Emerging Markets Equity Performance Review

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Emerging markets have easily outperformed the developed world markets since stocks rebounded from March this year. Emerging countries such as Brazil, India, China, etc. continue to attract capital and show strength relative to developed markets. Massachusetts-based EPFR Global which tracks fund movement worldwide, said that another $3.5 billion went into emerging market equity funds for the week ending May 13. Since the March lows, EPFR says $18.6 billion have moved to emerging markets.

The following are some key points on Emerging Markets from an IMF working paper titled “Spillovers to Emerging Equity Markets: An Econometric Assessment” by L. Effie Psalida and Tao Sun:

1.Emerging market equities have outperformed since 2003  and have recovered nicely in the past 3 months. In the chart below, we can see that US, Germany, UK and Japan equity indices lagged in performance when compared to emerging markets. Latin America is ahead of Asia and other emerging countries.Emerging Markets

2. The stock market capitalization to GDP ratio of many emerging markets is now nearing those of advanced economies.

Emerging Market Caps

The above shows the countries like Jordan, Chile have rebounded most from the trough to their peak attained in October 2007.  Russia is lagging behind Brazil, China and India since Russia is more heavily dependent on commodities such as crude oil.

3.Equity market returns of emerging countries have risen at a much higher rate than their developed market peers while the P/E ratios are comparable.

Emerging Market PEs

Source: Spillovers to Emerging Equity Markets: An Econometric Assessment, IMF Working Paper, L. Effie Psalida and Tao Sun

The Brazilian market has returned an astonishing 1199% return between January 2003 and July 2008. In the same time period, the US market has grown the lowest in the above chart. US markets performed worse than those of Germany and the UK.

The P/E ratio of China is the highest as of May 1, 2009 at  about 27.0Russia has the lowest at about 5.0.The P/E ratios if US, India, Chile, Brazil, etc. are very close to each other.

It remains to be seen if emerging markets will continue the momentum and outperform the developed equities this year. Many of the markets such as India, China have already bounced back to reach very high levels though the underlying economy is not growing at the same rate before the credit crunch began.

Related ETFs include:

iShares MSCI Emerging Markets Index (EEM)
iShares FTSE/Xinhua China 25 Index (FXI)
iShares MSCI Brazil Index (EWZ)

Knowledge is Power: UK Housing Picking Up? Edition

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1.Korea’s Ministry of Strategy and Finance reveals details of its $19.6 billion plan for the economy’s new growth engines. Korea announces boost to services sector

2. The FDIC’s Deposit Insurance Fund has plunged to an all time low of just $13 billion as of March 31, or 0.27% of $4.8 trillion in insured deposits. It is worth nothing that since March 31, 15 new banks have failed which includes the biggest one so far this year, BankUnited (which Marla has a special fondness for in her heart and will be providing some ongoing entertainment on).FDIC’s Deposit Insurance Fund Reserve Ratio Plunges To 0.27% Of Deposits

3.May 29 (Bloomberg) — Sheila Bair, chairman of the Federal Deposit Insurance Corp. and a lifelong Republican, boarded Air Force One for the first time in February. Neither President George H.W. Bush nor his son, President George W. Bush, had invited her on the world’s most famous jet in the five years she worked for them. Bair Becomes Bane of Too-Big-to-Fail Banks as Enforcer Geithner Must Trust

4.Britain’s finances are indeed a mess, but the economy is no worse than the rest of Europe and the United States — and housing is even picking up speed.Why Britain May Fare Better Than Expected

5.LONDON–The British government says more than 35,000 new cars have been ordered through its new car scrappage program since it was launched a month ago.

The government and car industry are sharing costs to offer discounts of 2,000 pounds ($3,550) to new-car buyers who trade in a model more than 10 years old.35,000 take advantage of U.K. scrappage program

Is it time to invest in Austria?

