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India's Slower Growth & Record Inflation Rattles ETFs

By Carl Delfeld of Chartwell ETF & ETFfolio

India's exchange-traded funds are proving volatile in a climate slowing growth, escalating government spending, and record inflation. After a sharp slide, India ETFs started to turn upward after its ruling coalition narrowly survived a test of leadership regarding the nuclear pact with the US but since then have demonstrated no clear trend.

James Fontanella-Khan of the Financial Times reports that India’s economy grew at it slowest rate in three years, as it struggles to control record-breaking high inflation and tighter credit and lower liquidity. Annual growth slowed to 7.9% in the first fiscal quarter of 2008 ended on June 30, significantly lower than the 8.8% rate reported in March.

India’s central bank recently sent its strongest signal yet that it will not tolerate high inflation, now running at nearly 12%, a 13-year-high, by announcing a larger than expected increase in its key lending rate with more hikes to come. India’s economic growth is being hampered by domestic supply-side constraints, particularly in infrastructure such as power, irrigation and transportation.

India’s agricultural output will also grow just 2%, down from a 4.5% expansion last year, due in part to an erratic monsoon, highlighting the challenge India faces in boosting agricultural productivity and meeting rising demand for food grains.

Industrial output is forecast to grow 7.5%, down from 8.5%, with industry still facing constraints from power shortages, while the service sector is projected to grow 9.6%, down from 10.8% last year. The Indian cabinet has approved an average 21% pay rise for 5 million federal employees and military personnel, the first revision of government salary scales for 12 years. Mr. P. Chidambaram, finance minister, estimates that the civil servants’ pay rise will cost Indian taxpayers $3.6bn this fiscal year.

Below are the ETFs tracking India's market:

iPath MSCI India ETN (INP): down 41% year-to-date
PowerShares India (PIN): down 20.5% since March 5th opening
WisdomTree India Earnings (EPI): down 25.9% since Feb. 26th launch

Indonesia Posts Growth Led by Consumers & Exports

By Carl Delfeld of Chartwell ETF and ETFfolio

Indonesia’s economy grew a higher-than-expected 6.4% year-on-year in the second quarter of this year, thanks to high commodity prices, strong consumer spending and robust exports. Oddly, Consumer confidence fell to its lowest level in three years, on the back of a 30% fuel price increase in May and rising inflation.

This is good news for the Indonesian Fund (IF)This solid growth will give a boost to President Susilo Bambang Yudhoyono as he released the government’s 2009 budget calling for a 55% increase in funds for poverty fighting and a significant expansion of the education budget.

Economic growth in Indonesia which is south-east Asia’s largest economy and the world’s fourth most populous country, reached 6.3% last year.

Nick Cashmore, of CLSA brokerage in Jakarta, believes that Indonesia had been “exceptionally lucky” because of high prices for coal and other commodities. “If this rising investment cycle picks up, [Indonesia] has the potential for insular growth that will set it apart from its neighbours,” he said. Exports accounted for 30% of growth in the second quarter, far lower than in neighboring countries, while consumer spending represented 60.3%.

Sri Mulyani Indrawati, Indonesia’s chief economics minister, was upbeat. “The growth momentum is very strong and the upward trend on employment and poverty reduction is healthy,” she told the Financial Times. “The main worry is inflation. It will be a couple of months before the central bank and we get it down to single digits again.”

This would be a great story except that market valuations are still high with the stock market trading at 3.5 times book value, 12.2 times cash flow and eighteen times annualized earnings based on S&P data.

Indonesia has been urged by the OECD to overhaul its rigid labor laws, remove foreign investment and ownership restrictions and cut its fuel price subsidies. Despite a 30% increase in fuel prices in May, the Indonesian government is expected to spend one-fifth of its government budget on fuel subsidies this

Chartwell ETF Adds Italy (EWI) as it Fights Inflation, Spending and Crime

By Carl Delfeld of Chartwell ETF and ETFfolio

The new center-right government of Italy is taking action on the fronts of inflation, spending and crime. Chartwell today added the iShares MSCI Italy exchange-traded fund (EWI) to its Country Rotation ETFfolio based on valuations and the pace of market economic reforms.

The Italian government is concerned that spiraling food prices and a six–year high in its core inflation rate will choke consumer confidence. The government plans to include measures in its budget plan for next year to curb the rising cost of basic food products, Prime Minister Silvio Berlusconi said at a news conference in Rome yesterday.

