A couple of thoughts on EM equities

At last, some peace and quiet.  After two days of searing, 1% move volatility, the S&P 500 finally allowed punters to take a breather yesterday, registering its smallest percentage move since all the way back on...er...last Tuesday.

That having been said, tensions continue to intensify between the West and Russia, with each side accusing the other of culpability for the MH17 disaster.  Whatever the truth may be- and it certainly appears as if the balance of evidence points towards the pro-Russian rebels- we can unfortunately say that at the very least, the Russians have prior form on this sort of thing, right down to denying responsibility for the tragedy.

Whether the EU stands up forcefully to Putin's Russia remains to be seen, of course.   Realpolitik has a funny way of injecting itself into any moral crusade, and one wonders how willing certain EU nations will be to cut off a vital source of export demand and/or energy.

Russian assets have unsurprisingly taken a tumble, with the RTS $ index almost (but not quite) back to where it was when Jay Carney issued his investment advice to go short.



The chart of Gazprom is obviously quite similar.   Now, losses incurred during the Russian invasion of Georgia prompted your author to adopt the principle of never investing in the markets of a nation that invades another sovereign state, unless the invaders speak English.  For the past six years he has held to this precept without fail.  Given that Gazprom currently boasts a dividend yield of 5.4% and a P/E of 2.56, should the price fall back to the March lows, Macro Man will have to consider whether he can swallow his distaste for the Blofeld-like character of Putin and buy some. 


What's interesting is that this latest swoon has come at a time when EM equities generally are faring quite well, as reader abee crombie pointed out in yesterday's comments section.  Over the summer, Macro Man has been working on a little equity screen project for developed and emerging markets.  For reasons noted above, he does not include Russian stocks in the screen.  In the EM space, it is curious to note that the screen's 3 favourite individual markets are all China-related (Taiwan, China, and Hong Kong.)  A sign, perhaps, that the bad news there has been comfortably priced?  (Note that the table displays rankings within the universe- so a low number is better.)



Hmmm....perhaps Macro Man should focus his attention there.   Something tells him he'll sleep better at night owning the Taiwan ETF than Gazprom.....
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Caustic Pop
admin
July 22, 2014 at 9:12 AM ×

Not shocked to see the Far East up there. It is where credit growth has been hardest and fastest post-crisis: https://pbs.twimg.com/media/BtGdo9fIQAA7RKw.jpg:large

But is this time different?

Also interesting to see MSCI ZA up there. The ALSI priced in USD has decently out-performed the MSCI EM trend since the end of Q1 this year: http://oi57.tinypic.com/210by50.jpg

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abee crombie
admin
July 22, 2014 at 2:05 PM ×

Sberbank over Gazprom any day! I already put some away here. Which leads into an interesting delve into the composition of EM 'cheapness'. A lot of it has to do with Banks, which are super cheap in the EM (China, Brazil, Russia) though mainly due to high NIM/ROE and low NPLs (China). Along with the SOE oil stocks which no one wants to touch unless there is a pending election (look at a recent chart of Petrobras. Hey Dilma, vai tomar no cou!)

Third Point's recent letter talked about some investments in Argentina. Election there in 2015. If we go by the playbook of the past 2 years (Brazil, India, Indonesia, Mexico etc) now may be the time to get serious on it

Nice post MM

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Skippy
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July 22, 2014 at 2:43 PM ×

I have held a position in Russia for some time (unfortunately) and added during the episode in March.

The key rub with the valuation is that most of the optically cheap markets and stocks tend not to manage returns for capital. It might seem like an obvious point, but if you look at the best returning markets through history they tend to have the British legal system, property rights and the rule of law, in common (the English language).

Russian oil and gas stocks tend to destroy, steal or confiscate capital via the capital expenditure programs which are also used for national service.

In other emerging markets it might also be the state, but the point is that companies are not run for minority shareholders.

On the positive side, Russian companies are still paying one of the highest market dividend yields globally and leverage is very low by global standards. This is not true in China or Brazil.

