ETF XRAY

Does India's Election Signal Upturn?

By Carl Delfeld of Chartwell ETF

While the Congress party led coalition strong showing is heartening, it does not in my view signal a dramatic change in economic and market prospects.

First, India’s market had already made a nice run in 2009 and valuations relative to other markets are not compelling. The SENSEX index now trades a t a hefty premium to other emerging markets and has rallied 75% from its recent low in just over two months.

Second, these gains and valuations are against a backdrop of a weakening economy and financial shortfalls with economic growth rates estimated to fall from 9% to less than 5% according to some analysts. The first budget, due in July, will puncture any sense that financial pressures will lessen going forward.

Third, and most importantly, the impact of the election on the key market reforms needed to significantly improve India’s economy are at best minimal due to the nature of the election. I do believe that great bull markets are often ignited by elections based on significant mandates for growth-oriented change. But this election was about personality, the extreme positions of the opposition and business as usual.

The continued premiership of Manmohan Singh, 76, is a source of stability and serenity when what India really needs is sustained and substantial reform.  Does the election make this more probable? To answer this we need to look underneath the recent campaign to examine the source of the Congress party electoral gains. 

Much credit needs to be given to the efforts of Rahul Gandhi, 39, the son, grandson and great-grandson of Indian prime ministers. He vigorously and to great effect campaigned in areas where the party has traditionally been weak.  But what was his message? With barely a nod to the importance of growth and need for market reforms, it was the usual bromides on social justice and the need to protect India from the pitfalls of global capitalism.

In fact, while it was common to hear over the last five years that reform was being stymied by the leftist wing of the ruling United Progressive Alliance, it was the Nehru-Gandhi power base led by Sonia Gandhi who opposed many market reforms and bragged about nationalizing the banks.

It doesn’t seem to me that there is any new mandate for positive change despite a situation that cries out for more competition, private financing of infrastructure such as power, streamlining bureaucracy, fighting corruption, vastly improving primary education and making labor markets more flexible.   

 

 

Dollar Weakens, Brazil & China Deal

By Carl Delfeld of Chartwell ETF

The US dollar has fallen 10% since it hit a three-year high on a trade-weighted basis in March of 2009. This week it reached its lowest point against a basket of currencies since December.

That has prompted fears that just as the dollar benefited when investors scrambled out of risky positions, so it will suffer as they seek out yield. The dollar has fallen 8.8% against the pound and lost 3% against the yen since March. Emerging market and commodity-linked currencies have rallied even more against the dollar over that period, with the Australian dollar up 20%, the Brazilian real 15% stronger and the South African rand up 16%.

Meanwhile, Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president.

An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.

“Currency swaps are not necessarily trade related,” the official said. “The funds can be drawn down for any use. What we are talking about now is Brazil paying for Chinese goods with reals and China paying for Brazilian goods with renminbi.”

Can China Change its Stripes?

By Carl Delfeld of Chartwell ETF

Can China really pull off a fast and smooth transition from an industrial, export-led economy to one fueled by internal demand? Or will its economy and market lose steam as the bank lending explosion pulls back?

Retail sales have held up much better in China this year than in other big economies, growing at a real 15.9% in March year-on-year according to Global Insight. The most strongest consumer spending figures are coming from inland and lower-tier cities rather than from the traditional growth powerhouses clustered around the Yangtze and Pearl River deltas. 

A China Confidential survey assessing consumer spending intentions among an estimated 64m middle and upper income households in 189 cities in March showed a much higher propensity to spend in rural cities. Of course China has more than one hundred cities with a population exceeding one million people. 

One sign of this trend is that Wal-Mart plans to increase the number of its stores from five to nine in Chongqing, a city 2,500km up the Yangtze river from Shanghai. This will mean it has more stores in Chongqing than in Beijing or Tianjin.

Harvard Heads to Emerging Market ETFs

By Carl Delfeld of Chartwell ETF

Harvard University's battered endowment has headed straight to emerging market ETFs looking to recoup losses and get back on a winning path according to tickerspy.

Looking at Harvard's top U.S.-listed holdings at the end of the first quarter which were recently disclosed to the SEC, the largest U.S.-listed equity holding by a wide margin was ETF iShares MSCI Emerging Markets Index (NYSE: EEM - News), where it was cutting its stake during the quarter.

