Global ETF Wrap Up

 

Global Market Wrap Up

Asian stocks fell sharply Monday, reversing a four-day rally, after weak U.S. housing and jobs data and volatility in the financial sector once again reminded investors of the fragile state of the global economy. Japan's Nikkei 225 fell 2% and European stocks opened 1% lower. Australian and Indian Banks were especially hit hard today.

For the week, however, the Dow was off 1%, the S&P 500 was flat while Japan was up 4%, Hong Kong up 4%, China’s Shanghai Composite up 3%, India up 5% and South Korea up nearly 6%.

Oil rose from a seven-week low to around $126 a barrel though the dampening of U.S. energy demand is keeping a damper on prices.

The U.S. dollar fell against the yen and Swiss franc, two currencies associated with stability in times of market volatility. Global markets fear that Britain, the euro zone, Japan and the United States are sliding toward recession. German business sentiment this month suffered its biggest drop since the 2001 attacks while U.S. home sales were the lowest in over a decade.

HSBC research shows that valuations in Asia are running at 2.1 times trailing book value, far above the 1.2 times reached in the last three major periods of market volatility in 1998, 2001 and 2003. Using price-to-expected earnings ratios to measure relative value, shows that Asian stocks are quite cheap. They have slid to 11.7 times 12-month forward earnings from 17 times in the last year. But earnings are, of course, a moving target.

Is Euro Overvalued?

The IMF has joined me in the opinion that the euro is overvalued. “In our view the euro is now overvalued relative to medium-term fundamentals, while the currencies of many current account surplus countries, including China, remain substantially undervalued,” John Lipsky, the IMF’s first deputy managing director, said in a speech this week.

China

The IMF wants economies with large current account surpluses to revalue their currencies, including China’s renminbi, which Mr. Lipsky said yesterday was “significantly undervalued” in spite of its recent appreciation against the dollar.

China’s (FXI) official reserves grew by a massive $280bn in the first half of 2008. Consumer price inflation has risen to 8 per cent and the currency has become more flexible and appreciated about 20% against the dollar. China’s current account surplus has risen from 3.6% of GDP in 2005 to 11.3% last year. China’s household consumption is at a new low of only 35% of GDP while the U.S. is at 70%.

Starbucks's (SBUX) is closing 600 U.S. outlets and eliminating 12,000 jobs after doubling in size in four years. International growth is being ramped up in China, Canada, the U.K. and Japan. Starbucks expects to gain as more-affluent Chinese are drawn to gourmet coffee. There are now 100 million middle-class consumers in China and this may grow to 200 million by 2020. Starbucks has more than 300 stores in China and had set plans to open at least 80 outlets this year.

Australia

The top holding of the Australian ETF (EWA) BHP Billiton reported its sixth consecutive year of profits growth after the Anglo-Australian mining group due to sizable profits from its petroleum, iron ore, manganese, and copper operations.

But Australia’s inflation rate recorded its biggest quarterly increase in 17 years as consumers were somewhat squeezed by increasing mortgage rates and record fuel prices. Its economy, though showing some signs of slowing, continues to enjoy consistent growth and is in its 17th year of continuous growth.

On the cautionary side, mortgage credit will expand by less than 10% for the first time in 40 years in 2008 according to Citigroup. The Australian stock market is down by 26% since its peak in November. Banks have been hit harder still and the top four banks account for 20% of the total Australian market value.

New Gulf ETF

Van Eck launched the Market Vectors - Gulf States Index ETF this week. MES tracks the Dow Jones GCC Titans 40 Index. This equity index measures the performance of 40 companies in Kuwait, United Arab Emirates, Qatar, Oman and Bahrain.

The index caps the weight of individual stocks at 8% in each country, with a maximum of 15 companies per country. Country allocations include Kuwait (52.3%), United Arab Emirates (25.8%), Qatar (14.9%), Oman (4.4%) and Bahrain (2.6%). The largest sector exposures are banks (38.5%), financial services (21.6%), real estate (10.5%), technology (7.6%), construction & materials (7.2%), industrial goods & services (7.1%) and telecommunications (3.6%).

Peru

Peru credit rating has been improved from to BBB- from BB+ because of the improvement of the Latin American country's fiscal situation. Peru's low level of inflation and strengthening macroeconomic fundamentals are trends that S&P expects "will remain in place over the medium term despite an increasingly riskier international environment and the continuation of challenging local politics".

