Monday, September 21, 2009

Moving forward: are we really leaving the Crisis behind us?

Our 4 emerging markets strategies had once again a positive week, albeit that their performances differed quite a bit when taking a closer look.

Surprisingly, the Next-11 portfolio that intends to play a 'Frontier' game performed best. During the first two weeks this portfolio was actually lagging the others quite a bit. The 4.20% return for the week was therefore probably to some extent a 'catching-up' effect. But there was more. National Bank of Pakistan (highlighted as our first real 'winner' in an earlier entry) continues to deliver. Is this stock the 'Karl Malone' in our portfolio? Karl Malone was called 'the Mailman', because he 'always delivered'.

The ''Mailman'' himself (with cowboy hat) next
to a bronze statue of himself in front of the 
Delta Center in Salt Lake City. Malone became
a true celebrity while playing for Utah Jazz.

NBP  has now scored a return of almost 25%(!) after 3 weeks. As you might recall, in an earlier entry we indicated that we would make a 30% increase one of the decision moments for a stock. Will we cash in on our profit, or continue to hold the stock, while at the same time adjusting our stop-loss in an upward direction? Will be continued! The second stock that helped explain the good week for our Next-11 portfolio is POSCO. The Pohang Steel Corporation (POSCO) had a good week and is now scoring +12.12%. 

POSCO (KOR): Steady recovery since March 2009 and
a good run in our Next-11 Portfolio in week 36-38
Data source: EmergInvest

On the negative side only Turkiye Is Bankasi is bothering the portfolio, but that is nothing new since our Turkish stocks were already experiencing a bad period. Actually: the stock and the currency recovered quite a bit.

Although currency effects are not the whole story, it is a fact that now - with recovery signs coming to us from various markets - growing numbers of international investors are more troubled by the relatively low US interest rate than before. Gold, the Euro and investments in projects/firms in countries that have struggled so much that they almost can't sink deeper are really reasonable alternatives. When looking to the currency table in Graph 1 we see that all currencies either won against the USD or remained stable. The biggest winners with 4.67% and 4.53% respectively are the South-African Rand and the Russian Ruble. Both countries with positive exposure to gold and/or other precious metals.

Graph 2

Over the last three weeks 
(period sinds End-of-August 2009)
the US Dollar was actually one of the 
weakest currencies around.
Almost all emerging market currencies gained, 
with the Russian Ruble and South African Rand 
appreciating almost 5 percent.

When looking at the EM Loser portfolio we do indeed so confirmation for the suggested behavior of international investors looking for bargains, with their behavior having an impact on currency movements as well. The EM Loser portfolio, with stocks from countries that suffered the largest downfall between September 2008 and End-of-August 2009 when we started to form our portfolios, had the second-best weekly performance and is for the whole three-week period from Week 36 to Week 38 now our best portfolio with a cumulative return of 6.92%. See also GRAPH 2. The performance in week 38 itself was +3.11%. That was the second time in a row that our EM Loser portfolio outperformed the MSCI EM benchmark portfolio. However, the MSCI EM is still the best portfolio overall with a cumulative performance of 7.92%. Exactly one percent more than EM Loser. But taking into account that EM Loser has an 11 percent allocation to CASH this is less bad than it seems. We decided in all our four model portfolios to keep at least approximately 5-10 percent in cash for safety reasons. And obviously, something like that works against you when markets are super-bullish.

But don't worry (or better, do worry!): there will be days/weeks/months when we will be so happy with our decision to keep something in cash. And also: don't forget that we did add risk to our portfolio in two other ways:
  • Our model portfolios aren't super-diversified, notwithstanding the fact that we did look at country and sector allocations. They all have (far) less than 20 stocks in them. As you know we wanted our portfolios to be structured in such a way that small investors could play the game as well based on information available in an online database like EmergInvest.
  • We left 'currency risk' un-hedged, something that is working to our advantage at the moment with the USD not performing that well.

Graph 2: Performance Overview Week 36-38
Four Model Portfolios Emerging Markets versus a set
of Relevant Benchmarks

The portfolio with our MorningStar Top Managers' Favorite Stocks (MORFAV) had a good week with a +2.28% return, but this was nonetheless a bit less than what the MSCI EM scored. It was however in line with MSCI Frontier and better than the return on the MSCI World, developed markets portfolio.

Actually when looking at Graph 2 more carefully we see a pattern emerging:
  • The CASH portfolio is terribly lagging, which is not surprising taking into account the very low interest rates at the moment. However, from a risk point of view this portfolio adds stability. But we don't believe that our allocation to it should be higher than the 5-10 percent we have right now.
  • The MSCI Frontier portfolio is lagging as well. And quite a bit so when comparing it to our Next-11 portfolio. What does that mean? It means that the selected 'leaders' in the Frontier group are really leading. On the other hand it indicates that the smallest countries that are not continued super-growth stories, are still ignored by careful investors. The momentum generated by the first herds of bargain hunters is not yet sufficient to create a big boom in Frontier stocks.
  • The MSCI World portfolio with stocks from developed nations scored a cumulative +4.14% and is now being outperformed by all but the EM Winner portfolio.
When looking at individual stock performance, the top-3 consists of:
  1. National Bank of Pakistan (PAK) +24.36%
  2. Gazprom (RUS) +14.05%
  3. ICICI Bank (CHI) +12.77%
The number 2 of last week, Mercantil Servicios Financieros from Venezuela, was replaced by Gazprom. The Russian gas giant had a great week. Remarkable, because we started the week with a blog entry featuring Alexei Miller, Gazprom's CEO, who warned that it might not be unlikely that the Ukraine - a huge Gazprom client - would not be capable to pay for its gas in 2010. This message did not really hurt the stock.

The bottom-3 stocks for the 3-week period from week 36 to week 38 are:
  1. Turkiye Is Bankasi (TUR) -8.63%
  2. America Movil (MEX) -2.80%
  3. Orascom Telecom Holding (EGY) -2.39%
Again, also here only one change in the top-3 list. Mexican cement producer CEMEX was replaced by another Mexican stock, America Movil. 

Stock of the week was clearly Gazprom. The Russian energy giant had a great week and is now number 2 in terms of performance, behind National Bank of Pakistan.

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