ETFxray

Record IPO Flow Helps BRIC ETFs

Carl Delfeld of the Chartwell ETF Advisor

Petro-China, the state-owned oil and gas group, launch of a listing in Shanghai in a deal that raised more than $9bn was just the tip of the iceberg of recent BRIC country IPOs. This is good news for exchange-traded funds that track the markets of Brazil, Russia, India and China as well as other emerging markets.

Joanna Chung of the Financial Times reports that nearly half of the $57bn raised globally by IPOs in the latest quarter was by companies in the so-called “Bric” countries of Brazil, Russia, India and China, which produced a record 118 IPOs.

Seven out of the top 10 IPOs in the third quarter were from emerging markets. The Asia-Pacific region, and in particular, China and Hong Kong – had the major share in terms of both the number of IPOs completed as well as the money raised.

The exchange-traded funds that track BRIC countries as a group are as follows:

Claymore/BNY BRIC (Brazil, Russia, India, China) ETF (EEB)
SPDR S&P BRIC (Brazil, Russia, India, China) 40 ETF (BIK)

Which of the BRIC countries should be in your portfolio? The Chartwell ETF Advisor is positive on two, hates one and believes that the other is overvalued.

Russia Grabs Pole Position, China Gains, in Emerging Markets ETF

Russian companies, fueled by the rapid growth and profitiability of its energy sector, have risen the ranks of the top ten companies in the emerging market index and the exchange-traded funds that track it such as (EEM).

The top ten holdings in this ETF basket in order of weighting are:

Gazprom (Russia)
Samsung Electronics (South Korea)
Posco (South Korea)
Taiwan Semiconductor (Taiwan)
Kookmin Bank (South Korea)
Silicon Precision (Taiwan)
Lukoil Holdings (Russia)
Chungwa Telecom (Taiwan)
China Mobile (Hong Kong)
United Microelectronics (Taiwan)

It may be surprising to many investors to see Taiwan with four out of the ten top holdings. China is also making progress and in the MSCI World index has pulled even with Taiwan and has also matched Hong Kong in terms of country weighting.

PetroChina announced today it would launch one of the biggest ever initial public offerings on the mainland market, becoming the latest large state-owned company to seek a Shanghai listing. The oil and gas group said it would issue up to 4bn shares in Shanghai which at Tuesday share price in Hong Kong, where it is already listed, would raise around $5.7bn

By Carl Delfeld of the Chartwell ETF Advisor

Is India Economy and ETF Too Hot?

Fears that India's economy, stock market and the exchange-traded fund (INP) that tracks it are overheated led its central bank to ramp up interest rates. Since January 2006 the Reserve Bank of India (RBI) has raised its overnight lending rate by one and a half percentage points, to 7.75% and the rupee, in turn, has jumped 10% in value versus the US dollar duringn the past four months alone.

But rather than slowing down, India's economy is speeding up. An article in the Economist states that JPMorgan estimates that growth in the three months to March accelerated to a seasonally adjusted annual rate of 11.4%. Yet, despite rapid growth, wholesale-price inflation fell to 5.1% in mid-May, down from 6.7% in January. Still the signs of an overheated economy are everywhere. A sharp increase in house prices, credit growth of 28% over the past 12 months, 15%-plus average rises in wages for skilled workers, record industrial capacity utilisation rates, and 41% more imports in April than a year ago.

Plus, consumer prices still appear to be rising at an annual 8% clip which likely means that more aggressive rate hikes are on the way. The trick is to slow growth down a bit without triggering a sharp decrease in economic activity - easier said than done and what in the US is often referred to as a soft landing.

The higher rupee has helped boost returns for investors in the India ETF but valuations may be getting a bit toppy. Still you must admire the underlying growth and momentum of the Indian economy. Will higher interest rates and a stronger currency blunt this mojo?

Join the Chartwell ETF Advisor and stay on top of the India story.

