International Stock Market Snapshot

Below we provide our unique trading range charts for 21 major country indices.  For each index, the light blue shading represents between one standard deviation above and below the 50-day moving average.  When the price is within this trading range, it is considered to be in “neutral” territory.  The red zone represents between one and two standard deviations above the index’s 50-day moving average.  Moves into or above the red zone are considered “overbought.”  Moves into the green zone (more than one standard deviation below the 50-DMA) are considered “oversold.”

With the exception of a few Asian countries, most indices shown below are trading into overbought territory.  China’s Shanghai Composite is the only index trading below its 50-day moving average.  Australia, Brazil, South Korea, Taiwan, the UK, and the US look to be the most overbought of the bunch.  After trading in perpetual downtrends for nearly all of 2008 and the first few months of 2009, most countries have now been trading in solid uptrends for five months now, with only a brief pullback here and there.  Brazil, China, Hong Kong, India, Malaysia, Mexico, Singapore, Sweden, Spain, South Korea, and Taiwan have all taken out their 52-week highs in recent months, while the rest still have a bit further to go.

Source: Bespoken Research

Gold Breaks $1,000

While the current price of gold ($1,005) is not at an all-time intraday high, if it holds onto these gains throughout the day, it will be at an all-time closing high.  Even with the potential for a record high close, gold’s current run to $1,000 has been met with a lot less fanfare than the prior two runs.  They say a watched pot never boils, but once you take your eye off of it…

Source: Bespoken Research

Are There Bright Spots Amid the Global Recession? – Nouriel Roubini

This week, I take a look at which countries have best weathered the global recession and credit crunch. All economies have been affected by the crisis, but a combination of policy responses and strong fundamentals has given some countries, especially some emerging market economies, a relative edge. These same strengths could lead the countries I highlight below to perform better as the global recovery begins, even if their growth rates remain well below 2003-07 trends.

What do these countries have in common? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in countercyclical fiscal and monetary policies, actions that were not possible in past crises. In contrast, countries that borrowed heavily to finance domestic consumption in the days of easy money are now facing sharp economic contractions. Despite the relative strength of these countries, however, their ability to return to sustained growth will depend on structural reforms that support consumption.

Latin America

A couple of countries in Latin America have thus far been able to weather this crisis better than their neighbors. Brazil and Peru stand out for their relatively healthy fundamentals and financial systems. Both countries have benefited from being relatively closed economies and from having diversified export markets and products. They also took advantage of the boom years (2003-08), reducing external vulnerabilities and increasing savings (fiscal and international reserves). By the time these the crisis hit, both countries had well regulated financial systems that saved them from being contaminated by toxic assets. The fact that their domestic credit markets are at an early developmental stage, so consumption is not very dependent on credit, helped them shelter internal demand. Finally, these countries enjoyed strong policy credibility.

Brazil

The Brazilian economy is definitely showing signs of resilience, given the massive adjustments among the developed economies. As early as Q1 of 2009, GDP data showed signs of resilient consumption despite the contraction in investments and the collapse of the industrial sector. Throughout the second quarter, manufacturing continued to show very weak performance vis-à-vis 2008 levels, although the sector has shown some tentative signs of improvement on a monthly basis. In the meantime, the retail sector continues slowly to adjust to a much less favorable environment than in 2008, and sales growth keeps on moderating, due to slower real income growth and a challenging credit atmosphere. Yet consumer confidence, which has now almost returned to precrisis levels, could support consumption, despite the labor market losses to come. The central bank’s own assessment of the state of the economy suggests that the monetary and fiscal stimuli will remain in place to help the recovery process. The fiscal packages for infrastructure and the housing sector, as well as the tax breaks to the auto industry and capital goods sales, should in part support the labor markets and the expansion of domestic production.

Peru

Peru’s economic performance has been relatively strong compared to its global and regional peers despite slowing sharply. In fact, Peru’s economy continued to grow in Q1 2009, with domestic confidence holding up and real lending to the private sector keeping growth at high levels. Construction projects continued, and the currency did not experience sharp fluctuations. Although Peru’s economy might contract mildly in Q2 and Q3 2009 due to tardy monetary policy actions and slow implementation of fiscal stimulus (an infrastructure development program), these programs are likely to take hold and prompt the economy to bounce back by the end of the year. A high level of international reserves also helped the central bank avoid destabilizing currency movements and properly provide liquidity to the financial system. Moreover, previous liability management operations helped Peru to reduce risks associated with maturity and currency mismatches, and to reduce external debt.

Asia-Pacific

Australia

Australia narrowly escaped a technical recession by force of luck and policy. Despite a slowdown in global manufacturing activity, China and other emerging markets continued to tap Australia’s abundant natural resources, boosting Australia’s net exports in 2009. Meanwhile, a leap in fiscal spending and a reduction in policy interest rates prevented a sharp falloff in consumer spending and housing prices. Thanks to resilience in Australia’s twin pillars of growth, exports and domestic demand, expenditure GDP growth turned positive in Q1 2009. Production and income measures of GDP nevertheless indicate Australia is effectively in recession, but the good news is that the bottoming of production around the world suggests Australia will avoid technical recession this year and that its effective recession will be brief.

China

China’s aggressive fiscal and monetary stimulus helped reaccelerate growth in the first half of 2009 from a near stall at the end of 2008. Manufacturing is expanding, new orders are up and the property market correction has been clipped. Yet it remains uncertain whether the government’s response merely bought time. China’s stimulus adds its own risks, including those of asset bubbles, overcapacity and nonperforming loans. Yet there are some signs that, supported by government incentives, domestic demand has been stronger than anticipated. A sustained increase in consumption, which has lagged overall growth in recent years, would require a reallocation of funds domestically, likely through patching holes in the Chinese social safety net. The Chinese stimulus has been dominated by infrastructure projects, which could boost productive capacity but would do little about structural factors that keep national savings rates high. However, there could be space to implement some such countercyclical policies in H2 2009 and 2010. If so, the Chinese recovery could have greater legs and could provide more support to other countries. If these efforts fail or are delayed, however, Chinese and global growth could be much more sluggish.