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Austrian banks and other institutions are the largest investor in many former communist Central European countries such as Romania, Czech Republic, etc. Since Central European nations are closely tied to Austria both historically and culturally the Austrian cash-rich companies naturally favored them.While it seemed like a strategic move before the credit crunch began, it went horribly wrong since many of these countries’ economies were badly affected in recent times.For example, Hungary went almost bankrupt due to external debt and was bailed out by the IMF with a huge loan. The stock market in these countries also fell hard which in turn affected the Austrian companies. As a result, many of the Austrian banks such as Raiffeisenbanken, Erste Bank (EBKDY) got clobbered badly before the rebound from March lows.Since the economies of the Central Europe have stabilized, banks of Austria and other companies are looking very attractive at these levels. However for American investors the choices are very limited since all the Austrian companies trade on the OTC market. Some of the companies in the OTC market are:

1.Erste bank – EBKDY
2.Telekom Austria – TKAGY
3.OMV – OMVKY

and a few other companies. Most of them are highly illquid. Erste Bank pays a nice dividend of 3.29% and has grown over 200% from the March low of about $4+. Telecom Austria pays a dividend of 7.23% and has a $6B market cap.OMV AG is the oil and gas producer with an yield of 3.63%.The stock is still off from its 52-week high of $85.

The simple and easiest way to get exposure to Austria is to invest via the only country-specific ETF, the iShares MSCI Austria Investable market (EWO). Currently it offers a dividend of 5.70% and has $79M in assets. The expense ratio is 0.52%.

This ETF “seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the Austrian market, as measured by the MSCI Austria Investable Market index.”

The ETF portfolio includes Erste bank, Telekom Austria, Verbund(utility), OMV, Raiffeisenbanken and others. Financials form about 31% of the assets.

German Utility E.ON has Stable Growth and Solid Dividend Yield

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Germany-based E.ON is one of the largest natural gas and electricity producer in the world. The ADR stock trades on the OTC with ticker EONGY.Currently it pays a juicy 5.79% dividend and has a $65B market cap. From its March lows of $22 the ADR has nicely rebounded to close at $35.54 today.

The following are some interesting points pulled from E.ON’s corporate site:

  • E.ON was formed in June 2000 by the merger of VEBA and VIAG, two of Germany’s largest industrial groups
  • E.ON has about 74 GW of installed generating capacity, making us one of the world’s leading power producers.
  • Operate and market an inter-regional gas pipeline system in Germany with a system length of 11,552 kilometers
  • 93,500 employees generated just under EUR87 billion in sales in 2008
  • Electricity and gas sales increased by 26% and 12% in 2008 over 2007
  • The dividend payout amount has increased every year since 2004
  • Since 2004,  yearly dividend payments also increased consistently
  • The 2009 Annual Shareholders Meeting, has approved on May 6, 2009 the cash dividend be increased by 9.5 percent, from EUR1.37 per share for the 2007 financial year to EUR1.50 per share for the 2008 financial year
  • Since the 2003 financial year, the dividend amount has increased by an average of 17.5% per year
  • US and Canadian investors hold 27.4% of all free float stock

Singapore and Malaysia Closed-End Funds

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Singapore and Malaysia used to be hot investment destinations before the current crisis. Malaysia was popular with investors because of its palm oil and other commodities. Singapore on the other hand was known for its off-share banking, trading hub, strong economy, etc. After touching historic highs Singapore and Malaysian funds fell hard in line with the global economic slump.

There are is a closed-end fund that is country-specific for these countries.Closed-end funds are cheaper to invest when they are selling at a discount to their NAVs. Currently these two funds are selling at a discount.However closed-end funds are very volatile during rough market conditions and are not suitable for all investors.

1. Fund Name: Singapore Fund (SGF)
Current Discount to NAV: 12.73%
Fund Size: $83 M

2. Fund Name: Malaysia Fund (MAY)
Current Discount to NAV: 14.01%
Fund Size: $57M