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September’s Red-Hot Emerging Markets
By Nicholas A. Vardy, CFA With Ben Bernanke’s putting “tapering” on hold, the green light for a traditional fourth-quarter rally in emerging markets is on. Recall that the mere threat of tapering on May 22 had put emerging markets into a tailspin. The stock markets of formerly red-hot BRICs — Brazil, Russia, India and China — fell off a cliff, as sentiment soured on these economic powerhouses. Political unrest in Egypt, Turkey and Syria sent global investors scurrying for the safety and security of developed markets, the U.S. and Japan in particular. That all changed on Aug. 27 when emerging markets bottomed. The MSCI Emerging Markets Index has rallied 14.59% since then, and among the 40 global stock markets I monitor on a daily basis, 13 are up by double digits in September alone. That’s a huge turnaround — but not an unexpected one. I’d be hard pressed to recall many other episodes of such massive underperformance of emerging markets compared with the U.S. Following such a sharp rally, emerging markets are certainly overbought on a short-term basis. But with the Fed putting tapering on the back burner for now, I’m looking for a big fourth quarter in emerging markets. And in a liquidity-driven market, September’s top emerging-market performers are a good place to start. 1. iShares MSCI Thailand Capped ETF : +21.29% The iShares MSCI Thailand Capped ETF THD -2.36% has been one of the top-performing emerging-market exchange-traded funds (ETFs) of the past few years, soaring 39.98% in 2012 alone. But during this past summer’s drubbing of emerging markets, Thailand was hit harder than most. Between May 22 — the day the Fed announced the prospect of tapering — and hitting a its low on Aug. 27, the Thai ETF tumbled over 28%. But since then, the Thai market has rallied 23.49%. The triple whammy of a slump in the Thailand’s currency, the baht, economic growth screeching to halt, and fears of the Federal Reserve’s tapering plunged Thailand’s stock exchange firmly into a bear market. Indeed, Thailand’s economy hardly is ship-shape. Its economy contracted 0.3% between April and June, following a previous fall of 1.7% during the first quarter of 2013, putting the Thai economy officially into recession. That’s a stark contrast to last year’s strong economic growth of more than 6%. No wonder that even as the market has rallied, Goldman Sachs cut its rating for Thailand from overweight. 2. iShares MSCI Turkey ETF : +20.45% Turkey was the top-performing emerging market of 2012, with the iShares MSCI Turkey ETF TUR -1.36% soaring an eye-popping 65.58%. But the threat of imminent tapering and boisterous anti-government protests caused the Turkish market to plunge almost 32% between May 24 through Aug. 26. Since bottoming, however, the market has rallied 21.47%. The summer’s political protests caught investors off guard. Back in the 1990s, Turkey’s emerging market was a poster child for economic instability. Sure as day follows night, you could always count on Turkey’s stock market to blow up regularly. That all changed with a new pro-business Islamic government installed in 2001. The Turkish economy grew at an Asian Tiger-like average rate of 7.5% between 2002 and 2006, faster than any other OECD country. By 2012, Istanbul boasted an eye-popping 36 billionaires, putting it fifth in the world behind Moscow, New York City, London and Hong Kong. In November 2012, Fitch Ratings upgraded Turkey sovereign debt to “BBB-,” the lowest rung on the investment-grade level — the emerging market’s first investment-grade rating in 18 years. Moody’s followed in May 2103, and the Turkish market hit highs not seen in 25 years. 3. WisdomTree India Earnings : +15.27%. Few former emerging-market darlings have attracted more negative headlines over the past six months than India. One of my favorite contrarian indicators is to look at headlines … and bet the opposite. That strategy would have paid off in spades with India. Britain’s Economist magazine dedicated its Aug. 24 cover story to India’s fall from economic grace. Since bottoming four days later, the Wisdom Tree India Earnings ETF EPI -0.32% has rallied 20.15%. Since May 22, the Indian had market plunged 27.7%, hitting a low on Aug. 28. Political gridlock, a brake on economic reforms, and a plummeting rupee, have made the Indian stock market the worst-performing stock market in the world in 2013, down 17.4%. And that’s after it’s recent sharp rally. The appointment of Raghuram Rajan, a University of Chicago economist and former chief economist of the World Bank , as India’s central-bank chief has lit a fire under the rupee and the Indian stock market. Rajan is introducing reforms to address India’s most glaring weaknesses. But not all of Rajan’s actions bode well for this former emerging market high-flyer. On Friday, Rajan unexpectedly raised a key interest rate in an effort to quell inflation — the first increase since 2011. Disclosure: I hold the iShares MSCI Turkey ETF. Continue reading
Look To The Fundamentals In Emerging Markets
http://www.ft.com/cms/s/0/70d9b14c-14af-11e3-b3db-00144feabdc0.html#ixzz2fQfIJxI8 By Gary Mead Being a generalist in emerging markets is to be a mindless herd member – and the herd has no mind, but is just pushed by snapping dogs. So ponder the particularities of a place, an industry, a sector: there will be fantastic opportunities once the herd stays put. What lies behind the recent rout? Quantitative easing (QE) is the monetary policy drug of choice right now, and the threat of its withdrawal has already induced an ugly international bout of cold turkey in world markets. Princeton University’s Jean-Pierre Landau, a former Bank of France deputy governor, put it more diplomatically at last month’s Jackson Hole annual summit for central bankers. Accommodative monetary policy has averted one global financial crisis, but inadvertently produced another – capital markets’ anxiety over how soon and how fast QE might be unwound. Mr Landau was pessimistic about the level of central bank co-ordination necessary to get off this drug without pain: “The most likely scenario is that of progressive fragmentation of the international financial system.” Since December 2008 the US Federal Reserve has poured easy money into the US economy and, by extension, the global system, obedient to one of its mandates, getting America back to work. It