Strong domestic demand and exports of minerals have helped push the Andean country's economy up 9% in 2007. Peru has been one of the world’s strongest markets over the last year but is hard to get at. One option is (BVN) which is a mining play that trades as an ADR. It has been buffeted lately by labor strikes.

Vietnam

Vietnam raised domestic fuel prices by as much as 36% this week as the country has been hammered by 25-30% inflation, interest rate hikes and slower economic growth. DBS Bank predicts that inflation will rise beyond 30% in August and that there would be another 2% rise in Vietnam’s base lending rate leading to GDP growth in 2008 falling to 6.4%.

France

France’s (EWQ) Prime Minister Sarkozy got off to a blundering start but has recently regained some momentum. Christine Lagarde, France’s finance minister, has rammed through a “modernization of the economy” law, which slashes red tape for entrepreneurs and increases competition in the moribund retail sector. The retirement age is also being raised by a year and companies are to be allowed to negotiate working time directly with employee representatives to permit more than a 35-hour week. Unemployed people who refuse more than two job offers will face penalties. Another good sign, cargo-handling is being transferred to the private sector in a sweeping reform of ports, a union stronghold. Keep in mind that ten of the largest European companies are headquartered in France.

Japan

Inflation in Japan (EWJ) jumped in June to 1.9 per cent, the fastest pace in 15 years, as prices for energy and other commodities surged. The squeeze on consumers is likely to hurt consumption in the second quarter. Together with the country’s first decline in exports in 55 months in June, which has been a major driver of growth for the world’s second-biggest economy, some analysts are predicting that second-quarter GDP growth will be negative.

Russia

Lower oil prices will hurt the Market Vectors Russia ETF (RSX) because it is heavily weighted in the energy sector, which makes up 42.6% of the fund. It had a strong start earlier this year, but year-to-date, it’s down 1.8%.

Indonesia

Indonesia (IF) 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 year.

The country’s central bank was also advised to act “resolutely” and “preemptively” to raise rates and combat inflation, which hit a 21-month high of more than 11% in June.

India

India’s (INP, IIF) ruling coalition narrowly survived a crucial parliamentary vote of confidence on Tuesday, giving it a tenuous mandate to push forward with a controversial agreement to co-operate with the US on civilian nuclear energy development.

After days of frantic dealing to woo undecided lawmakers, the Congress party-led coalition gained 275 votes of support, with 256 against. Opposition parties lost the opportunity to topple the government and force early parliamentary elections despite public discontent over inflation, now running at nearly 12%, a 13-year-high.

George Soros had gone on a buying spree in the Indian stock market. Soros' Quantum fund has invested close to $140 million in India since February and has picked up the pace of its purchases during the past couple of weeks. Wilbur Ross, the canny deep value investor, has also allocated $300 million to India and recently invested $80 million in SpiceJet which is India’s second largest budget airline.

New Zealand

New Zealand cut its benchmark interest rate on Thursday for the first time in five years and said further reductions later this year were likely as New Zealand struggles with negative GDP growth and the risk of sinking into a prolonged recession. Mr. Alan Bollard, governor of the Reserve Bank of New Zealand, cut the rate from 8.25 to 8 per cent – a level that remains the highest in the industrialized world after Iceland.

South Korea

Mr. Kang Man-soo, the South Korean (EWY) 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.

Belgium

Belgium (EWK) has suffered from top holding financial giant Fortis’s decision to suspend its dividend but politics is also an issue weighing on the market. Prime Minister Yves Leterme offered his resignation after failing to broker an agreement between the majority northern, Dutch-speaking Flanders and the minority southern, French-speaking Wallonia. King Albert rejected the resignation but it seems likely that Belgium will split into two countries sooner or later.

United Kingdom

The British (EWU) economy continued to slow in the second quarter of the year, recording a rate of growth that has not been lower in seven years. Sterling lost ground this week after a sharp fall in UK consumer spending heightened fears that the country was slipping into a recession. New data showed UK retail sales dropped by 3.9% in June, far worse than expectations.

Comments

[Calvin C.:]

Looks like every country is importing inflation from us.

2008 Jul 28 02:06 PM