Quick Emerging Markets View

Aurum Weekly Access - 12/19/14

By Michael McKeown, CFA, CPA - Director of Research

We just came across this great chart from The Economist.  The data is from this past January and shows how the market value of major U.S. companies is comparable to the total market value of a country’s stock market (based on the Morgan Stanley Capital Index (MSCI) local shares, which typically tracks 85% of local stock market listings).

For example, Google is about the size of Brazil’s total stock market value and Nestle the size of India’s. First, these countries have a long runway of opportunity as the winners in the local markets go on to become well recognized multi-nationals and more companies become public.  According to the International Monetary Fund, emerging market economies make up 40% of world economic output, yet the MSCI Emerging Markets Index is less than 15% of the world’s stock market value.  In the short-term, studies show economic growth and stock market performance have zero correlation.  Eventually though, value created through economies tends to intersect with capital seeking growth.

Most recently, the MSCI Emerging Markets Index tested the bottom level of a 5-year range between 900 and 1,100.  The strength in the U.S. dollar against emerging markets currencies is having the biggest effect on performance rather than country specific stock market price moves.

Emerging markets get lumped together for convenience sake, but the countries have many idiosyncratic drivers.  Monetary policy, demographics, natural resources, and more vary greatly as you look at each country.  The fundamentals driving stock price movements may correlate from time to time, such as now.

Previously we wrote about the relative cheapness of emerging markets.  It is important to remember that cheapness, by itself, is not a strong catalyst for near term returns.  It does, however, provide a basis for long-term expectations.  According to the Credit Suisse Global Investment Returns Yearbook, which looks at data over the past 90 years, emerging markets provided a 2% annual excess return premium over developed markets, so patient investors should be rewarded.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

Read More



Don’t Be Crude

Aurum Weekly Access - 12/12/14

By Michael McKeown, CFA, CPA - Director of Research

Just a few years ago the theory of “Peak Oil” was making the rounds, that the world would reach a point in the not so distant future that oil reserves would deplete rapidly, sending crude oil prices to the moon.  Fast forward a few years and the shale revolution in the U.S. brought a glut of supply onto the market, combining this with a secular decline in demand (along with several other factors we can only speculate) caused an oil price crash.

 

Food and energy are relatively inelastic purchases by households.  Regardless of price, households must consume these items.  Since energy and food comprise a higher share of income for lower income households,  a lower price at the pump will increase the marginal propensity to consume other goods and services.  Note the jump in sentiment in the bottom third household income tercile (red line) the last few months coinciding with the decrease in gas prices.

 

University of Michigan Consumer Sentiment Survey

Gas prices are the lowest since 2010, a welcome development.  It will be a net positive to gross domestic product with economists estimating a contribution 0.2% to 0.5% to growth in the fourth quarter.

This turns into analysis on inflation, or the lack there of, and the assumption that measures of inflation will fall.  However, it simply is not true, at least for the measure that matters for the Federal Reserve.  The Fed takes a long-term view with its monetary policy and will be looking at the “Core CPI (Consumer Price Index) excluding food and energy.”  The below scatterplot shows no linear relationship between the change in oil prices and the change in core CPI the following year. It does not impact the current year either.

The lower prices are affecting the big exporters negatively.  Many countries will be forced to run a deficit if oil prices stay below the breakeven levels and especially if the decline continues.

Source: UBS, Credit Suisse, Bloomberg, Reuters, IMF, J.P. Morgan Asset Management.

Expectations for earnings growth for the energy sector over the next twelve months are now -8.4% and were only lower in 2008, 2004, and 2002.  In contrast, the sector grew earnings at a positive rate in over 90% of rolling 5-year periods in the last 20 years.  There will definitely be companies that need restructured if the price of oil persists at these levels, yet there will also be winners who weather the storm.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

Read More



15 Years of Market Returns

Aurum Weekly Access - 11/28/14

By Michael McKeown, CFA, CPA - Director of Research

It was 1999, the topic of conversation was how the Y2K bug would affect companies, the NASDAQ hitting new highs, and the West Nile Virus first appearing in the U.S. Today we still have computer bugs that more frighteningly look to steal our identity.  The NASDAQ is yet to reach its all-time highs, but is at the highest level since 2000.  And the Ebola virus talk in the media seems to have slowed, as the news cycle moves on to its next headline focus for the next 3 to 6 weeks.

Over the years we have seen ups and downs in markets both domestically and abroad. Rather than look at them year by year, the below sheet breaks down 3 separate 5-year calendar periods, all ending in October (2004, 2009, and 2014 respectively) since it is the latest full month of data we have.

In 1999, not many people expected the next five years to bring -2.22% annual returns to the S&P 500, let alone -7.85% returns for large cap growth stocks (as measured by the Russell 1000 Growth). Likewise few would believe REITs would lead the way from 1999 – 2004, more than doubling with 20.83% annual returns.

Beginning in 2004, institutions really became interested in commodities and index like products.  Since 2004 though, the two sets of 5-year returns for the Dow AIG Commodity Index average out to -1.28% annually.

Shifting forward to October 2009, U.S. equity indices were barely positive over the trailing 5-year period due to the 2008-09 bear market.  International markets held up well and emerging markets crushed returns as China and others stimulated their economies.  Few would predict that the following five years, U.S. markets would take the lead followed by international and lastly, emerging markets.