India

Despite slowing from highs of 8% to 9% growth, India’s economy will grow close to 6% in 2009. Amid domestic and global liquidity crunch, large domestic savings and corporate retained earnings are financing investment. Sluggish labor market and wealth effects have hit urban consumption. But low export dependence, a large consumption base and the high share of employment (two-thirds) and income (one-half) coming from rural areas has helped sustain consumption. Pre-election spending, especially in rural areas, and high government expenditure, are also pluses. Timely monetary and credit measures have played a key role in improving private demand, liquidity and short-term rates and reducing the risk of loan losses. Credit is largely channeled by domestic banks, especially state-controlled ones, which have low loan-to-deposit ratios and little exposure to toxic assets. IT exports have held up despite repercussions on jobs and consumer spending. The oil price correction cushioned India’s trade deficit and large foreign exchange reserves helped the country withstand capital outflows in 2008. High returns in real estate and infrastructure and planned liberalization also helped boost capital inflows and asset markets when global risk appetite revived recently.

The Philippines

The Philippines’ stalwart consumers saved the economy from the recessions that plagued its more export-dependent neighbors. Remittances proved surprisingly resilient despite the global economic slowdown as Filipino laborers, especially professional or skilled workers, continued to find strong demand overseas. This was partly due to the government’s diligence in forging new hiring agreements with several countries. Unperturbed remittance growth shielded domestic demand from high unemployment rates at home, which is obscured by the country’s very loose definition of employment. In the meantime, however, dependence on external demand for Filipino labor denotes a lack of progress in developing the local economy. Apart from land grabs by Persian Gulf countries, the Philippines has attracted little foreign investment of the kind needed to create jobs and lift Filipinos out of the poverty that afflicts a third of the country’s 90 million people.

Indonesia

The global downturn and commodity correction have hit Indonesia’s exports and government revenues. But a low export-to-GDP ratio and a greater reliance on domestic demand relative to its Asian peers have cushioned growth. The Chinese stimulus is, to a degree, boosting commodity exports. Fiscal stimulus and election spending, along with monetary, credit and foreign exchange measures since late 2008, have sustained private demand and financing needs, despite tight external credit. Corporations’ external liabilities and banks’ nonperforming loans are significantly lower compared to those of the 1997-98 crisis. External loans and attractive yields, meanwhile, are financing the fiscal deficit. A revival of risk appetite and the carry trade has buoyed capital inflows. Swap agreements with Asian central banks have cushioned exchange-rate pressures and the scarce foreign exchange reserves. Favorable election outcomes and aggressive antiextremist measures have boosted investor confidence despite some recent risks, and investors are bullish about ongoing reforms and unexploited opportunities in the resources sector.

Europe

Poland

Amid the general Eastern European malaise, Poland’s economy has been a bright spot. In the first quarter, the economy posted positive real growth of 0.8% y/y, outperforming all other E.U. economies with the exception of Cyprus.

Why is Poland a standout? For starters, Poland’s economy did not boom to the same extent as its regional peers in the Baltics and the Balkans, and therefore did not build up the same level of accompanying external imbalances, which helps explain its milder downturn. Second, as Eastern Europe’s biggest economy, Poland has a large domestic market, making it relatively less dependent on exports to ailing Western Europe. Third, the country’s flexible exchange rate and record-low interest rate have helped cushion the slowdown. Finally, Poland proactively distinguished itself from others in the region and boosted investor confidence in May by securing a $20.5 billion flexible credit line from the IMF, a special facility reserved for emerging markets with strong fundamentals. While Poland’s economy has weathered the global turmoil better than its regional peers, a rapid recovery is unlikely and the outlook is not without risks. In particular, Poland’s fiscal situation is deteriorating, which will likely push back the country’s planned euro adoption in 2012.

Norway

Although Norway’s economy slipped into negative growth in the fourth quarter, its downturn will be among the mildest of advanced economies, with analysts expecting a contraction in the range of 1.0 to 2.0% in 2009 and a return to growth in 2010. What set Norway apart are years of current account and budget surpluses (both in the double digits as a percentage of GDP), a sizable public sector and a hefty war chest of oil revenues amassed in the Government Pension Fund. Consequently, Norwegian policymakers have had ample room to use fiscal and monetary policy to soften the downturn.

Statistics Norway estimates the impetus from fiscal policy in 2009 to be 3% of mainland GDP–the strongest stimulus since the 1970s. Meanwhile, the benchmark interest rate is at an all-time low of 1.25%, down from 5.75% in October 2008. Also helping to alleviate the pain of contraction is the fact that Norway’s economy is well equipped with automatic stabilizers. Given Norway’s comparatively bright outlook, there is talk that the country will be the first among advanced economies to hike rates. The central bank sees the first hike coming in Q2 2010, though some analysts think it may come earlier.

France

The French economy managed to avoid a recession in 2008 and is expected fare best among the big four euro zone member countries in 2009. France’s more balanced domestic demand-led growth model has served it relatively better during a synchronized global downturn. The large social safety net fully served its automatic-stabilizer purpose in a countercyclical manner. Fiscal measures were targeted to the short term and included mostly nonrecurring spending. France’s relatively healthy banking sector received targeted support and is in a position to fully sustain the recovery in the euro zone.