has done this partly by keeping a tight lid on US overnight interbank lending rates, maintaining them in a range of 0-0.25 per cent. On top of that it has bought almost $2tn of longer-term US Treasury bonds. This vast QE, aided and abetted by similar (if smaller) schemes in Japan and the UK, has had the inevitable consequence of dragging thousands of billions of dollars into emerging markets, in the desperate quest for yield. Those days are not quite over – but the smartest money is now trying to figure out when US interest rates will start to rise and dispel the Fed’s opiate-induced calm. For some, this is creating rising hysteria; others are exhorting us to calm down because this is just a return to the status quo ante bellum. The canniest, of course, are on the watch for fresh opportunities, and trying to ignore scaremongering headlines in normally reputable media. What are the hard facts? On May 22 the Fed’s chairman, Ben Bernanke, said he might start slowing bond purchases – so-called “tapering” – if the US economy continues to improve. Almost immediately the MSCI Asia-Pacific Excluding Japan Index slipped 14 per cent. Around $44bn has been withdrawn from emerging-market stock and bond funds globally since the end of May, according to the data provider EPFR Global. This retreat from emerging markets now appears to be a fixed trend. According to the authoritative latest (June 2013) Capital Flows to Emerging Market Economies report produced by Felix Huefner and his colleagues at the Institute of International Finance, private capital inflows to emerging markets will total $1.145tn in 2013, $36bn less than in 2012. Next year these flows will fall even further, to $1.112tn, the lowest level since 2009. But that is still a wall of money and it might be seen as a return to normality rather than outright collapse. As the west went into deep recession, cut rates and printed money, investors fled, looking for better returns wherever they could, paying scant attention to the fundamentals of the economies of several big emerging markets. Now that the west is in better health, those often weak fundamentals have reminded many investors why they had not previously entered them. India and Indonesia, the two Asian nations with the region’s biggest external funding requirements for their current-account deficits, have already stumbled. The Indian rupee fell to an all-time low in July after the country’s current account deficit widened to an unprecedented $87.8bn in the fiscal year that ended in March. Also in July, Indonesia’s current-account deficit climbed to a record, economic growth slowed and inflation geared up. Overall, more than $1tn has been wiped from equities in emerging markets in the last few weeks. The hope that a slower-growing developed world was smoothly converging with a faster-growing emerging world is, if not over, then certainly delayed. For anyone exposed to emerging markets as a whole, standing in the way of the crowd heading for the exit makes little sense. Too many countries in the emerging world face serious structural problems that were, perhaps justifiably, ignored when the developed world’s economies were being put through the wringer. It is difficult to ignore incipient revolution in Egypt, appalling civil war in Syria, bitter political divisions in Turkey and rampant corruption in India when the west appears to be on the mend. But the key to all this is an individual country’s balance of payments. Trading on the basis of “is this a risk-on or a risk-off day?” is unwise. Trading on the basis of the underlying strengths or weaknesses of a nation’s economy might be duller but is more rational. It is easy to get distracted by newsflow but look out for economic fundamentals. Continue reading
Japan And China Imported 83% Of Traded Hardwood
North American wood pellet exports reached a new record of over one million tons in first month of this year. There has been a steady growth in shipments from both the US and Canada the past few years, mainly as a result of the continued increase in demand for pellets in the United Kingdom by S. C. Pellet exports from the two primary pellet-producing regions on the North American continent – the US South and British Columbia – showed no signs of slowing in early 2013, with the rate of growth likely to accelerate in the second half of the year. In the US South, pellet export volumes to Europe resumed their double-digit growth after a brief pause in the 4Q/12. Export volumes, based on information from industry sources as well as trade data in Europe and North America, showed exports in excess of 1.7 million tons in 2012, as reported in the North American Wood Fiber Review (www.woodprices.com). Canadian exports also rose in 2012 to 1.5 million tons, but this increase was less than that seen in the US. During the 1Q/13, total pellet exports from North America reached a new record of over one million tons for the quarter. This can be compared to the annual shipments of 750,000 tons just four years ago. The United Kingdom continues to strengthen its claim as the primary destination for North American pellets with over two-thirds of the export volume from the US and Canada going to the UK in the 1Q/13. The story of Drax’s plans for its large power plant conversion from coal to biomass in Selby, England, continues to make news across North America. Earlier in the spring, Drax Biomass International Inc (DBi), a US-based subsidiary to Drax Power, announced that it will develop, construct and manage two pellet plants, a port storage and a loading facility in the US South, which will be sending pellets to fuel the company’s UK facility. Also, in Eastern Canada, pellet producer Rentech announced an off-take agreement with Drax Biomass, which will result in new investment in ports to increase pellet-loading capacity, and in rail transportation, along with the construction and operation of two pellet facilities themselves. The increase in pellet production in Western Canada has pushed sawdust prices upward the past few years, with 2013 prices being about 15 % higher than they were in 2010, as reported in the NAWFR. In the US South, where smaller logs from thinnings and treetops are commonly used for pellet manufacturing, there has not yet been any region-wide upward price pressure as a result of the new wood-consuming sector in the region. by S. C. 02 September 2013 Teatro Naturale International n. 9 Year 5 Continue reading