Meanwhile, Harvard was upping its exposure to individual emerging markets via increased stakes in iShares FTSE/Xinhua China 25 Index (NYSE: FXI - News), iShares MSCI Brazil Index (NYSE: EWZ - News), iPath MSCI India Index ETN (NYSE: INP - News), iShares MSCI Mexico Investable Market Index (NYSE: EWW - News), iShares MSCI South Africa Index (NYSE: EZA - News), and others.

Harvard also reopened its stakes in mobile telecom firm China Mobile (NYSE: CHL - News), iShares MSCI South Korea Index Fund (NYSE: EWY - News), media giant News Corp (Nasdaq: NWSA - News), and Israeli pharmaceutical company Teva Pharmaceutical Industries (Nasdaq: TEVA - News).

China Leads Fund Inflows But Fundamentals in Question

By Carl Delfeld of Chartwell ETF

Following a trend that began in late March, with cash coming off the sidelines and in favor of emerging markets equity ETFs and funds, High Yield Bond and some sector funds carried into the first week of May. EPFR Global-tracked Asia ex-Japan, Latin America, EMEA and the diversified Global Emerging Markets Equity Funds posted combined inflows of $3.6 billion and Emerging Markets Bond ETFs & funds recorded their best week since early in the first quarter of 2008.

China remains a major driver of both sentiment and fund flows for the emerging markets asset class as its economy responds to aggressive lending by domestic banks. Through May 6 China Equity Funds had taken in fresh money eight of the past nine weeks and 29 of the past 30 trading days, including a year-to-date daily high of $294 million on May 4.

But some recent data is in conflict with the “China will buck the downturn” thinking that the sharp increase in bank lending will allow China to maintain a 6-7% GDP growth rate is emerging.

Electricity production, often regarded as a proxy for economic growth in China, fell 3.5% from a year earlier in April.

China’s industrial production growth from a year earlier slowed to 7.3% in April from 8.3% growth in March. This also half the percentage growth that was posted one year ago as reported by Chartwell ETF.

China's exports slumped for the sixth straight month amid warnings that weak overseas demand was more than offsetting government spending to boost factory investment.

The 22.6% drop in exports in April from a year earlier, to $91.9 billion, was bigger than March's 17% fall and larger than projected.

For investors going forward, the question is, pass on China, go long with (FXI) or short with (FXP)? 

International Leads April ETF Asset Growth

By Carl Delfeld of Chartwell ETF

As of May 1st, there were 742 ETFs in the US with assets totaling approximately $531BN were managed by 22 ETF managers according to State Street Global Advisor’s SPDR ETF Snapshot. 7 new ETFs were launched and ETF industry assets rose $49BN for the month, or 10.2%.

All ETF categories except Commodity and Currency gained assets. The International category accounted for more than one third of the combined gains, rising more than $17BN. Fixed Income assets were up nearly $5BN, or 7.5%.

The top three managers in the US ETF marketplace were: Barclay’s Global Investors (BGI), State Street, and Vanguard. Collectively, they accounted for approximately 84.1% of the US-listed ETF market. The top three US ETFs in terms of dollar volume traded for the month were: the SPDR® S&P 500® [SPY], PowerShares QQQ [QQQQ], and ProShares UltraShort S&P 500® [SDS]. Average Daily Volume fell from $88BN to $75BN.

As of year-to-date, growth has outperformed value significantly. The Large Cap category led overall gains in absolute terms, rising more than $5BN. The Dow Jones REIT Index rose 32% in April, helping the REIT ETF category surge $1.4BN, or 33.6%.

Chartwell Launches Suite of Asia & Emerging Market Investor Services

Chartwell now offers a suite of services to help a variety of investors tap into Asian & emerging market growth. Markets such as China and India, Singapore and Australia, and Chile and Turkey all offer investors excellent growth prospects if approached with a smart strategy mindful of the risks.

Chartwell ETF is a weekly advisory service with an Asian tilt for the long-term, self-directed global investor. The Asia & Emerging Market Alpha Trader is for high net worth and more active investors. Chartwell Partners also offers Asia & emerging market separate account management using a blend of exchange-traded funds and individual stock picks.

There are four major distinctions between these new services and existing offerings. First, Chartwell is indifferent to the geography of the companies it highlights or invests in. Rather, it focuses in on the company’s source of revenue and profits and looks for those targeting Asian & emerging markets. Second, Chartwell seeks absolute returns rather than the usual mirroring of the MSCI Emerging Market index.

