The markets are moving into the home stretch now as corporate news slows. But with next year’s macro picture still cloudy, traders are picking over the flows for ideas. Here are a few:
Fiat (FIATY.PK) may not be a Brazilian company, but it definitely plays an intimate role in the Brazilian car market and larger economy. And that role is getting bigger. FIATY is set to unveil plans for a second car factory in Brazil — where it already is hard-pressed to manufacture 800,000 vehicles a year — on Tuesday. The news gives traders an opportunity to applaud the company’s global footprint and get ahead of what could become a true re-rating of the stock as an emerging markets play that just happens to be based in Italy.
More significantly, here you have a euro-denominated manufacturer willing to spend at least $5.8 billion in the next few years to expand its business in Brazil, a country with an allegedly overweight currency. Are the currency wars over?
Petrochina (NYSE:PTR) may be the best of Asia’s “big three” oil companies, which also include CNOOC (NYSE:CEO), Sinopec (NYSE:SNP). According to local analysts, the secret to telling these companies apart is their niche in the energy ecosystem. While they have evolved along more or less parallel lines, PTR is still primarily focused on developing established fields while CEO and SNP take on opportunities farther afield. In particular, PTR has a lock on China’s natural gas industry — think of it as the Gazprom (OTCPK:OGZPY) of China if it helps.
By contrast, CEO is much more involved as a pure oil play, while SNP is a prisoner to its refining margins, which could easily be squeezed between rising oil prices and Beijing’s system of fuel price restrictions. Bottom line: When looking for a core China energy play, PTR is the top of many lists. The others get a lot of buzz, but PTR is the giant to watch.
Sterlite (SLT) is paying $1.3 billion to buy three zinc mines from Anglo American (OTCPK:AAUKY). The economics of the deal are simple. As long as zinc stays above $1,850 a ton, this is a good deal for the Indian miner because it is basically buying enough proven ore in the ground that will more than pay for acquisition and mining costs.
But with zinc currently trading at $2,750 a ton in markets like Tokyo, it looks like SLT could be getting a 44% discount on these assets — and that is assuming that metals markets remain where they are in the future. Figure that every $90 or so that zinc rises (or falls) means that these mines will add (or subtract) another 35 cents to SLT’s current market value.
ETFs in the Spotlight
The ruble is widely expected to be one of next year’s top-performing currencies, thanks to strong oil prices, an increasingly robust capital market and a supportive tight rate policy. This makes the Russian Ruble Trust ETF (XRU) potentially interesting in the new year.
Even more than other currency ETFs, XRU is not exactly liquid, trading only a few hundred shares on some days. But if demand for the ruble heats up next year, this fund’s holdings could enjoy an increase in underlying purchasing power — if, of course, they accurately reflect the ruble’s performance in the forex markets. (XRU does not actually hold rubles or ruble-denominated assets.) So far this year, XRU is down 1.4%, while the ruble itself has weakened 3%. Similar “benchmark drift” on the upside could make this a very interesting investment indeed if the ruble surges next year.
The Emerging Market Local Debt ETF (NYSEARCA:ELD): Funds like this made a big splash while global money was pouring into the global credit markets in search of yields, but even so, ELD is up only around 3% since its summer launch, whereas a broad emerging markets stock fund like the MSCI Emerging Markets Index ETF (NYSEARCA:EEM) is up about 10% over the same period.
Is ELD a high-alpha play, or should traders be wary of chasing these “hot” assets without evidence that they will deliver real financial results? As stresses multiply in the emerging debt markets, the latter is probably the case. There is room for emerging fixed income in any portfolio, but simply betting everything on Brazilian bonds (for example) is probably not a recipe for long-term rewards.
Disclosure: No positions