North America

Canada

Despite relatively sound finances that helped it outperform the rest of the G7 in 2008 and early 2009, Canada’s exposure to the U.S. for trade and investment suggests its recovery may lag that of the U.S. (a trend that Q2 2009 data seems to support). However, a more consolidated financial sector with lower leverage, lower default rates and a revival of domestic demand should support recovery in 2010, albeit one characterized by below-potential growth. Canadian households and corporations still have more access to credit than their U.S. counterparts, a factor that helped buffer Canada from a more severe property market correction. Yet the nascent revival in consumption may be weaker than the Bank of Canada expects. The rebound in commodity prices is mixed news. Higher commodity prices and greater demand for metals, if not yet for oil and cheap natural gas, should contribute to an expansion of mining and energy output–but too strong a surge could boost the Canadian dollar, exacerbating Canada’s manufacturing weakness as it boosts labor costs.

Middle East and North Africa

Overall, countries in the region were relatively sheltered from the financial spillovers, but suffered from reduced demand. Expansionary fiscal policies throughout the region and effective–if in some cases belated–financial-sector support offset the export and investment weakness. The GCC countries most reliant on foreign financing to fund credit expansion, such as the UAE, are suffering the sharpest effects. However, past savings provide a cushion. In the long-term the region’s growth outlook depends on the price and effective deployment of its hydrocarbon endowments.

Egypt

Despite Egypt’s GDP growth slowdown to well below recent trends in 2009 (about 3.8% instead of the 7% in 2007 and 2008), the country has been able to weather the financial crisis better than its peers. The narrow exposure of Egypt’s financial sector to foreign structured finance, coupled with a low reliance on foreign bank loans, sheltered the country. Egypt’s countercyclical monetary and especially fiscal policies also shielded the economy somewhat, and previous reforms reduced financial vulnerabilities. Doubling the country’s stimulus package took the budget deficit to 6.9% of GDP for the last fiscal year (similar to the previous one). Should the FDI slowdown persist, financing this deficit will be more costly, however, and political issues surrounding the succession of Egypt’s president could potentially hamper reforms.

Qatar

Driven by an increase in liquefied natural gas (LNG) exports and government investment, Qatar is expected to be one of the fastest-growing economies in the world, with real GDP growth verging on the double digits in 2009. Government support allowed Qatar’s financial sector to more easily weather the turmoil than some of their Emirati or Kuwaiti counterparts. Noticeably slower growth in the economy’s nonhydrocarbon sectors, combined with lower loan growth, contributed to lower profitability and the weakening of balance sheets, prompting the government to buy stakes in local banks, as well as property and equity holdings on the balance sheets of local banks. Qatar’s relative strength contributes to the fact that Qatar’s sovereign wealth fund was among the first to return to significant foreign investment.

Lebanon

Lebanon appears to be withstanding the crisis remarkably well. The Lebanese banking sector was protected by regulations that restricted investment in subprime assets and in general kept Lebanese banks isolated from foreign credit. Domestic political uncertainty also added to the isolation. Unlike most emerging and frontier markets–but like Morocco and Tunisia–Lebanon continued to attract an impressive inflow of funds in 2008, although at a slower pace, meaning its asset markets outperformed. The recent political stability has given a boost to the tourism and real estate sectors. Stronger performance, however, would require Lebanon to more aggressively reduce its extensive debt burden, something which may not happen until 2011.

Source: Nouriel Roubini

Commodity Snapshot

Below we provide our trading range charts for ten major commodities.  The green shading represents between two standard deviations above and below the commodity’s 50-day moving average.  Moves at or above the green zone are considered overbought, and moves at or below the green zone are considered oversold. 

As shown, the energy and metal commodities are all currently at or above their trading ranges.  Even natural gas, which has been in a perpetual downtrend, has moved into overbought territory over the last couple of weeks.  Interestingly, gold is going up along with oil and the stock market, and the falling dollar definitely has something to do with it. 

The agricultural commodities like corn and wheat aren’t spiking along with energy and metals, which is a positive for those worried about food inflation.  And finally, coffee has bounced nicely in recent weeks after falling to the bottom of its range.

Source: Bespoken Research

Commodity Snapshot 28-7-09

Below we provide our trading range charts for ten major commodities.  The green shading represents between 2 standard deviations above and below the commodity’s 50-day moving average.  Moves outside of the green zone are considered overbought or oversold. 

The only commodity currently overbought is copper.  Oil, natural gas, gold, silver, and platinum are all right in the middle of their trading ranges.  Corn and wheat have been tanking lately and are getting close to the bottom of their normal trading range.  And coffee and orange juice are finally seeing some reversion to the mean after seeing some short-term divergence a couple of weeks ago.

Source: Bespoken Research

Market ‘Noise’: How Seasoned Traders Learn to Ignore It

For many years I was a futures market reporter. I spent time working right on the futures trading floors in Chicago and New York. Most of the time my daily reporting “beat” involved interviewing traders and analysts and then writing three daily market reports. For months at a time I would cover the same markets, day in and day out. It was a fantastic learning experience and an opportunity that very few get.

One thing I eventually discovered from covering the same markets day after day, month after month, was that the vast majority of the time the vast majority of the markets’ overall fundamental and technical situations did not change on a day-today basis. Yet, as a market reporter I was conditioned to write about why the market went up one day and why the market went down the next day, and so on.

Even though a market may have been in a very narrow trading range for days or weeks, I had to ask the traders and analysts every day to come up with some fresh fundamental and\or technical reasons why that market moved only a fraction. Reporting on the New York “soft” futures markets (coffee, cocoa, sugar, cotton and orange juice) is especially difficult for a reporter. He or she needs to dig up and write about some fresh-sounding news every day. The soft markets many times just do not have much fresh fundamental news on a daily basis — or sometimes even on a weekly basis, for that matter. Conversely, it was easier covering the financial and currency markets because there was usually at least one government economic report that came out every day that would make those markets wiggle a bit. Or, some government official (like Greenspan) would make comments to which those markets took notice.

As time went on and I came to better understand markets and market behavior, and as I studied specific trading strategies, I realized that the day-to-day market “noise” is not of much use to most traders. Here’s a specific example of market noise:

Recently the live cattle futures market was up a bit on a Monday due to talk that the cash cattle trade later in the week would be at higher money. On Tuesday the futures market dropped a bit because of ideas the cash cattle market trade later in the week may not be at firmer money, but steady at best. Nobody was trying to manipulate the live cattle market that week. It was just a case of differing opinions getting center stage when the market closed on different sides of unchanged.