Latin American ETFs Gain, China Suffers Negative Flows

Investors continued to reduce their direct exposure to Chinese equities and exchange-traded funds during the first week of June, pulling over $1 billion out of China and Greater China Equity Funds tracked by
EPFR Global for the second week in a row. But they pumped another $810 million into Latin America Equity Funds, adding to their indirect bet on the Chinese economy’s robust growth and its demand for raw materials. ETFs and funds geared to developed markets had a mixed week. Japan ETFs and equity funds extended their losing streak. But US equity funds posted inflows on the strength of an exceptionally good week for Large Cap Growth Funds as interest rate fears took a brief holiday before resuming at mid week, European equity funds were back in the black and global equity funds and ETFs extended their winning streak to 13 straight weeks.

There was a strong suggestion in this week’s data that investors are looking for dips to buy into. Flows and fund performance were, for the most part, inversely correlated. The four equity fund groups that posted the best portfolio performance – Japan, Pacific, EMEA and Asia ex-Japan equity funds – all posted net outflows, while relative laggards such as European, Global and Latin America equity funds attracted fresh money.

At the country level Brazil has been the star in recent weeks. But Mexico Equity Funds took in $149 million during the week ending June 6, handily distancing Brazil Equity Funds in terms of flows as a percentage of assets under management.

Find out more by joining the Chartwell ETF Advisor

India Market Passes $1 Trillion Milestone

The India stock market, helped by its largest companies which play a key role in the performance of its exchange-traded fund (INP), passed the historical mark of surpassing $1 trillion in market value.

According to the Bombay Stock Exchange, the total market capitalisation of India's stocks this week reached Rs40,811bn or $1,009bn with the rupee trading at Rs40.45 to the dollar, market capitalisation at the close was $1,009bn. The Financial Times reports that The Bombay Sensitive Index, a basket of 30 large and liquid stocks, yesterday closed up 110 points, or 0.77 per cent, at 14,508. It has trebled in three years.

The exchange is now the 14th largest in the world but a recent Morgan Stanley study offerd a cautionary note since big stocks contributed most of the returns. Surprisingly, two-thirds of stocks have shown negative returns in the past 12 months. "India is likely to under-perform its peer group due to concerns on inflation and hence growth," Morgan Stanley said. "The absolute direction of the market is still a function of global risk appetite."

By Carl Delfeld of the Chartwell ETF Advisor

Brazil Beats China for Fund and ETF Investment Flows

During the last week in May, investment flows into emerging markets by global equity managers and exchange-traded funds tracked by EPFR Global tilted toward Latin America and in particular Brazil at the expense of China.

The $789 million that investors committed to Latin America funds and ETFs was driven in part by a reassessment of Brazil’s economic prospects following its latest ratings upgrade. That upgrade, allied to falling interest rates and the government’s willingness to at least entertain the idea of rationalizing Brazil’s tax system, point to some positive surprises from the region’s biggest economy during the second half of the year. Brazil equity funds took in $280 million, their best showing in percentage terms since the last week of January, 2006. But investors still expect some negative surprises from the biggest economy in the Asia ex-Japan universe: they pulled another $354 million out of China and Greater China funds as the Chinese government continues its effort to rein in the country’s red hot economy and its booming equity markets.

In addition, EPFR Global reports that year-to-date flows into Emerging Markets bond funds pushed over the $3 billion mark. Global and Pacific Equity, Utilities Sector and High Yield Bond Funds also extended their winning runs as the spread between US Treasuries and JP Morgan’s benchmark EMBI+ index narrowed to a new record low of 153 basis points. But China and Japan Country funds and ETFs remained out of favor, although the pace of outflows slowed somewhat, and funds geared to interest rate sensitive sectors were hit with further redemptions.

By Carl Delfeld of the Chartwell ETF Advisor

China ETF is not a Bubble?

While the Shanghai A-share index stood at 4,375 on May 23rd representing a 258% gain since the beginning of 2006; the China exchange-traded fund (FXI) made up of primarily H shares listed on the Hong Kong Stock Exchange is up less than 5% so far this year.

The Economist points out several reasons why the Shanghai market may not be a bubble after all. First, it looks at the valuation issue. Chinese shares certainly look expensive, with an average price-earnings ratio of almost 50 (based on historic profits). But p/e ratios are hard to interpret when profits are growing so strongly. Over the past decade China's p/e ratio has averaged 37, much higher than elsewhere. According to Goldman Sachs, firms listed on the A-share market enjoyed an average 82% increase in profits in the year to the first quarter. The article also notes that since 2003, Chnia has been the laggard of the four BRIC countries even with the rapid rise over the last year.

