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Tuesday, November 25, 2014

Europe Lowers Interest Rates...Time For European Stocks to Catch Up ?




The WSJ and the FT have published  with analyses of the implications of policies of "easy money"/
lower  interest rates in Europe. The WSJ notes that the policy is at least partly in response to evidence that seems to indicate the low rate policy has "worked" US economic growth is back on track and at this point the predicted inflation has not come about. Certainly the low rates have fuelled rises in the prices of financial assets with the ubiquitous "bubble" terminology in the words of many.

What are the implications for investors ? the WSJ writes

http://online.wsj.com/articles/central-banks-move-to-boost-global-growth-1416617106

Though the moves toward easier money in Europe and Asia are good for investors, they come with multiple risks. They could perpetuate or spark asset bubbles, or stoke too much inflation if taken too far. Also, they don’t address structural problems that policy makers in each economy are struggling to fix.Though the moves toward easier money in Europe and Asia are good for investors, they come with multiple risks. They could perpetuate or spark asset bubbles, or stoke too much inflation if taken too far. Also, they don’t address structural problems that policy makers in each economy are struggling to fix.

The FT writes that many analysts looking at the results of aggressive lowering of rates did to the US equity market as well as the low valuations of European stocks and see potential for a strong move upwards in European stocks.

European equities are not an obvious buy for US investors, who see their own economy forging ahead, corporate earnings beating expectations and a stronger dollar.
Yet with company earnings for the eurozone not as bad as expected, some believe the sector is now undervalued, creating pockets of opportunity in the continent....

·          

Analysts at Barclays believe European equities could rally “significantly” if the European Central Bank embarks on full-blown quantitative easing, which they believe is not yet priced into stocks. They predict European markets, not including the UK, will grow at the most rapid rate of any other major market next year with a total return of 18 per cent, compared twith just 5 per cent in the US and 9 per cent for global and emerging markets.
Jack Ablin, chief investment officer at BMO private bank, is optimistic QE can help the eurozone.
“QE was effective in the US and if we see the ECB act, that should be cause for optimism,” he says, estimating that developed world equities trade at a 25 per cent discount to the US market.

But, as the article notes, the dilemma for US investors is that those low rates that might push up equity prices will also likely mean a lower Euro so that for dollar based investors a good deal of the gain on equities will be lost in the adverse currency movement.

As I noted in a previous article even individual investors have a vehicle  ETF HEDJ which lets them hold European stocks but hedge the currency risk. Apparently investors are incrreasingly looking at this instrument
The most popular exchange traded funds this year include the WisdomTree Europe Hedged Equity, which saw some of its largest daily net inflows in November, according to data from ETF.com.

And even without the currency hedge: 

Some believe European equities have further to rise than the euro has to fall, making them still worth buying even without a hedge. A rule of thumb investors use is that a 10 per cent fall in the euro against the dollar boosts earnings per share for European companies by 10 per cent.

One should of course be cautious about drawing too many conclusions from short term data it is often the case that the moves immediately after major economic events point a way towards long term movements.They often mark inflection points. This may be the case with regard to Europe. The weaker Euro trend continues. European stocks have rebounded quite a bit since October and accelerated more since the ECBs November 21st announcement of a bond buying program but still significantly lag US stocks.

Here are some one year charts

Unhedged Eurozone ETF FEZ



Currency Hedged Euro ETF  HEDJ



Germany (EWG) unhedged


And the Euro/US $ Exchange Rate


What's Been Going on Since Stock Connect Started Last Week

The beginning of stock connect and the announcement of lower interest rates in China has put a significant wind behind Chinese stocks especially the A shares.

Here is ASHR which holds only A shares


And here is GXC which includes all Chinese shares except A shares.


Sunday, November 16, 2014

More on China

http://www.bloomberg.com/news/2014-11-16/shanghai-stocks-out-of-step-with-world-is-key-to-allure.html


http://www.bloomberg.com/video/hong-kong-shanghai-stocks-link-a-massive-step-maynard-UH0lOE1dRAywHtlLAMWaMw.html

Friday, November 14, 2014

More on Stock Connect in China

via Bloomberg

China will waive capital-gains taxes for foreign stock investors using the Shanghai-Hong Kong (HSCEI) bourse link, clarifying its rules three days before the program’s debut provides unprecedented access to mainland shares.
Institutions already investing in Chinese markets through the so-called QFII and RQFII programs will also get a “temporary” tax waiver starting Nov. 17, the Ministry of Finance said in a statement today, without giving a time frame for the exemption. Chinese individuals who buy Hong Kong equities through the link get a three-year exemption, while mainland companies using the connect will be charged tax.
International money managers have been seeking to resolve confusion over the tax policy before the bourse link gives them a new route to access China’s $4.2 trillion stock market. MSCI Inc., which kept mainland shares out of its global indexes in June, said the lack of clarity was one of investors’ biggest concerns.

“It’s positive news for the market and foreign investors,” Zhang Gang, a strategist at Central China Securities Co. in Shanghai, said by phone. “The stock connect can start in a stable manner on Monday.”

Thursday, November 13, 2014

Stock Connect: A Major Change for Chinese and World Equities

On November 17 an important change in the Chinese stock market will take place which will likely have very important long term consequences for not only the Chinese stock market but for the global equities market. Stock Connect will give non Chinese investors access to onshore Chines A Shares and allow mainland Chinese investors access to shares trading ont he Hong Kong exchange.