For a trader who tries to follow the near-term fundamentals in a market too closely, hearing that kind of conflicting news can be a nuisance at least, or a factor that prevents successful trading results at most. It’s not easy for less-experienced traders to ignore the differing daily drumbeat of fundamental news that is reportedly impacting a market.

The lesson here is that prudent traders should not become overly sensitive or reactive to most of the day-to-day fundamental news events that are reported to be moving the market on any given day. What is important for the trader is that he or she recognizes and understands the overall trend of the market, and that daily market “noise” is usually an insignificant part of the overall process of trading and of market behavior, itself.

Commodity Snapshot

Below we highlight our trading range charts of ten major commodities.  The green shading represents between two standard deviations above and below the commodity’s 50-day moving average, and a move above or below this green shading is considered overbought or oversold.

On the energy front, oil and natural gas have declined quite a bit over the last week.  Oil remains in the center of its trading range, however, while most other commodities are now in oversold territory.  Gold, silver and platinum have all pulled back sharply since early June, while corn, wheat, and coffee have fallen off a cliff.  The one commodity that has bucked the overall downtrend is orange juice.  It was in oversold territory just a couple of weeks ago, but it has rallied nicely in recent days.

Source: Bespoken Research

Country P/E Ratios

taking a look at valuations, growth expectations, and stock market performance for more than 20 countries that have trackable ETFs.   Russia currently has the lowest P/E ratio at 6, followed by Italy (10) and France (11).  At 14, the US is more attractive based on its P/E ratio than most countries.  Taiwan has the highest P/E at 60, and the UK is surprisingly bad at 34.  It’s valuation is worse than China’s.  Germany also has a very high P/E ratio at 27.

Source: Bespoken Research

Emerging Markets with Mark Mobius

Emerging markets have been outperforming thus far in 2009, do you think this trend will continue for the rest of the year?
Although we are optimistic about the opportunities for upside potential, it is important to realize the volatility is still with us and will be with us for some time. This means there will be periods when the markets go down as well as periods when they go up. We should therefore take advantage of dips in the markets to buy stocks cheaply, paying attention to valuations and long-term earnings growth prospects in order to avoid buying or holding expensive stocks. We continue to find good value in markets like China, Thailand, Brazil, Mexico, Turkey and South Africa.

What sectors are you looking at now?
Commodity stocks look attractive because many of them have declined below their intrinsic value and we expect the global demand for commodities to continue its long-term growth. Consumer stocks also look attractive. With rising per capita income and strong demand for consumer and other goods, the earnings growth outlook for these stocks is positive.

Will the global equity market retest the low point in March?
There is always the possibility of this happening and it could be triggered by something totally unexpected, such as war breaking out on the Korean peninsula or a massive global flu pandemic. As I have said, markets will continue to be volatile as global economies remain fragile and we should see rises and falls in the months ahead.

Which country do you expect to be the best performer among the BRIC markets?
That would be impossible to say at this time but we think China has a good chance of achieving that goal. Of course, I’m talking about measuring that move from the beginning of this year. Russia also looks very undervalued.

In view of China’s strong market performance, would you say that it’s in a bull market?
You can see that it is a bull market since the increase has been so dramatic, but it would be difficult to call it a sustainable bull market in view of its very sharp rise. I still feel we will face volatility and there will be corrections along the way. We do, however, expect China to continue to lead the global market recovery.

Will the Chinese government propose another stimulus package in 2009?
That all depends on the success of the measures already in place. They clearly have the resources to do this again. We should expect them to act if current measures and programs do not produce the desired results.

You mentioned in October that Russia’s cheap stocks were a once-in-a-lifetime opportunity. Since then, the RTS Index fell a bit more to 498, then subsequently doubled. After that great performance, are stocks still good value, or is it time to take a breather?
Russian stocks still look cheap. Yes, they have risen dramatically from their low point but they are still a long way from their previous high. Of course, the PE has risen this year but Russian stocks, as represented by the MSCI Russia index, are still trading at a single-digit PE of 6.8x as of end May, 2009 – an increase from an even lower 3.4x as of end December 2008.

Do the economic problems within Russia – unemployment rising to 10%, inflation at 13%, and possible GDP contraction of 6% – undermine the investment case for the country right now?
These factors will have a short-term impact on the market, but we always evaluate companies on a long-term basis – taking a five-year view. Thus, we are in fact able to benefit from buying stocks at cheaper prices now.

Do you see any parallels between the market crash of 1998 in Russia and the one over the last year? Is there fear focused on this market that leads to sharper crashes than elsewhere? Did you learn anything in 1998 about Russia that helped you navigate this crisis?
No, because Russia and most other markets are in a much stronger position, financially and economically, than they were in 1998. Russia has built up strong foreign exchange reserves and trade surplus that have enabled it to withstand external shocks to its economy.

The Russian market was also affected by the correction in commodity prices due to its high exports of oil and other commodities, as opposed to any extraordinary fear focused on this market. However, we maintain the view that commodity prices will continue to increase in the long term due to greater demand from emerging markets and a relatively inelastic supply. This will thus benefit Russia in the future.

The most important lesson we’ve learnt from 1998 or any other crisis is that markets always recover – it’s just a matter of time. Thus one should always maintain a long-term and patient view with regard to investing.

Lastly, you have been investing in the emerging markets for the last four decades. Being an expert in investing in emerging markets, do you have any advice to share with investors during the current market situation?
It is very important for investors to remember some key principles: (1) diversify – it is important to diversify in order to minimize risk – this is why investing in a diversified mutual fund is best for investors, (2) look globally – no country has a monopoly on good opportunities so you must search globally – this is why we have global emerging-market funds, (3) be patient – don’t expect to obtain quick gains – the long-term investors do best, (4) don’t invest unless you understand the investment you are making – understanding will strengthen your confidence and enable you to make long-term investments.

