis levels.

Despite all the continuing troubles at home, some investors are attracted to Spanish bank stocks due to their overseas exposure particularly to the fast-growing Latin American economies. Since Spain used to rule much of Latin American in the past, strong colonial ties still bind the region to Spain. The following chart shows the high exposure of Spanish banks to Latin America:

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Spanish-Banks-in-Latin-America

 

Source: Spanish banks boast strongest FOS network in Latam, The Banker

The Banker magazine noted:

With aggregate assets of $494.5bn, Spanish-owned banks have the strongest foreign-owned subsidiary presence in Latin America.

It is interesting to see U.S. banks having the second highest presence in the region. Bank of Novo Scotia (BNS), one of Canada’s top five banks, has a solid foot print in many Latin American and Caribbean countries.

Currently Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria S.A (BBVA) have dividend yields of 11.16% and 5.31% respectively.

The five-year performance of SAN and BBVA is shown below:

SAn-vs-BBVA-5-Years

Source: Yahoo Finance

Note: Dividend yields noted are as of Feb 22, 2013

Disclosure: Long SAN, BBVA, BNS

A Review of the S&P 500 Index

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The S&P 500 is one of the widely followed U.S. benchmark equity indices. This index is a better barometer of the U.S. markets than the Dow Jones Industrial Average or the NASDAQ indices. Here are some interesting facts about S&P 500:

  • The index was first published in 1957.
  • The 500 companies in the index are the leading companies in the leading sectors of the U.S. economy capturing 75% coverage of U.S. stocks
  • The sector breakdown is shown in the chart below:

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SP500-Sector-Breakdown

  • The average dividend yield of the index is about 2%.
  • As of Feb 27, 2013 the price return for 1, 3 and 5 years are 14.15%, 11.74% and  1.68%. But the total returns for the same periods are 16.78%, 14.14% and 3.97% respectively due to the addition of dividend returns.

Source: Standard & Poor’s

a) S&P 500 – Long Term Price Returns:

SP500-Returns-Long_TErm

b) S&P 500 – Price Returns since 2000:

SP500-Returns-Since-2000

Related ETF:

SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

BRIC’s Trade With MENA Region Rising

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Trade between the Middle East and North Africa (MENA) region and the BRIC countries is increasing yearly since 2001 as shown in the graph below:

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BRICS-Trade-with-MENA

Source: Two years of Arab Spring: Where are we now? What’s next?, Deutsche Bank Research

Resource hungry China and India are interested in the natural resources of the region such as oil, natural gas and Phosphates.  China is also increasing its food exports to the region. Egypt, the world’s largest wheat importer, imports more than half of its demand from Russia.

The BRIC countries are also some of the major supplier of manufactured products and equipment to the region. For example, Tunisia is the largest market for Brazilian cars in the Arab world. China has a big presence in Algeria with the country home to some 35,000 Chinese workers. India and China are also active in Egypt. Brazil and Russia are slowly starting to increase their investments in the oil and gas sector in the region.

Related ETFs:

Market Vectors Africa Index ETF (AFK)
Market Vectors Gulf States (MES)
PowerShares MENA Frontier Countries ETF (PMNA)

Disclosure: No Positions

Lower, Growing Dividend Yield is Better Than Just Higher Dividend Yield

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Stocks that have low dividend yields but grow the yield consistently each year perform better in the long run than stocks with high dividend yields as discussed in this article. Total return of lower dividend stocks in the long run will be higher than the total return of higher dividend stocks.For example, the telecom sector pays a higher dividend than consumer staples sector. However in terms of returns consumer staples sector stocks easily beat telecom sector stocks.

In this post, let me explain this logic using the examples of three ETFs for three S&P sectors. Please note that the charts below show only price returns. If dividends are included the difference would be much here.

a) Consumer Staples Select Sector SPDR ETF (XLP)  vs.SPDR S&P Telecom ETF (XTL) – 2 Years:

Click to enlarge

XLP-vs-XTL-2-Years

 

b) Consumer Staples Select Sector SPDR ETF (XLP)  vs Utilities Select Sector SPDR ETF (XLU) – Long Term:

XLP-vs-XLU-Long-Term

Related ETFs:

Utilities Select Sector SPDR (XLU)
SPDR S&P Telecom (XTL)
Consumer Staples Select Sector SPDR (XLP)

Disclosure: No Positions