Q-Why focus on the export oriented natural resource economies of Canada and selected Latin America countries
A-Taking the case of Canada first -This is an economy exporting strategically important natural resources balanced by an increasingly affluent services sector. A fiscally responsible country with a strong balance of payments positions that produces budget surpluses that has and can be drawn down upon to "buffer" the economy against turbulence in the international marketplace .
Latin America on the other hand is a region rich in natural resources needed by the fest of the world for nation building . Policy makers are tasked with the responsibility of using increase in export income to increase the living standards of its people in a fiscally prudent manner through non-inflationary growth.(indeed there is an ever widening divergence in inflation rates reflecting the differences in policy mixes being adopted by countries to secure growth and prosperity for its peoples.
In making any decision about investing in (or exiting ) a country /sector specific ETF as it applies to the AMERICAS I am guided by 2 (broadly interlinked) principles
1)Exchange rates of such economies that are trending upwards (vis a vis its major trading partners) are likely to provide directional clues as to the future movements of that countries Stock Index allowing investors to take positions to benefit from any Stock market gains PROVIDED
a)the rise in income from these "gifts of nature" is utilized in sensible and pragmatic manner by various sectors of the Economy .This would make economic stakeholdrs in the Nations Economy feel secure and confident about making
investment decisons athe Government, corporate and individual level and
this is likely to feed through into higher stock prices and the stock index thereof.
2) Economic agents in these countries that use the increase in their incomes to help boost growth in a non inflationary manner are likely to provide upward momentum to the countries currency particularly so if such growth is being achieved on the back of high real returns on currency deposits which in itself provides impetus to carry trade actions.
(indeed the more sound a countries balance of payments positions and the higher the real yield on currency deposits the greater the likelihood for currency appreciation which within the context of a an inelastic export basket (i.e an export basket that is difficult to replicate ) can boost export income further thereby sustaining higher stock index/ currency appreciation for a lot longer).
Two good examples of countries which in recent times have witnessed stock index gains on the back of currency appreciations would be Canada and Chile
How then can one trade and benefit from Americas' natural resource economies transformation?
Probably the wisest move would be to buy country specific e.g MSCI Canada index (EWC) the Chile index (ECH, and/or sector specific ETFs like the Global materials index (MXI ) and the S and P Global energy ETF (ICX).
However given the volatile nature of the Stock indices of natural resource economies i would like to put forward an alternative idea and compare returns to that would have been obtained from conventional ETF investing ...
The idea would to create a class of equity shares hitherto to be known as EtfStops i.e this would be equivalant to the amount of equity put "at risk" through a price falls (before a stop loss order (normally set at 5% below purchase price)triggers a sell) .
To dissipate risk further i would propose that the total value of EtfStops i.e the total amount of equity put 'at risk"be divided into 5 classes of shares with each share corresponding to a trading day i.e Monday, Tuesday, Wednesday, Thursday, Friday
i believe this system will prove to be an effective channel to capture. preserve and protect stock market gains since
a) any Stock index gains will accrue only to The EtfStops holder corresponding trading day but
b) any index losses will be shared amongst all remaining Etfstops holders .
the balance of the purchase price for an Etf will be financed by holders of Cero
Equities (i.e. zero borrowing cost) finance who would be entitled to 20% of net profits accruable to holders of Etfstops
I have applied the above metrics to The MSCI Canada index (NYSEARCA:EWC)and the Global materials index (NYSEARCA:MXI). Although its very early days results have been very promising and holders of EtfStops and/or CeroEquities would have achieved far better rates of return (with lower volatility) vis avis conventional Etf investing
(of course the true test of the efficiency of the system can only truly be made when markets take a dip at which point it will be possible to compare returns on Etf investing using Etfstops and CeroEquity with returns through Conventional Etf investing )
I hope in due course to update fellow ETF enthusiasts about positional movements in Etfstops and Ceroequities vis a vis conventional Etf Investing as well as share my views and insights about the exciting transformation taking place in Americas' natural resource economies.
Disclosure: no positions are held in any of the Etfs mentioned