Source: Mark Mobius

Build wealth with BRICs

The Australian sharemarket accounts for about 2 per cent of global market capitalisation, yet the median Australian balanced fund has a portfolio allocation of almost 40 per cent to the local market and just 25 per cent to international equities, according to the June 2008 Mercer asset allocation survey.

Exchange-traded funds (ETFs) are a simple, low-cost way to overcome this home bias and get more exposure to offshore markets such as in fast-growing emerging economies.

This ‘home bias’ is by no means unique to Australia – investors worldwide favour domestic shares to overseas markets – but the extent of the bias is magnified in Australia because the sharemarket here represents such a small proportion of global capitalisation.

There are several compelling reasons why a significant home bias may be sub-optimal within a global framework:

• Differing sector breakdowns across regions (because of specialisation) mean that a domestic share portfolio will never be as well diversified as a global portfolio.
• Because Australia represents a very small percentage of global sharemarket capitalisation, opportunities therefore exist for exposure to stronger-performing offshore markets.
• Many emerging economies have had much stronger recent growth than their developed counterparts, fuelling much discussion about their potential to deliver strong future returns.
• Access to international markets has never been simpler, easier or more cost-effective.

‘Developed bias’ in international shares

Most international equity allocations are benchmarked to a broad, developed index (for example, the MSCI World ex-Australia index), with little or no exposure to developing countries, or emerging markets. However, the emerging markets represent around 11 per cent of the MSCI All Country World index, more than either Japan or the UK and almost four times larger than Australia’s weight.

Therefore, within the (arguably neglected) international equity allocation, there exists another bias towards developed markets at the expense of the emerging and frontier countries. We explore these markets in more detail below.

Recent institutional appetite for emerging markets

Flows to emerging markets funds during the first quarter of 2009 were estimated to be about US$3.5 billion by Barclays and Morningstar. Strong flows continued through April also, with US$1.05 billion flowing into the iShares MSCI Emerging Markets Index Fund alone during the month.

These recent robust (primarily institutional) flows have created speculation of whether it is the right time to begin investing in emerging markets.

Historical performance and correlation

Emerging markets suffered badly during the global market turmoil, falling close to 50 per cent from their peak in late 2007, similar to Australian equity market performance.

Despite these falls, long-run performance of emerging markets has been strong, with a historical average return of 8.7 per cent a year between January 1990 and May 2009, compared with 4.5 per cent from MSCI World ex-Australia index and 8.6 per cent from the S&P/ASX 300. However, the volatility of emerging markets returns has also been higher – annualised risk of 21 per cent compared with 13 per cent and 14 per cent for MSCI World ex-Australia and S&P/ASX 300 respectively.

Although emerging markets returns have moved more in sync with the developed world recently, investors should not necessarily assume that higher correlations will persist. The chart below shows the 12-month historical correlations of the MSCI Emerging Markets index with the S&P/ASX 300 and MSCI World ex-Australia.

Correlations of MSCI Emerging Markets
Index with other markets

The chart highlights how unstable correlations can be, especially over short periods. Using short-term historical correlations as predictors of future values is therefore a very unreliable method of forecasting future correlations

Rationale for possible strong emerging markets performance

As mentioned, there has been recent speculation as to whether the rapidly growing emerging economies will deliver strong sharemarket returns. Reasons include:

Economic growth

Australia accounted for just 1.2 per cent of 2008 world GDP, with the US and Europe each making up more than 20 per cent of global economic output. Outside the developed economies, the emerging markets accounted for 28 per cent of total global economic output, driven largely by Brazil, Russia, India and China (commonly referred to as the ‘BRIC’ economies) contributing a combined 22 per cent.

Not only do the emerging economies now make up a significant portion of the global economy, but they have also been growing much faster recently than the developed economies, with 2008 real GDP growth of 6.3 per cent, compared with 1 per cent for the developed economies. Australian real GDP grew by 2.2 per cent during the same period.

This strong real GDP growth for emerging markets is expected to continue, with forecasts of 0.5 per cent in 2009 and 4.7 per cent in 2010, compared with developed market expectations of a 3.6 per cent contraction and 1.3 per cent growth respectively, according to BGI and JPMorgan.

Because of this strong recent and forecast economic growth, the emerging markets have been the focus of much discussion about their potential to deliver strong future investment returns. As the economic development of emerging countries continues, their sharemarkets should become increasingly attractive as part of a diversified international equity portfolio.

Strong fundamentals

In April 2008, price/earnings (P/E) multiples were approximately 15.7 times and are now significantly lower with 12-month trailing P/E of 9.1 and forward P/E of 10. Given these current low valuations relative to historical averages of 14 times, some investors believe that emerging markets are relatively cheap and provide opportunity for strong future returns.

Commodity exposure

Many emerging countries are rich in natural resources. As developed markets poise for a recoverym there is likely to be a need for commodities from emerging markets. In addition, developed markets generally rely on the goods and services produced by emerging markets. Exports from emerging markets may also help them to recover before developed markets.

Improved market access

Along with the recent rapid growth of many of the emerging economies, their equity markets are also rapidly becoming larger with improved market liquidity, breadth and accessibility.

Brazil, Russia, India and China now account for almost 15 per cent of global publicly traded shares. Although a large proportion of the shares issued in these countries are still not available for direct investment by foreign investors, they are becoming increasingly more accessible over time. Thus the significance of emerging markets is likely to increase in the foreseeable future.

Access emerging markets on the ASX with iShares

In the past, gaining exposure to many international markets (especially those less developed), was costly and difficult, if not impossible, particularly for individual investors. This was largely because of a lack of liquidity in the underlying markets, foreign investment restrictions, political and regulatory instability, and prohibitive transaction costs.