Third, exchange-traded funds (ETFs) are a core investment tool and provide much needed diversification and transparency. Individual stock picks allow more precision and flexibility. And fourth, Chartwell opens its universe beyond only emerging market countries and brings into play more developed countries such as Singapore, Japan and Australia that are at the heart of Asian growth.

In addition, Chartwell pays close attention to risk management which plays a critical role in successful investing in Asia & emerging markets.

“Focusing on the theme of Asian & emerging market growth while preserving flexibility in investment tools with attention to risk management is a winning formula for investors”, according to Chartwell Managing Partner Carl Delfeld.

Delfeld writes the “Global Gambits” column for Forbes Asia, has written four books on global investing, and recently founded the economic strategy think tank, America Unbound, with a mission of helping America grow with Asia and emerging markets.

Carl headed up the Japan and South Korean group at Bank Boston’s headquarters after serving in its London branch. From there he founded the Asia-Pacific group at the investment bank Robert W. Baird & Company opening markets in Tokyo, Sydney and Hong Kong. Carl then served as an Asian specialist with the Joint Economic Committee and the Senate Finance Committee.

After a stint as a consultant on Asian emerging markets with the U.S. Treasury, Carl represented the United States on the Executive Board of Directors of the Asian Development Bank in Manila during the administration of George H. W. Bush. During his tenure he led investment missions to the Philippines, China, Singapore, Thailand, Malaysia, Indonesia, Mongolia, Nepal, Thailand and Vietnam.

Carl earned a Masters Degree in international economics and Asian diplomatic history from the Fletcher School of Law & Diplomacy followed by a Japanese Government fellowship at Keio University.

 

 

WisdomTree Emerging Market Currency ETF Hits Market

By Carl Delfeld of Chartwell ETF

WisdomTree and the Dreyfus Corporation, part of BNY Mellon Asset Management, announced today through a press release the listing of the WisdomTree Dreyfus Emerging Currency Fund (CEW) on the NYSE Arca with an expense ratio of 0.55%.  

Bruce Lavine, WisdomTree President & COO commented, “Our new Emerging Currency fund fills an important void in the ETF landscape by giving investors the first currency basket product delivered in the 1940 Act fund structure.  CEW should be attractive to investors interested in diversifying outside the U.S. Dollar or accessing a less correlated asset class. 

 “The ETF provides investors exposure to both money market rates across 11 Emerging Market countries, as well as movements in these currencies relative to the U.S. Dollar.  Our clients asked us for a basket strategy to complement our individual country currency income funds and we are happy to deliver that today.” 

Constituent currencies at launch: Mexican Peso, Brazilian Real, Chilean Peso, South African Rand, Polish Zloty, Israeli Shekel, Turkish New Lira, Chinese Yuan, South Korean Won, Taiwanese Dollar, and Indian Rupee.   

Although the Fund invests in very short-term, investment grade instruments, the Fund is not a "money market" fund and it is not the objective of the Fund to maintain a constant share price. 

 

Chartwell ETF China Pick Up 16.1% for Week

By Carl Delfeld of Chartwell ETF

China has proved skeptics like me wrong in weathering the global downturn surprisingly well. Growth has fallen to an annual rate of 6% but this is impressive given how much worse it might have done in light of a 44% plus fall in exports. In response, markets have really taken off since its infrastructure stimulus measures were announced earlier this year.

Below is the reasoning for our ETF Pick of the Week of last week, the Claymore China Small Cap (HAO), which is up 16.1%. 

At this point, I am still wary of CAF which is trading at an unusually high premium to its net asset value but today recommend looking at HAO which targets small and mid cap companies listed on US exchanges. I like HAO for several reasons. HAO is largely populated by private companies, not owned or controlled by the government. In contrast, of the top 35 companies listed on the Shanghai exchange, 34 are controlled or owned by the central government. HAO trades at a multiple of seven times earnings, three times cash flow and 0.70 of book value. For large cap China ETFs like FXI, the top ten holdings can account for about 50% of total assets  while for HAO the top ten represent just 17%.

 I still recommend an 8% trailing stop loss and rate this as a high-risk position.

Go to Chartwell ETF to sign up for our weekly service for only $40 per month. Or call 719,264.1503 for information on our Asia & Emerging Markets Alpha Trading Service.