Next, it looks at the likely impact of a sharp pullback in China's market. The total value of tradable shares—that is, excluding those held by the government—is only 25% of GDP (the market capitalisation is nearly 80%). This compares with 150% in America and over 100% in India. Some estimate that only 7% of Chinese hold any shares at all compared to 50% plus in America. But this is changing fast as more than 300,000 new brokerage accounts are opened in China every day!

What is interesting is whether you can now buy H shares in Hong Kong at lower multiples for the same company that trades for on the Shanghai or Shenzhen market. This is certainly something worth looking into.

By Carl Delfeld of the Chartwell ETF Advisor

Russian ETF Primarily Energy Play

Tne new Russian exchange-traded fund (RSX) introduced by the Van Eck family of ETFs is decidedly an energy play. RSX tracks the DAXglobal Russia Index, which holds 30 companies based in Russia and attempts to represent the Russian economy broadly. RSX is very exposed to energy companies, accounting for over $150 billion of exports in 2006. Backtested the DAZglobal Index has yielded a 5-year annualized performance of about 40% .

This dependence on energy cuts both ways of course but keep in mind that politically Russia may present global ETF investors with more risk than other BRIC countries. Russia will also be watched closely as it elects new leadership in early 2008.

Jonathan Bernstein of ETFzone points out that only one company in the top eight holdings of RSX is not an energy company. This is Sberbank which is heavily involved in energy lending. A quick glance shows that almost 50% of the RSX basket is accounted for by the largest seven energy holdings. Still, RSX is far superior in terms of cost and flexibility to previous Russian funds on the market and has an annual fee of only 0.69%.

By Carl Delfeld of the Chartwell ETF Advisor

China, Japan ETFs Rebound After Weak Start

Despite measures by the People’s Bank of China last Friday such as raising interest rates and lifting bank reserve requirements, both intended to suck out liquidity cool hot share prices, the Shanghai Composite finished today up 1% after falling 3% in early morning trading.

The Central Bank also widened the trading band for the renminbi just days before Beijing ministers headed for the US for a meeting at which their management of the allegedly undervalued currency would be a focus of discussion. But the Financial Times reports that the widening of the daily trading limit to 0.5 per cent would have no direct implications for the renminbi’s level against the dollar, since the currency has rarely come close to testing the 0.3 per cent limit set in 2005. The the pace of renminbi appreciation has actually slowed in recent months, to an annual rate of about 2 per cent.

Japanese shares also headed higher on Monday, buoyed by continued yen weakness. The Nikkei 225 gained 0.9 per cent to close at 17,556.87 while the broader Topix was up 0.9 per cent at 1,710.67.

By Carl Delfeld of the Chartwell ETF Advisor

Emerging Market ETF Snapshot

The emerging market countries and the exchange-traded funds that track them are playing an increasingly important role in the global economy and our global ETF portfolios.

Emerging market countries account for 85% of the world's population, 25% of world GDP and the Deutsche Bank estimates that they will generate 50% of global growth in 2007. During the last four years, emerging market countries had GDP growth overall of 7.7%. But because their stock markets are playing catch up, emerging market stock markets only account for 7% of world stock market value.

This is the opportunity.

Emerging market ETFs include iShares MSCI Emerging Markets (EEM) and Vanguard's slightly lower cost Vanguard Emerging Market (VWO). In the Vanguard ETF basket there are the following country allocations: South Korea, 15.7%, Taiwan, 12.4%, Brazil and China, 10.5%, Russia, 10%, South Africa, 8.6% and India and Mexico, 6.3%. There are also seven emerging market country iShares available if you prefer a rifle rather than shotgun approach. These ETFs cover markets in Brazil (EWZ), Malaysia (EWM), Mexico (EWW), South Africa (EZA), South Korea (EWY), Taiwan (EWT) and China (FXI).

By Carl Delfeld of the Chartell ETF Advisor