(Reuters) - A long-awaited trading link between Hong Kong and Shanghai will launch on Nov. 17, a crucial step towards opening China's capital markets that will give foreign and Chinese individual investors unprecedented access to each others' stock exchanges.
The announcement by Hong Kong and Chinese regulators on Monday comes as China is making a big push to widen the use of the yuan, with Canada and Malaysia becoming the latest addition to a growing list of trading hubs for the currency.
The so-called Stock Connect trading scheme could boost the average daily value of stock trading in Hong Kong by about 38 percent by 2015, French bank BNP Paribas estimates, and may ultimately lead to the creation of the world's third largest stock exchange.
The project will at the same time provide a channel for Chinese savers to start moving some of the $8 trillion of private wealth currently in deposits into overseas stocks.
This graphic from the WSJ article on the subject  is a useful overview of the changes

The consequence of this change  is to give foreign investors more than their limited access to stocks listed on the Shanghai market (A shares) and Chinese investors access to shares of Chinese companies traded on the Hong Kong exchange (H shares which are included in the Hang Seng Index). Many companies dual list.
The long term impact of this change is potentially far greater than the near term impact. China’s “economic footprint” is far larger than it’s representation in global stock indices and in the portfolios of global investors. That is because of the limits of accessibility to the Chinese market. A shares have not been included in the emerging market indices. The stock connect will have important long term implications as this analysis in the FT by a Goldman Sachs researcher explains:


The long-term implications for the Chinese market are tremendous. Foreign ownership of A shares, which stands at less than 5 per cent of free float through the current quota systems, will increase as these stocks are added to global equity indices.
There will also be changes to fund allocations, as China is under-represented in global equity benchmarks. It contributes more than 12 per cent of global GDP and a similar share of world trade, but has a weighting of just over 2 per cent in the MSCI All Country World Index. The inclusion of A shares in global equity benchmarks could trigger as much as $21bn of incremental fund allocations to China by 2016.
In the long term, Stock Connect will integrate A shares with Hong Kong shares to create the world’s second-largest market by value. Size aside, it is a market of increased relevance to global investors who are seeking more exposure to China. The integration of A shares into global indices will allow investors to capture China’s growth more broadly and access opportunities that are only available in domestic markets at present. It will also allow international investors to refine their exposure from large-cap oil, telecom and banks towards sectors offering more focused exposure to domestic consumption such as health care and media.
Stock Connect is a big step forwards in further liberalising China’s A share market, creating unprecedented opportunities for investors worldwide. It is also an important component of China’s market reforms including renminbi internationalisation, which will elevate the country’s standing in the global economy

A Bloomberg article gives an idea of the implications of the addition of A shares to the major emerging markets index 
…A-shares could eventually be a 10 percent weighting in the MSCI Emerging Markets Index, according to MSCI. The index has $1.4 trillion of assets that use it as a benchmark. That means over $100 billion worth of demand could come from being included in that one index, albeit incrementally. 

The impact on the MSCI all world index would be to near double the weighting of China from under 2% to a bit under 4%

ETFs and Stock Connect
There are around half a dozen ETFs that invest in A shares. They have been established in partnership with Hong Kong brokers who have been permitted to buy A shares (qualified foreign institutional investors: QFII) An indication of potential interest in this sector is that over 15 ETFs in this sector are currently under registration but not listed.The largest and most liquid of these is ASHR 
ASHR has traded higher all year and has gotten a further lift as the stock connect date has approached moving up 8% in the last 3 months.


But the underlying index still trades at a p/e of 8.9, a significant discount to the overall emerging markets as well as of course the US. So on both a valuation basis and the long term prospects of large inflows there may well be significant long term opportunities in this sector.

Monday, October 27, 2014

The Most Important Fundamental Factor Than Should Affect High Yield Bond Prices Looks Positive

Ultimately the most important risk factor that should be reflected in high yield bond prices compared to investment grade bonds is the risk of default. Effectively high yield bond investors are being paid higher interest because they are taking higher default risk (i.e. not getting paid back).

On that front the recent report from Moody's rating agency is good news for high yield bond investors. As Barrons reports 

High-Yield Default Rate Down To 1.7%, Should Stay Low – Moody’s


Of all the things that make high-yield bonds prone to the occasional market shock, defaults really aren’t one of them for the moment or for the foreseeable future. A Moody’s report out today says the default rate among U.S. companies with speculative-grade ratings fell to a mere 1.7% at the end of the third quarter. That’s near a six-year low and down from 1.9% a quarter earlier, and it’s well below the market’s 4.4% long-term average since 1993. The Federal Reserve’s ultra-low-rate policies since the financial crisis have enabled even the junkiest of junk-rated companies to refinance debt and issue new debt at uncommonly low interest rates...

Sunday, October 26, 2014

This One is A Little Perplexing

FT


Global turbulence triggers flight from EM equities

Global market turbulence has triggered the biggest outflows from emerging market equities in more than a year.
Investors removed $9bn from stocks and shares across Africa, Latin America, eastern Europe and Asia in October, according to figures from the Washington-based Institute of International Finance, which tracks all cross-border investment into developing countries by non-residents.
But here are returns for October
GMF emerging asia  +2.1% (blue)
VWO overall emerging markets  +1.4%(green)
SPY S+P 500 +1.1% (gold)
One month growth of $100,000 total return
This comparison is interesting flows into emerging markets (top) and price movements for VWO (bottom) seems to be evidence of quite a bit of performance chasing buying high and selling low