Italy’s parliament last week approved the centre-right government’s plans to make substantial cuts in public spending over the next three years to meet European Union requirements to balance the budget by 2011.
The measures, involving close to $18bn in cuts, reflect a significant shift in the policies of Silvio Berlusconi, the prime minister, and Giulio Tremonti, the finance minister, whose previous administration, from 2001-06, was characterized by rising spending.

Another key issue in Italy is rising urban crime and recently Italian troops, some in body armour and with automatic weapons, were deployed on urban crime patrols, fulfilling an election campaign promise by Silvio Berlusconi to make Italy’s cities safer.

POSCO & South Korean ETF (EWY)

By Carl Delfeld of Chartwell ETF and ETFfolio

A leading company in the South Korean ETF (EWY) is the giant steelmaker POSCO (PKX). It has controlling stakes in 20 domestic companies and 43 foreign firms according to a recent profile in the Economist. Its subsidiaries include South Korea’s sixth-biggest construction firm, a power company and a computer-services provider. The company wants to increase sales from 42 trillion won ($38.8 billion) this year to 100 trillion won in 2018, and steel output from 35m to 50m tons.

As well as planning to expand into shipbuilding, POSCO is looking out for opportunities to acquire steelmakers in Asia. It hopes to begin work soon on a 12m ton steel-production plant in the Indian state of Orissa, where it also has mineral rights. And next year it hopes to complete the construction of a cold-rolling mill near Vietnam’s Ho Chi Minh City, and an automotive steel-sheet plant in Mexico to supply General Motors and Hyundai Motor.

Like other steelmakers, POSCO has sought to acquire mines to insulate itself from the commodity-price boom. The company has stakes in two iron-ore mines and seven coal mines in Australia and the firm is looking to buy mines in Africa, Siberia, Indonesia and Eastern Europe, and has a goal that 30% of its raw materials should be supplied by mines in which it has a stake.

Mr. Kang Man-soo, the South Korean finance minister, is pushing ahead with the privatization of state-invested companies such as Daewoo Shipbuilding and Marine Engineering, despite slowing growth and intense political opposition. “Apart from exports, everything – including investment, consumption, employment and the current account balance – is showing a trend similar to that of 1997.”

South Korean inflation is at its highest level in almost a decade and Korea will likely record its first current account deficit in 11 years. Unlike 1997, however, the country has ample foreign exchange reserves – seven times pre-crisis levels.

EWY is down 2% in mid-day trading.

Ireland Gains From UK Global Tax Net

By Carl Delfeld of Chartwell ETF and ETFfolio

The New Ireland closed-ended fund (IRL) has been trying to get some traction and has recovered somewhat lately when Irish-Allied Bank (AIB) has a good day or two. But an upward trend is not clear.

The Financial Times notes that many UK multinationals argue that too much of their foreign profit potentially falls into the British tax net under existing anti-avoidance rules. Ireland, which does not apply similar rules, is proving an attractive alternative.

Fears of a corporate exodus from Britain were reignited on Wednesday when Henderson Group, one of Europe’s largest investment managers, said it was considering moving its tax base to Ireland. Earlier this year, Aberdeen Asset Management, a big global fund manager, announced that it is considering relocating abroad.

In addition, Charter, an engineering company whose origins go back to Queen Victoria, announced on Thursday it was switching its tax base to Ireland to cut its tax rate and compliance costs.

The Economist point out that the Irish economy, and in particular its real estate and financial sectors will face a tough environment going forward as demand for loans will continue to weaken in the next few years. Mortgage borrowing, corporate investment and, to a lesser extent, personal consumption are all expected to be considerably lower, as the economy slows and the property market undergoes a correction.

An Olympian ETF Portfolio

By Carl Delfeld of Chartwell ETF and ETFfolio

While watching the Olympics, I couldn’t help myself from thinking about the investment opportunities of the various countries participating in the games. I hope many investors were also reminded at how the world is changing and why they need a global portfolio to capture value and growth around the world. Let’s look at a few global investing strategies and end with a portfolio of Olympic powerhouses.

