Monday, October 19, 2009

New Format; And our First Success-induced Decision Moment

Week 41 and Week 42 (ending October 9 and October 16 respectively), were both successful weeks for global stock markets. The MSCI World gained about 6.1% in 2 weeks and Emerging Markets performed even better, albeit that the difference was marginal. Since we constructed our 4 model portfolios in such a way that they are a bit more calamity-proof in bad times due to the selection of big, solid, lower-risk stocks and the addition of a 5-10 percent money-market-cash component to our portfolios we would expect this to be difficult weeks for the model portfolios.

As chart 1 to 4 below show, this is exactly what happened. Our portfolios benefited from the good performance of the market, but on average they went less up than the MSCI EM did. Exception was the MORFAV (Morningstar Favorites) portfolio that had two extremely good weeks. On a cumulative basis the MSCI EM is the best portfolio around with a 13.5% return in 7 weeks (in US dollar terms) i.e. more than double the return on the MSCI World index that scored a cumulative 5.7% return.

Chart 1; MORFAV versus various indices - week 36-42 2009

The MORFAV portfolio benefited on the one hand from the good performance of its two Brazilian holdings, mining conglomerate Vale and the Brazilian Stock Exchange BOVESPA itself, but Russian GAZPROM and ICICI Bank from India were winners as well. The well-diversified portfolio didn't consist of any big losers. 

As you might recall, in our entry written on Sep 6, we indicated that we will have decision moments whenever a stock appreciates 30 percent or depreciates by the same amount. With total return on Vale now reaching 32.6% in US Dollar terms, this is the first time we reached that type of individual-stock decision moment.

There are two opportunities:
a) Keep the stock and increase its stop-loss from 70 to 100 and its next decision point from 130 to 160; or
b) Take profit now and select an alternative stock.

We will address the Vale decision in a separate article that we will write immediately after this one.

The next decision moment could follow soon, because the total return for ICICI Bank from China has reached 29.0 percent.

Chart 2; EMWIN versus various indices - week 36-42 2009 

The EMWIN portfolio had two good weeks, albeit that its return over those 2 weeks (5.8%) fell short of that on the MSCI EM index. Its top performing stock is Brazilian energy giant Petrobras, that benefited from good performance in domestic currency terms and from a currency return vis-a-vis the US Dollar (see also below our currency analysis). Petrobras posted a total return of 22.3%. The total cumulative return on the EMWIN portfolio is now 8.21%. Compared to the MORFAV portfolio this portfolio is on the one hand less diversified (smaller number of 'names'), with on the other hand a larger allocation to money market cash. This does to some extent explain the lagged performance vis-a-vis the MORFAV portfolio. On the other hand, we did simply pick large, solid stocks for this portfolio based on their market value whereas the MORFAV portfolio consists of good names picked by top assets managers. In other words: we expect MORFAV to bring something extra based on the picking qualities of these managers.

Chart 3; EMLOS versus various indices - week 36-42 2009

Up until 2 weeks ago the EM Loser portfolio - consisting of stocks from developing countries that showed the lousiest performance over the 52 weeks up until the last week of August 2009 - was actually the best performing portfolio! The last 2 weeks this portfolio lagged dramatically in performance. Its strong stocks are not to blame. National Bank of Pakistan was our best stock until 2 weeks ago. OK, political risks and events in Pakistan led to a situation in which this stock didn't really gain during week 41 and 42 but with a cumulative return of 26.3% it is still more than OK. The second portfolio stronghold is GAZPROM and the Russian Energy giant had two good weeks. The problem is that this portfolio consists of 3 stocks with a negative cumulative return and one that posted a mere 1.5% positive return, i.e. 4 out of 9 are underperformers that drag overall performance down. The negative performers are Kuwait Finance House, MTN Telecom from South Africa and Teva Pharmaceuticals from Israel. Performance is in all three cases not so bad as to consider replacement of these stocks. But with an overall performance (cumulative) of now 7.4%, the EMLOS portfolio is not the shining star it seemed to be 2 weeks ago. At least not for the time being. 

Chart 4; EMNXT11 versus various indices - week 36-42 2009

Our EMNXT11 portfolio consists of stocks from countries selected by Goldman Sachs in its Next-11 group of markets that will be the next above-average growth stories. When analyzing this group we are especially interested in its performance vis-a-vis the MSCI Frontier Markets index. The Frontier Markets didn't do very well compared to the other markets during these two good weeks. They went up only 2.45 percent. Our EMNXT11 portfolio fared far better with a 2-week return of 5.55 percent. On a cumulative basis it scored a 9.2 percent return over the 7-week period from week 36 to week 42. The MSCI FM posted 'only' 6.1 percent. It looks as if our Next11 portfolio is a good alternative for those investors who want Frontier Market exposure.
The two best stocks in the portfolio are National Bank of Pakistan (also part of this portfolio) with a cumulative return of 26.3% and Posco, the steel giant from South Korea, with a total return of 23.3%. Note: as is clear from the Posco example, the Goldman Next-11 concept is not a pure frontier market concept. It is a concept based on expected future growth of various markets. Normally we would expect smaller, less mature markets to grow faster, but in some cases - and South Korea is one of them - a combination of Governance, Human and other resource availability, development of the domestic economy et cetera can lead analysts to a feeling that a specific country can post above-average growth. Within the Next-11 concept we see a mix of both types of growth stories.

The good returns of Emerging and Frontier Markets during the last 7 weeks were not just due to their internal strength. These stories were also to quite some extent related to weakness of the US Dollar. The chart below shows that 6 currencies won at least 5 percent vis-a-vis the US Dollar during the last 7 weeks. The Brazilian Reais won even more than 10 percent and this contributed strongly to the good performance in US dollar terms of Vale, BOVESPA and Petrobras. But all-in-all we cannot say that the good performance was solely a currency story. It was also clearly related to internal strength and recovery of Emerging Markets that were hit too hard when the Global Credit Crisis unfolded.

Chart Curreny Returns weeks 36-42 2009 (cum.)

You are used to us finishing this performance report with information on the top-3 and bottom-3 performers:

The top-3 (cumulative) are:
    1. Vale (BRA) 32.61%
    2. ICICI Bank (IND) 29.01%
    3. BMF Bovespa (BRA) 26.49%
For the first time since we started following this overview, National Bank of Pakistan has fallen out of the top-3. It remains a strong stock, but the political unrest in Pakistan is at the moment too much for investors.

The bottom-3 (cumulative) are:
    1. Kuwait Finance House (KUW) -2.96%
    2. MTN Telecom (SAF) -1.34%
    3. Teva Pharmaceuticals (ISR) -0.68% 
Turk Is Bankasi, for many weeks a solid non-performer in the bottom of the list has posted two good weeks and is now a reasonably 'plus'. 

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