Bubbles happen all the time in frontier markets. The index in Ghana is up 50% in four months. Assuming you wanted to take the risk, what are the safest investment vehicles and do their returns really represent the mouth-watering headline numbers?
While I was waiting for my interview on a radio program, I overheard the interview of the guest before me. I assume that he was from some sort of sell side firm, because he was touting the benefits of investing in frontier markets. From my viewpoint this was silly.
Frontier markets are volatile, divorced from fundamentals, lack supervision and corporate governance. If you want to invest in the growth of frontier markets there are much better ways to do it. But, I started to questions my convictions. I had just read another article about some small market showing increases of 50%. In this case, it was the Ghana Stock Exchange.
The GSE-Composite Index (GSE-CI) has now risen 50% since the start of the year. I believe that this rise is one of the unintended consequences of central banks’ monetary policy rather than a reflection of fundamental growth. Still someone made money.
So rather than just look at the risks, I asked myself a different question. These bubbles happen all the time in these small markets. Assuming you wanted to take the risk, how could you invest? What are the safest investment vehicles and do their returns really represent the mouth-watering headline numbers?
I started with a website sponsored by CNN This had a graphic that allowed you to point at various markets to determine their gains. One of the best performing markets was not a developed country at all, but Japan. Again, the promise of unlimited free money forever resulted in a 46% increase in the Nikkei 225 since the beginning of the year. The increase might be great for the Japanese, but for others might not so much. The reason has to do with the yen. The actions of the Japanese central bank have debased the yen. An investment in dollars would not have been so successful. A popular ETF, iShares MSCI Japan Index (EWJ), quoted in dollars has risen but only by 16%.
The next best performing stock market was that of the United Arab Emirates (UAE). Its market increased by 28%. The problem with investing in the UAE is that to match the market you would have to physically own all of its components. There is a similar problem with other frontier markets. There are not any ETFs that represent the particular country’s market. However, there are ETFs that do invest a region, which includes the target country’s market.
The closest one for the UAE is the DFM General Market Vectors Gulf States Index ETF (MES).
Fortunately, there is another Gulf States market that has performed very well this year. The Kuwait market has risen 23%. MES does have holdings in both the UAE and Kuwait, but it has not performed anywhere near as well as either market. This year it went from $20.58 to $23.76. This is only 16% increase. The ETF is also tiny. Its capitalization is only $11 million shares. Its average trading volume is only 2,700 a day. Therefore, a block trade could move the market, at least temporarily. The ETF trades in a very tight range. In October 2009, it was trading at $23.91 just a bit lower than it is today. So, the idea that these markets are good diversifications for term investors is not true.
In contrast to the Gulf States markets, is one of the recent stars of the Frontier markets: the Philippines. It stock market has risen from 5,860 to 7,070 in this year alone, a rise of 20%. Since last April, it has risen 35%. Investing in the Philippines is easier than investing in the Gulf. It does have a dedicated ETF: MSCI Philippines Investable Market Index Fund (EPHE). Even better EPHE has tended to match the performance of the index. It has risen almost 20% this year. Since last April, it did even better than the index returning a 41% gain. It has a large capitalization of $414 million and good volume. It trades an average of 370,000 shares a day.
EPHE also represents some of the problems with these markets and these investments. These markets, even large emerging markets like Brazil, Russia and China tend to be very concentrated in a few companies. For example in the Brazilian market, the top five companies make up 48% of the total market value. On the Russian market, the top five make up about 45% of the market and in China, the top 5 make up about 30% of the market. The markets are not only concentrated by companies, they are concentrated by sectors. Russia’s market is dominated by commodities companies. China is more like most frontier markets. It is dominated by financial companies. EPHE is like China, 40% of its holdings are financial with 10% in telecommunications.
Like the Gulf States, three other of the best performing markets are not represented by ETFs: Argentina, Nigeria, Kenya and Botswana. Each of these markets did well this year: Argentina 27%, Nigeria 19%, Kenya 15% and Botswana 16%. However, if you want to invest in Africa there are only two ETFs SPDR S&P Emerging Middle East & Africa (GAF) and Market Vectors Africa Index ETF (AFK). Both of these ETFs lost money since the beginning of the year.
