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As Government Bond Rate Rises, How To Invest In Equity Market?

|Includes: ASHR, DAX, DIA, DXGE, EIDO, ERUS, EWG, EWGS, EWJ, iShares MSCI Mexico Capped ETF (EWW), PIN, QQQ, RSX, SPY, XLV

I have recently produced a report on our global ETFs investment strategy.

Point 1. Global Investment Strategy Summary

1. Global PPIs are rising

2. Cost push inflation signals are clear, yet demand pull inflation signals are mixed

3. I expect China and US lead gradual and firm global demand pick-up.

4. Therefore, we recommend to add equity to global investment portfolio, while reducing portion of government bond holdings.

5. We expect long-term end of government bond rates will rise gradually and steadily. In steepening yield curve environment, we continue to recommend to Overweight global banking sector.

In the past, we have calculated impact of 1% rise in long-term government bond rate to equity market.

Equation is simple. We estimate 1% rise in LT Gov't Bond rate = 12% reduction of fair price of equity market.

In 2016, for US market, we saw average 10-year government bond rate of around 1.7% vs. 2.0% level in 2015. Therefore, even though the rate rises to 2% level by end of this year, impact on equity market should be limited.

Every year, we estimated that global equity market adds additional 6~7% upside potential due to dividend yield and rise in book value.

Point 2. US market upside by end of this year: 2~3% point

Dow up 4.3% YTD, S&P500 up 4.36% YTD, NASDAQ up 4.17% YTD

Vs. Potential Upside Increase by 7% point. Therefore, we expect at least additional 2~3% rise of US equity market by end of this year.

We especially like NASDAQ.

Point 3. Our global equity ETFs model portfolio returns over 9% since establishment (annualized return of over 20%)

As you may aware, we have started to produce global equity ETFs model portfolios for our domestic investors.

In this week, we have changed our portfolio a little. We added Mexico EWW into our portfolio, expecting US demand recovery.

ETFs Portfolio Accumulated Return (%)

Type

Performance (%)

Emerging Focused

1st: 2.17%, After 1 st change: 6.10%, After 2 nd change: 0.82%, Accumulated Performance: 9.29% (annualized 22.3%)

Advanced Focused

1st: 2.03%, After 1 st change: 6.22%, After 2 nd change: 0.10%, Accumulated Performance: 8.48% (annualized 20.3%)

Note: Portfolios were introduced on 28 August, 2016. Source: Kiwoom Securities

Portfolio Change

Type

Change in Portfolio

Emerging market focused

USA S&P: 15%-> 5%, USA Dow: 5%-> 10%, USA Nasdaq: 10%-> 15%

Indonesia: 15%-> 10%, China: 10%-> 5%, Mexico 0%-> 10%

Advanced market ocused

USA S&P 15%-> 5%, USA Nasdaq: 15%-> 20%

Mexico 0%-> 5%

Source: Kiwoom Securities

Emerging Market Focused US listed Equity Related ETFs Portfolio

Country

Code

Entry

Current

Price

% owned

Performance

Performance

Within Portfolio

Overall Portfolio Performance since last change

USA

SPY

214.17

213.74

5%

-0.20%

-0.01%

-0.68%

DIA

181.48

181.77

10%

0.16%

0.02%

QQQ

119.19

118.38

15%

-0.68%

-0.10%

           

Germany

DAX

24.73

24.61

10%

-0.49%

-0.05%

 

EWG

25.93

25.80

5%

-0.50%

-0.03%

Japan

EWJ

12.60

12.58

5%

-0.16%

-0.01%

Russia

RSX

18.74

18.44

15%

-1.60%

-0.24%

ERUS

14.77

14.54

10%

-1.56%

-0.16%

China

ASHR

24.90

24.80

5%

-0.40%

-0.02%

Indonesia

EIDO

26.30

26.23

5%

-0.27%

-0.01%

Mexico

EWW

51.86

51.08

5%

-1.50%

-0.08%

KOSPI

 

2,037.17

2,013.89

 

-1.14%

   
                 

Source: Kiwoom Securities

Advanced Market Focused US listed Equity Related ETFs Portfolio

Country

Code

Entry

Current

Price

% owned

Performance

Performance

Within Portfolio

Overall Portfolio Performance since last change

USA

SPY

214.17

213.74

5%

-0.20%

-0.01%

-0.64%

DIA

181.48

181.77

10%

0.16%

0.02%

QQQ

119.19

118.38

20%

-0.68%

-0.14%

XLV

69.38

68.96

5%

-0.61%

-0.03%

Germany

DAX

24.73

24.61

5%

-0.49%

-0.02%

 