Fixed Income returns were a little better than starting yields as interest rates fell in each of the five-year periods.  For example, municipal bonds returned 7.19%, 4.15%, and 5.26% annualized in the five-year periods ending in 2004, 2009, and 2014.

Why take a look at data this way?  As we discussed back in January, many allocation decisions are made looking backward at returns rather than forward, using valuations as a starting point.  This often leads to performance chasing and avoidance of opportunities.  Of course, 1999 was a peak in the domestic stock market and a trough in 2009, with many areas of the globe offering opportunity in between.  It will be interesting to see how the asset class hues shake out for the 2019 column.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

Read More



Aurum Access: King Dollar

By Michael McKeown, CFA, CPA – Director of Research

Over the last four months, the U.S. dollar increased against foreign currencies and put downward pressure on precious metals. While oil also fell, its correlation to the U.S. dollar index was actually positive, indicating the oversupply and capacity issues were the driver of its fall.

Gold, Gold Stocks, Oil vs. US Dollar

Read More



Midterms & Stock Market Performance

Aurum Weekly Access - 11/3/14

By Michael McKeown, CFA, CPA - Director of Research

The midterm elections do not seem to be generating a lot of buzz. Perhaps it is me though, not watching the nauseating cable news channels or the general apathy of the nation towards politics, except for watching House of Cards.

The S&P 500 price index is up an average of 17% from Nov 1st to October 31st following midterm election years since 1966. Over the last twelve midterms, there have been zero subsequent down years for the equity market.

Midterms & Stock Market

 

Read More



The Fund (Almost) Everyone Owns - PIMCO Total Return

Aurum Weekly Access - 10/3/14

By Michael McKeown, CFA, CPA - Director of Research

It is the most widely held bond fund in the world and likely shows up in your 401(k) plan, your brokerage account, or in the endowment of the investment committee you advise. At its peak, the fund held nearly $300 billion in assets and with separate account vehicles, the total strategy assets were reportedly over $500 billion. On Friday, September 26th, PIMCO's founder and Co-Chief Investment Officer Bill Gross resigned. He was the lead portfolio manager on the PIMCO Total Return fund since its inception in 1987 and often nicknamed the "Bond King".

Due to his departure, $23.2 billion of net assets left the fund in September. While the media loves the gossipy details of the story inside PIMCO, the consultants and advisors that recommended the fund are scrambling to save face. How could steady underperformance and an embarrassing discontent within the organization go unnoticed by the very people compensated to know these things?

Read More



Must Watch Bond Charts

Okay, love may be a strong word to describe these colorful data points plotted below. But I do not think investors are paying these enough mind. Everyone has said interest rates will rise, usually generically referring to the 10-year bond. Investors crowded into short duration bonds to avoid a rise in interest rates. Interestingly from a year ago, what area actually had a tougher time? The short duration bonds (blue line, orange dots). Note that the 2-7 year area of the curve all rose relative to 1 year ago. The 10-year and 30-year yields are both lower. 092414yield curve This is a chart of bond prices for CCC-rated companies. These are companies having a tough time making payroll with 50% defaulting within five-years of issuance. Investors are so starved for yield that they are paying above par for the privilege of lending to these junk rated companies!  Since 1986 according to Standard & Poor's, the cumulative default rate over a 5-year period for this group is 50%, making this area of the corporate bond market a very risky proposition at today's prices.

Read More



Picking Fund Winners without Using Returns

Aurum Weekly Access - 9/12/14

By Michael McKeown, CFA, CPA - Director of Research

When it comes to selecting mutual funds, looking at past performance is usually the easy and the wrong solution, as every piece of financial literature gives fair warning, "Past performance is not an indication of future results."

Historical returns are poor indicators for both choosing new funds and evaluating current holdings. A study from the Employee Benefit Research Institute of professional pension managers found that pension funds hire managers after they had great returns and fired their own managers after poor results. It is classic rearview mirror driving.

091214 EBRI

Source: EBRI

Read More



Europe Joins the Party

The European Central Bank (ECB) shocked capital markets yesterday by lowering its overnight rate, marginal lending facility, and deposit facility on Thursday. This led to a steep decline in the Euro against the U.S. dollar of 2%, a huge move for currency markets. ECB president Mario Draghi announced the ECB would begin purchases of asset-backed securities and Euro-denominated bonds, also known as a form of QE (Quantitative Easing), finally joining the likes of the U.S., U.K., and Japan. Let's check in on some data to see how Europe is doing since it dominated headlines in 2011-12. The risk of QE causing an inflation breakout is low, considering Euro Area inflation is below 1%.

090514 1a

Read More



Three Reasons the 10-Year Yield is Falling

Coming into 2014, Bloomberg's survey of 67 economists showed that 97% believed that the 10-year Treasury yield would end the year higher. It started off at 3.02% and most expected it to rise into the 3.25% - 3.50% range by year-end, and with forecasts as high as 4%. Today, the yield sits at 2.33% and the 30-year Bond is closer to their prediction! The 30-year Treasury fell from 3.92% at the start of the year to 3.07% today. Why were all of these economists so wrong? We have three reasons. 1. The end of QE and the George Costanza Opposite Theory

082914 1

Read More



Latest News





Ultra Modern Portfolio Theory®

 

bridge