Market Musings 05/06/21: Hunting down value in Banks, Emerging Markets

5th Jun by Edmund Shing

12 comments 1887 reads

Hunting down value in Banks, Emerging Markets

Summary:

Podcast: Pet Power
Value in European Banks
Value in Emerging Markets: Russia, Brazil

Podcast: Pet Power

Why has COVID-19 boosted pet ownership?
What are the psychological and physical health benefits of having pets?
How pets are a driving a new consumption trend – treating our pets
How can you invest in this growth trend?

Hunting for Value: EU Banks

Last week I pointed out that the Euro STOXX index of Eurozone stocks was approaching its historic peak hit in early 2000 and again in mid-2007.

If we focus in on the Euro STOXX 50 index of just the largest 50 stocks in Euroland, the chart looks a little different.

In the case of the SX5E Euro STOXX 50, at the current 4089 level we remain far from the 2007 peak of over 4500, and even further from the March 2000 peak of close to 5500.

Just returning to the 2007 mark would deliver a 10% price return, to which we can then add a 3%+ dividend yield.

Euro STOXX index 50 has broken out, heading back to 2007 peak?

Source: tradingview.com

But for this to occur, one has to ask what are is going to be the driving force which are going to be the leading sectors, driving the Euro stocks back to a new all-time high.

Well let's look at the cyclical nature of the Euro STOXX index, which reflects to a large extent the cyclical nature of the Eurozone economy, geared towards manufacturing and exports.

I think the two driving groups of sectors in the Euro stocks index in Europe are indeed industrial stocks, which is unsurprising because, again, countries like Germany are strong in manufacturing, historically. And secondly, financials, and more specifically banks.

The Industrial goods sector, led by brand names such as Siemens and Schneider Electric, has already led the Eurozone stock market higher with stellar performance since 2009.

European Industrial Goods sector has already performed very well since 2009

Source: tradingview.com

Banks have lagged the European stock market since 2009

Source: tradingview.com

In contrast, the Banks sector has been a continual drag on the overall…

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Wilkonz

5th Jun

Thanks Edmund as always. I enjoyed the podcast about pets. There is clearly a substantial uptrend in the amount of money people are spending on premium pet food (about 75% since 2017, so not entirely Pandemic related). Other. spending on pet care is also rising. By coincidence I was checking out Chewy Inc ($CHWY) this morning. It is trading under the 40 week EMA at present but looks like bouncing back over the next month or two. On the basis of the podcast, this could be quite a good punt if it gets to around $84 (i.e. 25% below the 52 week high).

Wilbraham

Interesting, thanks!

But my view is missing the Emerging Markets piece - the article ends after the Eurozone Banks piece. Is this perhaps a quirk of the old site/ new site stuff?

Edmund Shing

6th Jun

No Willbraham,

That is a function of my laziness! I will hopefully add the EM Value part today, didn't have the energy left yesterday...

Edmund

clarea

Nothing wrong with having a snooze and coffee on weekends Edmund quality pearls as always in your weekend rambles.

Andy

Sorry I am posting this in the comments, as for some reason I cannot edit the article...

Value in Emerging Markets: Brazil, Russia

The other area of value that I see in stock markets but is not being discussed widely at the moment is in Emerging Markets.

Today, emerging market equity indices are dominated by South-East Asia, namely China, South Korea and Taiwan.

But with commodity prices in a bull market, better emerging market countries to look at are Brazil and Russia. Both countries’ stock markets have heavy exposure to commodities such as: crude oil, natural gas, iron ore, nickel, palladium and gold via Petrobras and Vale (Brazil), and Gazprom, Lukoil and Norilsk Nickel (Russia).

Note the correlation between commodity prices (in orange) and the relative performance of Russia v the MSCI Emerging Markets index. When commodities rise, Russia tends to do better.

Russia outperforms when commodity prices rise

Source: Bloomberg

Both the Russian ruble and Brazilian real have started to perform well against the US dollar, in line with this commodity bull market.

Ruble and real are strengthening v USD

The Russian (in purple) and Brazilian (in green) stock markets have outperformed emerging markets (in blue) overall since 2016.

Since 2016, Russia and Brazil have beaten MSCI Emerging Markets

For Brazil, the only real choice is an ETF that tracks the MSCI Brazil index, such as the £IBZL iShares MSCI Brazil ETF.

There is the Blackrock Latin American Investment Trust (LON:BRLA) Blackrock Latin American Trust, but it has actually underperformed IBZL since 2016.

But in the case of Russia, the Jpmorgan Russian Securities (LON:JRS) JP Morgan Russia Securities trust is potentially an attractive choice for Russian stock exposure for 3 reasons:

1. The JRS trust has outperformed the MSCI Russia index and the £CSRU Russia ETF since 2016, posting an impressive 24% annual average return;

2. This trust offers currently a 4.9% dividend yield for income seekers;

3. The trust also sits currently at a 13% discount to Net Asset Value.

JRS trust has outperformed the MSCI Russia index since 2016

Thanks very much for the Part 2, Edmund. To my mind, rather more interesting than pet stuff! I've always kept some EM exposure through my DC pensions (Blackrock index fund) though to be fair, World ex-UK has consistently performed better.

As an aside, I've shares in a private coatings company that has a major part of its operations in Mexico, for the local auto market. They were badly hit by covid and reported earlier this year that ''The economic recovery program implemented by the Mexican Government provided little support to the economy and required all employees to receive full pay and benefits throughout the shutdown period. Fortunately, the strong business conditions experienced in early 2020 rebounded rather quickly in 3Q and 4Q20 and allowed the Company to quickly get back on track.'' I've no idea if Brazil had similar policies.

Thanks again!

Just stumbled across a rather grim prognosis on Brazil. I might give it a miss until the political future is clearer.

Btw, doe anyone understand The Economist's business model? They provide huge amounts of content free as podcasts and youtubes. Does anyone outside of corporate subscriptions now buy the printed magazine? Even my local supermarket has ceased stocking it!

7th Jun

Many thanks for the update Edmund. Whilst on the subject of emerging markets, do you have any thoughts on India? The main index seems to be in a strong uptrend at present.

Source: IG.COM

Phil O.

Hi Wilkonz

Yes India seems strong at present, as COVID cases are finally declining there. However, I always struggle with the dominance of conglomerates in that index and also the relatifvely high valuations, supported by domestic tax incentives to invest in stocks.

Hi again Wilbraham,

Yes Mexico in principle should benefit from the strong US consumer recovery, as much auto production etc for the US market is done over the border in Mexico...

rjmahan

10th Jun

Lots of interesting Russian individual stocks - some Russian listed, check out FEES (Russian National grid), GLTR - Russian rail freight should do well if resource shipments increase, HYDR - Russian Hydro - markedly undervalued vs western peers. As well as stalwarts Gazprom etc....

Market Musings 05/06/21: Hunting down value in Banks, Emerging Markets

Hunting down value in Banks, Emerging Markets

Summary:

Podcast: Pet Power

Hunting for Value: EU Banks

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About the Author

Edmund Shing

12 comments

Value in Emerging Markets: Brazil, Russia

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