EWG

25.93

25.80

5%

-0.50%

-0.03%

 

DXGE

26.68

26.53

10%

-0.56%

-0.06%

 

EWGS

42.52

42.33

5%

-0.45%

-0.02%

Japan

EWJ

12.60

12.58

5%

-0.16%

-0.01%

Russia

RSX

18.74

18.44

10%

-1.60%

-0.16%

ERUS

14.77

14.54

5%

-1.56%

-0.08%

China

ASHR

24.90

24.80

5%

-0.40%

-0.02%

Indonesia

EIDO

26.30

26.23

5%

-0.27%

-0.01%

Mexico

EWW

51.86

51.08

5%

-1.50%

-0.08%

KOSPI

 

2,037.17

2,013.89

 

-1.14%

   
                 

Source: Kiwoom Securities

We like emerging markets over developed markets. In order of attractiveness: DAX(Germany) > MICEX(Russia) > MEXBOL(Mexico) > JCI (Indonesia).

RIM Upside Potential by Country

Country

Index

Market Cap.

(Mil $)

Current

Index

Target

Index

Upside Potential

Expected

ROE

Germany

DAX

1,115,941

10,757

13,010

20.9%

11.7%

Russia

MICEX

481,502

1,977

2,381

20.4%

11.5%

Mexico

MEXBOL

293,600

48,094

54,587

13.5%

20.0%

Indonesia

JCI

448,923

5,398

6,004

11.2%

18.1%

Korea

KOSPI

1,104,092

2,037

2,238

9.9%

9.1%

USA

Nasdaq

8,267,627

5,283

5,693

7.7%

17.4%

USA

Dow

5,435,821

18,169

19,425

6.9%

16.9%

Japan

NIKKEI

2,942,699

17,365

18,364

5.8%

9.5%

China

CSI300

3,456,933

3,367

3,558

5.7%

12.5%

USA

SP500

19,280,082

2,143

2,211

3.2%

15.5%

Canada

S&P TSX

1,625,003

14,871

15,103

1.6%

11.1%

Australia

S&P ASX

2,818,436

3,806

3,831

0.7%

11.5%

France

CAC

1,379,340

4,541

4,563

0.5%

8.6%

Europe

STOXX50

2,825,610

3,087

3,083

-0.2%

8.3%

India

SENSEX

714,427

28,091

27,534

-2.0%

15.7%

Brazil

IBOV

644,808

63,866

58,508

-8.4%

10.2%

UK

FTSE

2,297,763

7,018

6,280

-10.5%

11.0%

South Africa

FTSEJSE

548,786

45,202

39,540

-12.5%

11.0%

Global

AC World

 

414

430

3.9%

12.0%

Total

 

55,681,391

   

3.9%

14.1%

Note: As close of 26 October, 2016. Source: Kiwoom Securities

Point 4. In Steepening Yield Curve Environment, BUY banks

We like banking sector globally. US banks, Japan Banks, German Banks, and Korean Banks, etc.

We have calculated Korean Banks Upside Potential on RIM.

Residual Income Model Analysis

KOSPI Upside Potential on RIM

     

Risk Premium

   
     

8.0%

7.5%

7.0%

 

LT ROE

8.6%

1,770

2,007

2,245

   

9.1%

2,010

2,254

2,497

   

9.6%

2,263

2,512

2,761

           
     

Low

-13.6%

     

Middle

10.5%

     

High

34.9%

     

Average upside

10.3%

           
     

Index Target

2,258

Currently, KOSPI has around 10.3% upside potential based on our RIM.

Korea Bank Index Upside Potential on RIM

     

Risk Premium

   
     

8.0%

7.5%

7.0%

 

ROE

6.4%

618

751

883

   

6.9%

740

875

1,010

   

7.4%

867

1,005

1,144

           
     

Low

-16.2%

     

Middle

17.4%

     

High

54.9%

     

Average upside

18.8%

           
   

Korea Bank Index Target

877

Currently, Korea Bank Index Residual Income Model upside potential is around 18.8%.

Korean banking sector attractiveness vs. KOSPI is much higher at the current point in time.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.