There are several ways to build a global portfolio. Picking stocks gives you the chance to zero in on promising industries, sectors and management teams and having a balance of American and international companies in your portfolio can make a big difference in returns. Created to be an alternative to the Dow Jones Industrial Index, the Chartwell Global 30 is a blend of thirty equal-weighted companies with the twist of having exposure to fifteen American and fifteen international companies representing twelve different countries.

The Chartwell Global 30 recently passed its three-year anniversary beating the Dow, S&P 500 and EAFE benchmarks handily. Selecting stocks allows me the chance to gain diamond exposure through Anglo-America, Brazil’s growing energy reserves through Petrobas and the amazing $2,500 car from India’s Tata Motors.

Another strategy is to follow a “pick countries, not stocks” approach using country-specific exchange-traded funds. Chartwell ETF has specialized in country ETFs since 2002 using primarily iShares MSCI ETFs that now offer exposure to 26 countries. A newcomer with a strong balance sheet, Northern Trust’s NETS ETFs, currently offers investors access to 15 markets and aims to double this within a year.

Picking country ETFs allows investors the flexibility to focus in on specific markets and sectors. Using a broad-based international ETF like the Europe, Australia and Far East Index (EFA) may be simple and low cost, but 43% of your money will go to Japan and the United Kingdom. Adding France and Germany to the mix brings this to about 65% leaving little room for great markets like Singapore, Ireland and Hong Kong.

Why not challenge these backward-looking, market-cap weighted indexes by looking forward and selecting markets based on future potential. Chartwell’s Country Rotation ETFfolio does just that. Even our EAFE Equal-Weight ETFfolio using seventeen country ETFs has beat the market cap weighted version by a wide margin.

Use your imagination and the flexibility of ETFs to create your own funds. Chartwell has an ETF folio that follows the Index of Economic Freedom and another that offers exposure to global sectors in which the U.S. has a competitive advantage.

And while it is admittedly a stretch, let’s consider what an ETFfolio of the top ten countries in the Beijing Olympics medal count would look like.

The U.S. did remarkably well across the board underscoring its role as the world’s leading investment destination. China surged to win the most gold and reach the symbolic level of 100 medals. Quite an achievement that punctuates China’s growing heft. With the Shanghai Composite down 55% this year, it has come down to earth and is interesting from a valuation perspective.

Next comes Russia with a performance fueled by a strong Olympian tradition and petro dollars but perhaps a bit overshadowed by the Georgian fiasco. I will take a pass on this one even though it is off 36% since just May.

Next is the UK and Australia. Both are financial-oriented markets but the UK is having a much harder time coping with its real estate bubble, slower growth and a weak sterling. Australia, while not cheap, has strengthened on the bounce in commodities evidenced by strong profits at BHP and Rio Tinto. We need to keep an eye on more competitive banking market since the top four Aussie banks represent 20% of the market’s value.

France and Germany were neck and neck representing more than half of continental Europe’s largest companies and market cap. Germany is facing a sharp slowdown and weak consumer confidence but has some great multinationals like Siemens in its ETF basket. I like France primarily because after a slow start, President Sarkozy is gaining traction in executing some market –oriented campaign promises. Both of these markets are relatively cheap on a price-to-earnings and price to cash flow basis.

Next comes South Korea, an industrial powerhouse, favored partner of China and striving mightily to be noticed on the world stage. It has spent a bundle supporting its currency and exports have proved to be resilient. Next is the surprisingly robust performance of Italy. Along with Ireland, Italy has caught my eye as one of the cheapest markets in the world with the added bonus of undertaking significant market reform.

Alas, the Ukraine grabs the number ten slot but without an ETF the mantle falls on Japan to round out the top ten. Japan seems to be struggling and searching for a way to regain its mojo, consumer and investor confidence and a somewhat elusive economic growth. On the plus side, Japan ETFs offer very high quality multinationals, low political and currency risk and its smaller companies are trading collectively at below book value. Another important advantage of having exposure to Japan ETFs is that its market is only 29% correlated to the S&P 500 index.

Below is how this Olympian ETFfolio would look like with tickers from both iShares and the NETs country ETFs. This grouping, including Russia, is up slightly for the week.