Since the cross-listing of iShares exchange-traded funds (ETFs) on ASX, investors wanting to gain simple, transparent and cost-effective international diversification can do so with ease and precision, across a range of developed and emerging markets.

ETFs enable investors to gain broad exposure to entire sharemarkets with relative ease on a real-time basis and at a lower cost than most other forms of investing, thus overcoming many of the barriers mentioned.

For example, an Australian investor can gain exposure to the broad MSCI Emerging Markets index by buying a single ASX-listed ETF (ASX code: IEM). For those seeking more focused exposures, iShares ETFs are listed on ASX covering Taiwan (ITW), South Korea (IKO), China IZZ) and the four BRIC countries (IBK).

Source: Ben Garland

Oil Bull Market: Fast and Furious

Oil has now rallied 108% over the last 118 calendar days.  Based on the standard bull market defintion of a 20% rally preceded by a 20% decline, the current oil bull is already the sixth strongest since daily pricing begins in 1986.  In terms of duration, it only ranks 14th out of 26.  The average gain for prior oil bull markets has been 66.09%, while the average duration has been 217 days.  This makes the current rally in oil nearly twice the average bull market gain in nearly half of the average duration.

Source: Bespoken Research

Asian markets won’t retest lows, says Chris Wood

Chris Wood, street smart Global Equity Strategist of CLSA, yesterday said in an interview on CNBC-TC18 that the US markets remained in a bear market rally while Asia and India were in a secular bull market.

He said the Indian and Asian rally was started by local money, which according to him was a big long-term positive. He added that Asia and emerging markets (EMs) would be the biggest beneficiary of the Fed’s monetary easing. He also said liquidity could lead to massive asset bubbles in Asia and EMs.

Q: What have you made of the markets’ move in the past few weeks?

A: I was expecting what I call a counter-trend rally, driven by a counter-trend rally in the S&P this year. The key point is that the S&P in the fourth quarter last calendar year went further below its 200 DMA, and at any point since 1932, in the midst of the Great Depression. So, it was almost inevitable that we were going to have a counter trend rally at some point in 2009. Actually, I thought it would start with the arrival of the new administration in January-February, but it didn’t start so much.

My guess as to how far this rally can go is 1000-1050 on the S&P, but I am viewing this as a counter-trend rally in a secular bear market for the US. I have a different view for Asia and India. I believe Asia and India remain in a secular bull market. So I have a fundamentally different view for the Western world and Asia.

Q: How would you describe what happened in 2008 then in India and other Asian markets like China? Deep cyclical correction? Over 10-15 months in an overall secular bull market?

A: I would describe that as a deep cyclical correction in Asia and EM driven by massive collective damage from what was going on in the Western financial system. That is why with my Absolute Return Portfolio I have been recommending to investors from the middle of 2007 only to own my recommended portfolio, by hedging the Western financial risk by being short on Western financial stocks. But in my view, the sell-off in Asian stocks last year was exacerbated by dramatic liquidation by foreign money, particularly by hedge funds and so-called funds of funds.

What is positive in the rally that began in Asia in October-November last year is that we’ve seen growing local investor participation in Asian market, so the people who bought earlier in this rally since late last year weren’t foreign fund managers but local investors throughout the region. That growing local investor participation is a long-term positive.

Q: So are you saying that the secular bull market has commenced again in India and other Asian markets?

A: Yes, I think it has recommenced. Two technical pieces of evidence support that view. First, Asian markets and EMs have been leading this rally ever since they bottomed last October-November. Second, when the S&P made a new low in March, the Asian markets and EMs did not make a new low. That is technical evidence to me that Asian markets and EMs have become the asset class of choice in global equities.

In the very short term, because Asian markets and EMs have outperformed dramatically, there is some scope for the S&P to outperform. However, in the long run, in my view, the asset class of choice in which to remain fundamentally overweight is Asia and EMs.

In my view, the biggest beneficiary of the dramatic monetary easing, quantitative easing undertaken by the Western central banks led by the Fed, won’t be American/British consumers or American/British stock markets. The biggest beneficiaries will be Asia and EMs. In fact, the dramatic monetary easing could lead to massive asset bubbles in due course in Asia and EMs because the excess liquidity will flow to the best growth story and the best growth stories in the world are Asia and EMs. They have the best demographic dynamics and have the healthiest economies because, unlike the Western world, they do not have the structural leverage problems.

Q: Often, the measure of the restart of a bull market after a bear market is when the previous highs get taken out. How long is it before you think India and other Asian markets can take out their old bull market highs?

A: I don’t assume that happens quickly, because I am bearish on the Western world. If I wasn’t bearish on the Western world, then I would say very quickly, but I am. So in my view we are in a process here, we have commenced a process of incremental decoupling from Western markets. At the beginning of 2008 many investors in China and Indian equities believed in decoupling but by the end of 2008, after a dramatic collapse in Asian stock markets after the Lehman bankruptcy, investors stopped believing in decoupling and started believing in the absolute opposite.

The absolute opposite was an export-correlated train wreck with the US consumer. People became extremely negative on the most important EM story, which was not India but China. This year the Indian and Chinese economies have shown growth momentum; those very bearish concerns were misplaced. So we now have some empirical evidence that Chinese and Indian economies are able to decouple to a certain extent from the American economy, from the American consumer.

The American economy is not growing, so that is building confidence in asset classes. We have begun the process of incremental decoupling. But I think unfortunately when the S&P turns down again, when people realise that it is an L-shaped situation in the US, not an U-shaped or V-shaped recovery, you will get renewed correction. But my view is that next time the Western stock markets go down the Asian markets will prove much more resilient. But this process is incremental; it is not going to happen on a 12-month view.

Q: How bearish are you on the US markets?

A: I would expect a retest of the 660 level in due course in the US if the equities correct and it coincides with the new dollar rally because the dollar rally is on deleveraging. But if the dollar keeps declining, the lows on the S&P need not be so large because some of the downside will be taken on the dollar.