Outside of these markets, EM is not very cheap. Perhaps a better way to trade EM is via the diversified miners which have started to out perform or catch up and are levered to unloved China/EM?

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Anonymous
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July 22, 2014 at 3:32 PM ×


Looking at European China proxies, I do not think a chinese slowdown is priced in, China stocks have governance issues and Taiwan has been "cheap" since I can remember...
http://viennacapitalist.com/2014/07/06/elevators-in-china-is-a-chinese-slowdown-priced-in/

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Anonymous
admin
July 22, 2014 at 3:51 PM ×

First of all, i agree that the Moscow backed rebels/morons/separatist are the most likely culprits.

However, I did not really like your wording. You were saying the Russians have prior form on this....
well: so have the US
http://en.wikipedia.org/wiki/Iran_Air_Flight_655
and the Ukraine
http://en.wikipedia.org/wiki/Siberia_Airlines_Flight_1812
and the Isrealis
http://en.wikipedia.org/wiki/Libyan_Arab_Airlines_Flight_114
and...
.. so its not like any nation have the moral high ground here.

With regards to the cheapness of Chinese stocks: I am not sure if the bursting bubble in real estate (look at the numbers, e.g. cement consumption over the years, per capita, etc) is already priced in. Real estate and all sectors connected (construction, steel, finance) are an important sector of the Chinese economy and I think overcapacity is slowly revealed.

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Macro Man
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July 22, 2014 at 4:07 PM ×

@ Anon 3:51 Point taken re prior episodes of the US and Ukraine, though AFAIK the last of the countries you mentioned is too busy with their own problems right now to have opined on the MH17 disaster. It's amazing what sticks in the brain and what is forgotten (or in some cases, never taught, viz CIA involvement in overthrowing Mossadegh)

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Anonymous
admin
July 22, 2014 at 4:34 PM ×

Anon 3:51 here.

Just to be clear: I was not trying to deflect blame (Russia/separatist are most likely perpetrators in this case), just attempting to be fair and balanced (not in the Foxnews way ;)).

I just discovered your blog and I really like it by the way. Have you by any chance looked at the Chinese real estate numbers? The cement production (as a whole and per capita) are quite scary.
br

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Leftback
admin
July 22, 2014 at 6:37 PM ×

Watching EM equities with interest, mainly to see what might be worth buying the next time there is a general global dump whenever there is another real or imagined liquidity shortage.

BUCKY is approaching 81, which in June proved to be a barrier he couldn't surmount. If our favorite carry trade is USDJPY then that means we might see USDJPY make another run at 102, and then presumably fail once more, as nobody really believes we are going to see meaningful Fed tightening beyond the now widely anticipated October end of the current QE program. In line with the above thinking, we can see Spoos surge to 2000 perhaps, on the wings of USDJPY 102, but that should contain it for a while.

The technical picture for EURJPY continues to get weaker and weaker. In part this is reflecting a raft of economic data out of Germany, which indicates that the main engine of the EU economy has been slowing down, perhaps an inevitable result of the EUR reaching a level above 1,3500 where the Southern EU economies simply cannot operate.

Capital markets are currently sustained by the forces of Abenomics, Yellenomics and Dr Aghi's Bazookanomics, but not so much by actual fundamental economics. It cannot last.

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Mr. T
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July 22, 2014 at 7:09 PM ×

"Spoos surge to 2000 perhaps, on the wings of USDJPY 102"...

So you are saying a <1% move is some kind of a surge? Spoos will put on the required 15 points the first time Cook says "watch".

I agree with your assessment that whats driving markets is CB's, but I think I disagree with you that there is no catalyst that will make that, or them, stop. None of these policies are efficacy-based - in fact its the opposite where indications they are not working will only increase the magnitude of the effects.

EM's are cheap for a good reason. I'll stick with my crowded HYG@6% trade over hoping Putin shares his table scraps with me in Gazprom.