United States (SPY)

China (FXI), (SNO)

Russia (RSX)

United Kingdom (EWU), (LDN)

Australia (EWA), (AUS)

Germany (EWG), (DAX)

France (EWQ), (FRC)

South Korea (EWY)

Italy (EWI), (ITL)

Japan (EWJ), (TYI)

Chartwell Global 30 Adds Diageo (DEO)

By Carl Delfeld of Chartwell Partners Asset Management

Created to be an alternative to the Dow Jones Industrial Index, the Chartwell Global 30 is a blend of thirty equal-weighted companies with the twist of having exposure to fifteen American and fifteen international companies representing twelve different countries.

With its premium and super premium brands, Diageo (DEO) earns higher margins than more commodity-like products. These brands should hold up better in a global slowdown and also have ample room to grow in fast-growing Asian and Latin American consumer markets. It also makes sense that these premium brands should be able to pass on higher costs more readily. After all, what's a few bucks more when you are already paying $50 for a premium bottle of vodka?

Even so, the Financial Times reports that Diageo trimmed forward-year guidance from 9% organic operating profit growth to 7-9% – though the upper end remained intact. It is also confident of delivering double-digit earnings per share growth, helped by a planned $750m share buyback. This trim in earnings has hit the stock and I see it as a good entry point. A 2009 price/earnings ratio of over 14 times seems to represent good value.

Hong Kong Exchange Faces Falling Volume & Profits

Carl Delfeld of Chartwell ETF and ETFfolio

Hong Kong ETFs such as the iShares MSCI (EWH) and NETS (HKG) have been acting better during the past week even when China-focused ETFs are taking a drubbing.

But the venerable Hong Kong Stock Exchange fully expects a challenging second half of the year due to weaker investor sentiment, after Asia’s third largest exchange reported a 6% drop in second quarter net profits.

The bourse's average daily trading volume was down 23% during the first three months of the year at HK$76bn ($9.7bn) reports Leanne Wang of the Financial Times. In July, the average turnover volume slipped to HK$63bn. It also reported net profits of HK$1.32bn in the three months to the end of June, down from HK$1.4bn in the same period last year. Compared to the first quarter of this year, profits were down 20%.

The exchange said that volatile market conditions forced many companies to shelve or withdraw initial public offering plans during the second quarter, which resulted in a smaller number of newly listed derivative warrants and led to a pullback in listing fee revenues.

The Dollar, Russia & Oil

By Carl Delfeld of Chartwell ETFand ETFfolio

Steve Forbes writes that "President Bush can start to reverse the U.S.' and the west's Carteresque response to Russia's subjugation of Georgia by strengthening the U.S. dollar. In 2004 the weak dollar triggered a global commodities boom--just as it did in the 1970s. Major commodity-producing countries such as Russia have since received revenue windfalls of hundreds of billions of dollars. The higher the price of oil, the more assertive Moscow has become in its foreign policy.

In 1981 Ronald Reagan fearlessly attacked a rise in inflation far worse than the current one. He succeeded. The dollar was strengthened, and interest rates came tumbling down. Then sky-high oil prices tumbled, from almost $40 a barrel to $10 by the mid-1980s. That precipitous fall in oil was a critical--and utterly unappreciated--factor in the Soviet Union's collapse. Mikhail Gorbachev ascended to power with the vigorous support of hard-liners. Starved for hard currency, he turned to such liberalizations as glasnost and perestroika out of desperation, not principle.

Strengthening the dollar with Reaganesque determination would send oil to the $40--to--$50-per-barrel range. At the same time the U.S. and its allies could start putting restrictions on Russian/oligarch-held bank accounts in Europe and here."

The importance of economics to America's foreign policy is all too often overlooked.

German Weakness Hits Euro Hard

By Carl Delfeld of Chartwell ETF and ETFfolio

A steady stream of bad news on the German economy has helped drive the euro to a six-month low against the dollar and pushed European government bond yields to their lowest level in three months.

The closely-watched Ifo German business climate index dropped to a three-year low of 94.8 in August from 97.5. Meanwhile, the GfK index of consumer confidence in the eurozone’s most important economy fell to its lowest in five years falling for the third time in a row according to AFP. This has been a reliable lead indicator on the health of the German economy.

Detailed German GDP data were also published, which showed that consumption was very weak.
“All in all, the data suggests the marked slowdown of German growth registered in the second quarter was probably not a one-off,” said Martin Lück, economist at UBS.

But keep in mind that the largest names in the Germany's ETFs (EWG, DAX) are companies like Siemens which reflect opportunities for global growth rather than serving as a barometer for the German economy.