Q: Even if the S&P were to go for a retest you think none of the EMs, including India, will go for a test of their 2008 lows?

A: I don’t believe in a world where the S&P revisits the lows of March. I don’t think the Asian equity markets, India, will revisit the lows because the Indian economy has demonstrated its domestic demand-driven resilience this year. We are now getting people talking of 5.5-6% growth – a few months back the RBI had come out with statements that growth was going to be much slower than expected and it said that growth was going to be 6%.

Reality is that at the beginning of this year investors thought 6% was not attainable, but the data that have been coming out have been a positive surprise. The Indian economy is keeping its growth – not by artificial stimulus measures by the government – so basically the data have been a positive surprise this year and the government has been another positive surprise, which has been a clear mandate that should allow a more coherent policy that should allow for a renewed vigour in the infrastructure cycle now.

Q: How positive is the election?

A: I don’t want to over-dramatize it because of the Indian government’s history of disappointing on reform expectations. But I what I do think is positive is that most foreign investors were on the sidelines before the election as they knew the situation is inherently unpredictable. So because of the clarity and because you don’t have a weak coalition government, I think that was a major catalyst for foreigners to reinvest in India, and logically the sector that should benefit is the infrastructure sector. The other point is that it has removed the risk that the fiscal deficit in India could get out of control.

Q: What are you overweight on in India and China?

A: I am overweight both on India and China but in the last quarter more India, because I was more overweight China in the first quarter. But in my long only portfolio, I am 33% in India and my biggest weight is in Indian banking though I did add an infrastructure name after the election.

Q: Public sector units or private sector?

A: Both, but if I were making a new allocation it would be to a private sector bank.

Q: This trait to tanking up to defensives, you think that trend is over?

A: Tactically, Asian markets have had a big rally and people were fortunate to be in the high-beta names and they should be thinking of moving to less-high-beta names now, 70-80 on the oil price, you should reduce the beta names. But I would reduce in the commodity-driven stocks, not banks.

Q: Do you find any discomfort with regard to valuations in India?

A: PEs look scary in India, especially infra, but India is a genuine domestic demand-driven growth story. So it deserves a high PE premium. On a price to book basis India looks undemanding. The whole risk in Asian valuations is in the potential negative correlation to the Western world.

Source:Prieur du Plessis

China – Secular bull in commodities remains intact

The Chinese Purchasing Managers Index (PMI) for May remained in the expansionary zone of higher than 50%, although it moderated to 53.1% from 53.5% in April, according to Li & Fung Research Centre. Although eight of the 11 sub-indices were slightly lower than their respective levels in the previous month, it is noteworthy that the new export orders index returned to the expansionary territory for the first time since June 2008. “Strong domestic demand, together with an improving export situation, has helped resume the expansion of the manufacturing sector in China, “said the report.

China’s PMI seems to indicate that the country might have seen the worst of the GDP growth statistics. (The Hong Kong PMI is used as a proxy of the Chinese PMI prior to 2004.)

Source: Plexus Asset Management (based on data from I-Net Bridge)

Importantly, China’s PMI for new export orders shows the Index again expanding (i.e. above the 50 level) and, based on the close relationship with the Metals Index, should provide further support for commodity prices.

Source: Plexus Asset Management (based on data from I-Net Bridge)

David Rosenberg, the closely followed chief economist and strategist of Gluskin Sheff, argues in a newsletter on Monday that the Asian economic revival, with strength spreading across the continent, may be for real. This is, needless to say, bullish for the commodity complex, with gold, copper and oil all having broken above their 200-day moving averages just as the US dollar has cracked below its key support level.

“The US is still the largest economy in the world by far, but it is losing its dominance each year and the fact of the matter is that it is a mature service-driven economy. Emerging Asia in general, and China in particular, are still the marginal buyer of basic materials, and their economic success is more critical to the outlook for commodities,” said Rosenberg.

He highlights that the world has just endured the steepest world economic setback in 70 years and yet commodity prices across a broad front – gold, oil, copper, soybeans -  managed to bottom at their highest “recession levels” of all time. “This attests to the supply discipline by today’s resource companies compared to their predecessors, and affirms our belief that what we experienced last year was a severe cyclical correction in what is still a secular bull market – you can connect the dots on the chart and see that the CRB looks a lot like what the S&P 500 looked like in the months following the sharp 1987 collapse,” said Rosenberg. It seemed like the end of the world in October of that year, and yet in retrospect it was just the fifth year in what proved to be an 18-year secular bull phase.

My research concurs with Rosenberg’s conclusion that commodities still seem to be in a supercycle that was only temporarily interrupted by the global economic malaise. As inflation money finds its way into commodities, it is still not too late to purchase these, but only on price corrections that are bound to occur from time to time.

Source:Prieur du Plessis

Oil Up 99% In 75 Trading Days

Oil has rallied more over the last 75 trading days than it did at any time during its entire bubble run from 2001-2008.  In fact, its current rally of 99% since the February 12th low is nearly double the highest 75-day rally during the last oil bull (From December 2001 to April 2002, oil rallied 55% over 75-days.)  Oil has also gone from $33.75 to $67.75 in just 75 trading days.  During the 2001-2008 oil bubble, it took 409 trading days to complete the same task from January 2004 to August 2005.  While many investors are arguing that oil’s rally is a good sign for the global economy and equity markets, let’s hope it doesn’t keep up the pace, or else we’ll be right back to $150 in no time.

Source: Bespoken Research

Most Overbought ETFs

With stocks rallying around the world, the many ETFs that track various equity markets have moved significantly above their 50-day moving averages.  Below we highlight the most overbought ETFs in relation to their 50-day moving averages. 

