On Banks, Sovereign Wealth Funds, And Emerging Markets

 |  Includes: EEM, EWH, EWM, EWS
by: Emerging Money

By Steven Orlowski

Three of the better-performing emerging markets are Singapore, Hong Kong, and Malaysia. A recent Standard & Poor’s report notes it expects most rated banks in these three countries to further expand over the next several years.

According to the report, titled "Regional Expansion By Singapore, Hong Kong, Aand Malaysian Banks Is A Double-Edged Sword," the banks' financial health, risk management, and internal support from respective governments is expected to continue to support the ratings and expansion. The report says these banks are likely to continue expanding over the next several years to take advantage of higher yields and the growth potential in emerging markets.

But while these banks expand, new evidence suggests sovereign wealth funds are becoming more conservative as cash levels are increasing -- in some cases to peak financial-crisis levels. The Government of Singapore Investment Corp. (GIC), which manages more than $100 billion, boosted cash to higher levels than during the financial crisis, reducing exposure to stocks, bonds, and its European holdings.

Cash was increased to 11% of the portfolio as of March from 3% the year prior. Stocks dropped from 49% to 45%, reflecting a reduction in developed markets, while bonds were reduced to 17% from 22%.

The move to cash is testament to the limited options government funds have when seeking to preserve capital in light of ongoing global uncertainty. GIC’s holdings in Europe were reduced to 26% from 28%. While investments in the U.K. were held at 9%, its assets in Portugal, Ireland, Italy, Greece, and Spain made up 1.4% of its portfolio. 33% of the portfolio is in the U.S., a majority of the 42% invested in the Americas. Allocation to Asian emerging markets increased to 29% from 27%.

Reflecting the ongoing global malaise and the challenge for large institutions to make reasonable investments, the moves are not so different from individual investors striving for a semblance of safety and growth. While Singapore's GIC moves to cash, and banks in Malaysia, Hong Kong, and Singapore look to expand, we can heed the message.

A look at the recent charts of the three aforementioned regions, Malaysia (NYSEARCA:EWM), Hong Kong (NYSEARCA:EWH) and Singapore (NYSEARCA:EWS), compared with the iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM) shows a developing divergence from the aggregate emerging markets performance.

Singapore is the real standout, with a significant out-performance compared to the overall index.

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Malaysia looks very good as well.

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Finally, Hong Kong looks a little better, but clearly not as good as the other two. Its ties to mainland China are having an impact, but it still looks impressive considering China is significantly underperforming the index.

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Banks are the types of businesses that need to be followed closely because understanding where they are expanding gives us an edge when determining where to put our own money. Paying attention to the choices sovereign wealth funds are making is just as beneficial. They are out there to make money. Increasing cash and liquidating positions in developed markets is an ominous sign -- one we should heed with caution.