Two contrasting markets are Vietnam and Indonesia. Both markets have gone up this year by about the same amount: Vietnam by 13% and Indonesia by 14%. Their ETFs have not. Both ETFs are very similar. They both have a capitalization of about $450 million. There is a large difference in performance. The Indonesia ETF has increased by 13% this year exactly reflecting the increase in the Indonesia index, while the Vietnam ETF has increased by only 4.8% a fraction of the index.
Cashing in on the headline numbers is a bit of a challenge. It is possible in some markets, while others should simply be avoided. The one thing that is consistent in analysing these investment vehicles is that like anything else, they entail risk often quite a lot. Growth in developing countries is far from a one-way bet. Right now, some of the free money from Japan will probably leak into countries like the Philippines and Indonesia, which might make them attractive investments assuming you trust central bankers will continue the largest economic experiment in history.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)
Nifty is still to close below any previous day’s low to trigger a short-term sell signal.
Most of the Asian indices opened in the positive on the back of a strong US jobs report on Friday which eased concerns about the global economic growth outlook. Back home the indices had an almost flat opening. The Sensex opened at 19,572 while the Nifty opened at 5,945. The benchmarks quickly slipped into negative during which the indices hit their respective lows. The indices came back into positive zone in the morning trade. Sensex hit a low of 19,554 while the Nifty hit a low of 5,928. The key benchmark indices pared gains after striking fresh intraday high in early afternoon trade. Both the Sensex and the nifty hit lower high at 19,694 and 5,977 respectively. The indices closed almost at the days high at 19,674 and 5,971. Sensex was up 98 points (0.50%) while Nifty was up 27 points (0.46%). The Nifty saw a volume of 52.18 crore shares, much lower than normal.
The weakness in the morning session was caused by an expose by Cobrapost.com which named 23 more banks caught offering money laundering solutions. However, the indices shrugged off this negative news. We had mentioned in the Friday’s closing report that the key benchmarks await fresh signals. We continue with that stance.
Indian services sector growth eased sharply during April as new orders came in at a much slower pace, a business survey showed today, 6 May 2013. The HSBC Services Purchasing Managers' Index, based on a survey of around 400 companies, fell to 50.7 in April 2013, it’s lowest since October 2011. It was the third straight month of decline, and took the index too close to the 50 mark that separates growth from contraction. The index had stood at 51.4 in March. Services make up over 60% of India's economy.
The broader indices closed in the positive. The BSE Mid-cap index rose 1.17% and the BSE Small-cap index rose 0.96%.
The top sectoral indices were BSE Metal (up 1.98%); BSE IT (up 1.88%); BSE TECk (up 1.55%); BSE Consumer Durables (up 1.51%) and BSE Auto (up 1.39%). The main losers were BSE FMCG (down 0.77%); BSE PSU (down 0.25%); BSE Capital Goods (down 0.09%) and BSE Bankex (down 0.01%).
Twenty-one of the 30 stocks on the Sensex closed in the positive. The chief gainers were Tata Steel (up 3.58%); Hindalco Inds (up 3.52%); TCS (up 3.25%); Reliance Industries (up 2.53%) and Hero MotoCorp (up 2.32%). The key losers were ONGC (down 1.67%); NTPC (down 1.48%); ITC (down 1.35%); HDFC Bank (down 0.91%) and Coal India (down 0.79%).
The top two A Group gainers on the BSE were— Karnataka Bank (up 7.38%) and CRISIL (up 6.06%).
The top two A Group losers on the BSE were—Sobha Developers (down 3.21%) and MCX (down 3.19%).
The top two B Group gainers on the BSE were—Finolex Inds (up 19.96%) and Brescon Advisors (up 19.76%).
The top two B Group losers on the BSE were— Indsil Hydro (down 19.74%) and Valiant Communications (down 19.25%).
Of the 50 stocks on the Nifty, 31 ended in the green. The key gainers were Hindalco Ind (up 3.72%); Tata Steel (up 3.63%); Asian Paints (up 3.30%); TCS (up 3.28%) and NMDC (up 2.77%). The major losers were Kotak Bank (down 1.49%); ONGC (down 1.44%); ITC (down 1.39%); Ambuja Cements (down 1.35%) and ACC (down 1.21%).