As shown, the Russian stock market ETF (RSX) is the most overbought, trading 36.17% above its 50-day.  India (INP) ranks second at 35.72%, followed by the steel ETF (SLX), emerging market Europe (GUR), metals and mining (XME), and Singapore (EWS).  The majority of the ETFs on this list track countries.  The rest are generally concentraded in the commodities area.

Source: Bespoken Research

Emerging Markets ETF – EMM

One of my best trades for 2009 has been a long position in EEM, the emerging markets ETF. The chart of the week below shows that emerging markets have been consistently outperforming the S&P 500 index since the beginning or January (see ratio study at top of chart) and was one of the first major equity groups to top its 200 day simple moving average (dotted green line) in late April. While the SPX has been going sideways during May, emerging markets have continued to tack on gains, bolstered by rising prices for commodities.

I would not be surprised to see EEM finding increasing resistance at several stages in the 34-40 range, but for now at least, I see no reason to exit EEM at least until its performance relative to the SPX begins to falter.

Source:Bill Luby

International Market Snapshot

Below we highlight our trading range charts of the major stock indices of 22 countries.  For each chart, the light blue shading represents between one standard deviation above and below the index’s 50-day moving average.  The red shading is between one and two standard deviations above the 50-day moving average, and moves into or above the red zone are considered overbought.  As shown by the charts, markets aren’t just rallying in the US.  In fact, equities have rallied more in most other countries than they have in the US since the March 9th lows.  As you’ll see below, every single country is trading in overbought territory, with Hong Kong, India, Taiwan, Singapore, Russia, and South Africa the most overbought.

Source: Bespoken Research

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Elliott Wave on Crude and the USD

Short Term Forecast Update

The USD is in wave b down, currently in wave 5 of (C). We should see further downside before a strong rally in wave c up. Crude is in wave b up, currently in wave 5 of (C). Crude is an excellent example of a bear market correction, since we would want to see at least 3 waves (an abc) complete from the peak. If you are not familiar with Elliott Wave, you can examine the completed decline on any chart that has had a parabolic advance in a so called bubble. The decline completes as 3 waves, with wave b up, as the bear market rally. This rally also coincides with the other markets.

The charts are aligning for a reversal similar to last July before the commodities and markets crashed. Its deja vu before history repeats itself. We still need to see further upside for the DOW, but the next decline should take out the March lows. We still need to see the USD and Euro (not shown) hit their targets before the reversal. The metals still have further upside as well, but we should see a strong correction similar to the one last year, before the bull advance resumes. Many of our charts illustrate triangles or ending diagonals patterns, which indicates a top is near and we could see a reversal as early as next week. The reversal could extend a bit longer, so keep an eye on the USD, when it hits the target and bounces above the top trendline, we expect all of the markets to roll over at the same time.

USD

Crude

 We called the top for Crude on the day that it rolled over, with the first downside target of $55.

These charts are only a guide so that you can follow the action and watch the expected action. The action could play out exactly as illustrated or it may need minor adjustments as we follow it through.

Source: by Dan Stinson

Emerging Markets Continue to Surge in 2009

Russia’s RTS stock index was up another 3.2% today, while China was up 1.71% and India was up 2.3%.  The BRIC (Brazil, Russia, India, China) countries continue to surge higher in 2009, as they’ve far outpaced stock markets of so-called “developed’ countries.  Below we highlight their year to date performance compared to the S&P 500.  As shown, Russia is up a whopping 72.1% this year, followed by India at 51.6%, China at 44.6%, and Brazil at 39.7%.  The S&P 500 is up 0.22%.

Source: Bespoken Research

Gold,Silver and Oil rises on weak Dollar

Crude Oil continued to make new highs for the year as focus has switched to the signs of pickup in demand from Asia combined with fears about inflation.

The continued weak economic outlook in Europe and the U.S. and subsequent drop in demand has been the main focus for the bears over the last few months. However crude has now rallied nearly 100% from the January lows and many are beginning to adjust their outlook.

OPEC at their meeting in Vienna refrained from further production cuts, something that is currently difficult to do as some members has been cheating and producing more. Instead they switched to verbal intervention as Saudi Arabia said that the global economy can handle a $75-80 Oil price as they saw demand picking up most notably in Asia. Front month Crude Oil broke above 200 day moving average at $62.18 and this strong technical picture helped drive prices above $65 this week

Up until recently the main factor driving Oil prices higher were the support from rallying stock markets combined with the weaker dollar.  This last move however has happened without the support from the U.S. stock market as no new highs has been seen for over two weeks now.

What has been seen is a rally in government bond yields as traders continue to sell bonds on the basis that yields could continue to rise as governments are struggling to finance ever increasing budget deficits. This week US 10 year yields rose to 3.71%, a level last seen in November 2008 long before Central Banks began Quantitative Easing.

Rising bond yields has unnerved investors and the subsequent risk of a dollar collapse or reemerging inflation are driving investors into commodities.

Technically the rally in Crude Oil is now well established and short sellers have got to be patient. With the break above $62.18 traders now look for a move back to the November high of $71.77 followed by the 38.2% retracement at $76.30.

On the downside $62.25 needs to give way before talk of a correction can begin followed by major support at $59.50. One major word of caution is the RSI level which indicates the market is overbought and the risk of a downside correction could be happening soon. 

I will be keeping an eye on the S&P 500 index which is currently stuck between 200 day moving average resistance at 930.50 and strong support at $885. Continued rise in bond yields and subsequent dollar weakness will be supportive for commodities.

Meanwhile precious metals continue to be driven higher by some of the already mentioned factors. Silver is heading for its biggest monthly gain in 22 years and Gold is back to a three month high with $1,010 again coming into play.

Flows into ETF Gold funds has not increased during the week which leaves us a little concerned about the sustainability of this rally. In the near term however the dominant factor behind moves in Gold will be moves in the US dollar which to certain extend is driven by movements in bond yields.

A further weakening of the dollar combined with geopolitical risks out of North Korea may revive investment demand for Gold and take it back towards the February high at $1010.