As traders catch up from the Thanksgiving break and tidy their books ahead of the new year, news flow is lightening up. That gives us a chance to revisit a few key developments.
BRAZIL: Gerdau (GGB) (quote) is one of Brazil's finest steel makers, but confesses that high raw materials costs and a strong real will keep its margins under serious pressure for the immediate future.
But for all its challenges, this is still a world-class steel company and definitely the best managed of Latin America's top metallurgy names. This is why Banco Santander likes GGB, despite all current evidence to the contrary.
RUSSIA: Vimpelcom (VIP) (quote) is back on our watch list because this company seems stubbornly dedicated to its unpopular merger with Egypt-based telecom Orascom Holdings (OTC:ORSDF) -- a merger that even VIP's top shareholders have protested against.
When last we left this deal, it looked dead. Algeria was nationalizing Orascom's local network in that country, and VIP's owners were grumbling that most of what was left of the company's assets would only duplicate their global holdings or even force anti-trust action. But as of Friday, VIP cheerfully announced that it wants to close this merger by the end of June, and that it will spin out Orascom's North Korean and Egyptian businesses if and when it happens.
INDIA: Tata Motors (TTM) (quote) might have stumbled by raising the price of the Nano, the world's cheapest car, by about $200. But other factors may be in play to explain why sales cratered a stunning 85% last month.
For one thing, even though this car only costs about $2,200, it requires financing for many of its low-income buyers to afford. And the collapse of microlending in India in recent weeks has sparked a backlash throughout the low-income credit markets. Rumors that these cars tend to catch fire are not helping.
ETFs in the Spotlight
In terms of pure exposure to China's manufacturing sector, CHII (quote) is hard to beat, with a full 80% weighting to some of the world's leading industrial behemoths and the rest of the fund primarily concentrated in engineering firms and other contractors. From trains to ships to power plants, if China wants it, it is a good bet that there is a company in this fund that makes it.
Although the Chinese infrastructure story is probably one of the biggest themes driving the global economy, this fund is still up only 11% year to date. This is not simply a problem with the Chinese environment's recent volatility because these companies work on long-term projects -- a fleeting shift in the housing market is not going to change multi-year contracts to buy ships, for example.
The real problem is that while traders talk a lot about infrastructure, few are willing to wrap their heads around actual companies. Some are quasi-arms of the state; none are sexy. Top names in this fund are obscure: China National Building (CBUMY (quote), Anhui Conch Cement (AHCHY (quote), China Railway (CRWOY (quote), Shanghai Industrial Holdings (SGHIY (quote), China Railway Construction (CWYCY (quote), China Communications Construction (CCCGY (quote), Weichai Power (WEICY (quote), China Shipping Development (CSDXY (quote). Of the lot, the real star this year seems to be AHCHY, so add that one to your cement group.
FXA (quote): The Australian dollar has appreciated 8.5% against its U.S. counterpart this year -- much more than the Brazilianreal, although you might not know it from all the rhetoric out there. While the Brazilian stock market is unusually geared toward commodity companies, the underlying economy is actually as consumer-oriented as the United States.
On the other hand, Australia's economy really is dominated by mining, and so its dollar naturally tracks the surging price of ore, metal and coal much better than the real. So it is natural to see AUD fare so well. The surprising thing, as with many of these new currency-based ETFs, is that FXA has outperformed its benchmark currency -- up nearly 10% so far this year. Once again, the answer is that FXA, like many currency funds, does not invest in Australian currency or money market instruments at all, but instead builds a portfolio of U.S. Treasury bills and other dollar instruments that theoretically reflects the real's movements.
In practice, however, Treasury paper has performed much better than anyone's models -- even if only a little better than the Australian dollar itself -- which is why FXA and its peers are ahead of the game. This situation is unlikely to last, so be careful.
Disclosure: No positions