Among the news today, the Central Bureau of Investigation (CBI) said in a fresh affidavit filed in the Supreme Court on its probe into the coal blocks allocation today, 6 May 2013, said that changes were made by law minister, coal ministry, attorney general and officials of the Prime Minister's Office in CBI's draft status report on coal scam. Last week, the Supreme Court had issued strong observations against CBI sharing the draft coal block scam report with the government. The apex court had asserted that the probe agency must be liberated and should not be controlled by political masters.
Growth in China's services sector slowed sharply in April to its lowest point since August 2011, a private sector survey showed on Monday, in fresh evidence that economic revival will remain modest and may be facing wider risks.
The HSBC services Purchasing Managers' Index (PMI) fell to 51.1 in April from 54.3 in March, with new order expansion the slowest in 20 months and staffing levels in the service sector decreasing for the first time since January 2009.
Except for Nikkei (down 0.76%) and Seoul Composite (down 0.22%), all the Asian indices closed in the positive, the highest gainer being KLSE Composite (up 3.38%), following declaration of general elections. European indices are showing mixed performance. The US Futures were trading flat.
The board of directors of Avantel has approved buy back of the company’s fully paid-up equity shares of Rs10 each from open market through the stock exchange mechanism for an amount not exceeding Rs210 lakh at prevailing market price the exchange subject to a price not exceeding Rs75 per equity share. The stock rose 0.62% to close at Rs 64.90 on the BSE
The board of directors of BPL has approved transfer of the Healthcare Business of the company as a going concern to BPL Medical Technologies Private Limited for a consideration of equity shares of BPL Medical worth Rs21.05 crores (subject to the approval of the members, for which the Board has authorized conducting a postal ballot). The consideration shall be settled by way of allotment of fully paid up equity shares of that Company for a consideration other than cash basis. The Board has further authorized entering in to appropriate agreements with the parties concerned. BPL rose 2.06% to close at Rs 17.30 on the NSE
The Indian economy is supposedly recovering after three years of slowing economic growth
Morgan Stanley Research believes that the Indian economy is reversing from three years of slowing economic growth and creeping inflation and is due to stage a recovery, albeit a slow one.
Morgan Stanley in a report states: “We expect the initial phase of recovery to be driven by an improvement in growth mix and productivity growth rather than a big rise in investment to GDP or headline GDP growth. The starting point of macro stability environment (inflation, current account deficit and high banking sector loan deposit ratio) will still likely constrain domestic demand from staging a strong recovery.” Also, India put a strong showing amongst emerging markets for the month of April, coming out as 2nd best on both absolute as well as relative basis, according to the research note.
Several positives were observed, including exports acceleration, pick up in implementation of private projects, easing of wholesale price inflation, improved fiscal deficit and reduction of global oil prices. However, some concerns were noted which included: decrease in manufacturing output, decline in automobile sales, poorer corporate earnings and worsening credit ratio amongst corporates.
The key factors to look out for is government ability to contain and bring down fiscal and current account deficits, which has been deteriorating in the last few years. However, Morgan Stanley is optimistic that the government will achieve its fiscal deficit targets. The report states: “For F2013, the government is likely to achieve its revised fiscal deficit target of 5.2% of GDP, which would be a significant improvement from our tracking estimate of 6.1% in September.”
In the light of the recent fall in price of crude oil and gold, Morgan Stanley does not expect much of an impact of gold decline on the current account deficit as hyped earlier. But crude oil does impact quite a bit. Their sensitivity analysis states: “Every 10% reduction in crude oil prices would cut India’s current account deficit by about 0.6% of GDP. The decline in gold prices will likely have a small impact on India’s current account deficit, as we believe that the inflation direction (real interest rates) will be key for gold imports.”
Similarly, a sensitivity analysis was carried out for gauging subsidy burden. The report states: “Every $10/bbl change in oil prices changes fuel oil subsidy in India by $5.8 bn (0.3% of GDP) if domestic fuel prices are unchanged. For fiscal deficit calculation, assuming governments share in subsidy burden is at 50% (oil subsidy burden is shared by the government and oil marketing companies) a change of $ 10/bbl will affect the fiscal deficit by $ 2.9bn/0.14% of GDP.”
Even as macro indicators show improvement, there’s a concern whether companies are able to churn out profits or repay debt. More and more companies are actually making losses while the ability to repay debt is decreasing. This has put the banking sector in the spotlight and it remains to be seen how they will fare.