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abee crombie
admin
July 22, 2014 at 8:16 PM ×

Not so "Fragile Five" Stock market performance YTD 2014, in local currency, even strong in USD and Euro

India ~ 20%
Brazil ~ 12%
Turkey ~ 20%
South Africa 12%
Indonesia ~ 19%



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Anonymous
admin
July 22, 2014 at 8:40 PM ×

Just my 2 cents concerning the stock screen.
If you converts continuos ecofin variable into digital equal spaced numbers (ranking) you lose the outliers power which very often proves to be importsnt in stock selection. In ither words: it's risky to follow big banks quant model for customer. Ciao ciao
Gianni

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theyenguy
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July 23, 2014 at 5:54 AM ×


Liberalism’s Grand Finale Came On July 22, 2014, On Reports That China Buys US Debt At Fastest Pace On Record.


Asia Excluding Japan, EPP, Emerging Asia, GMF, The Emerging Markets, EEM, EWX, EDIV, DGS, EMMT, more specifically the BRICS, EEB, Brazil, EWZ, Russia, RSX, India, and China, YAO, jumped higher taking the Emerging Market Currencies, CEW, higher, on the Financial Sense report that China Buys US Debt At Fastest Pace On Record.


China Investments, CHXF, CHIX, CQQQ, ECNS, CHII, TAO, CHIQ, CHIE, HNP, YAO, CHII, CHIM, CHXX, REMX, EWH traded to new rally highs. Indonesia, IDX, IDXJ, and Singapore, EWS, EWSS, traded to new rally highs. Taiwan, EWT, and South Korea, EWY, traded strongly higher.


Ambrose Evans Pritchard reports China’s Terrifying Debt Ratios Poised To Breeze Past US Level .


Emerging Market Financials, EMFN, Brazil Banks BBDO, India Banks, HDB, IBN, The Chinese Financials, CHIX, rose to new rally highs. Asset Managers, such as IVZ, BEN, BK, AMP, STT, KKR, traded strongly higher.


Bloomberg reports Record India Bank Issues Seen As RBI Allows Longer Debt. Incentives for Indian lenders to issue longer-dated debt to fund infrastructure and affordable housing will trigger record sales of rupee-denominated bank bonds this year, according to the nation’s biggest underwriter.


The trade lower in the Benchmark Interest Rate, ^TNX, to 2.47%, drove Home Construction, ITB, Design Build, FLM, Networking, IGN, Casinos, BJK, and US Infrastructure, PKB, higher. Smartphone, FONE, and Transportation, XTB, rose to their former rally highs. Nasdaq Large Caps, QQQ, Health Care Providers, IHF, and Steel, SLX, rallied to a new highs.


Global Industrial Miners, PICK, specifically Aluminium Producers, traded to a new rally high, and Copper Miners, COPX, traded strongly higher, as Base Metals, DBB, specifically Aluminum, JJU, traded to a new rally high.


Global Real Estate, DRW, and US Real Estate, IYR, Residential REITS, REM, Mortgage REITS, REM, traded to a new rally high. Global Infrastructure, IGF, and Global Utilities, DBU, traded strongly higher.

Emerging Market Local Currency Bonds, EMLC, traded strongly higher leading Aggregate Credit, AGG, to a new rally high, as the Benchmark Interest Rate traded lower to 2.47%. The case for Interest rates going higher has come of age as David Kotox posts Financial Sense posts Tapering Is Now Tightening.

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Anonymous
admin
July 23, 2014 at 9:52 AM ×

macro man,

you work all your models out in excel alone?

seems like you've had a lot of work done on it

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Anonymous
admin
July 23, 2014 at 12:29 PM ×

RE: Taiwan
"Taiwan has been "cheap" since I can remember".

Sure, look at the long term chart:

http://www.chartsrus.com/charts.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRUl.php?ticker=^TWII

Hit its height around the same time the Nikkei did, so a quarter of a century back...

Time for a new long term cycle to get startet ? In any case, a bet with downside limited by techn. & fundamentals.

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