Thursday, November 19, 2009

Weeks 44-46; First the panic and then the recovery

 
After Panic the Rebound; Bulls Back?
Or Markets still in a Freaky State?

During weeks 45 and 46 financial markets recovered from the very bad final week of October 2009. A week that showed negative returns in a range from -4.10% in Developed Markets to -5.54% for the MSCI Emerging Markets. When looking at our 4 model portfolios things ranged from -4.87% (the EM Loser Portfolio) to -7.60% (Morningstar Favorite Managers). Based on structural factors, we believed that this negative week was definitely an overreaction by market participants. Especially big investors domiciled in developed nations were behind this negativity. The strong rebound during weeks 45 and 46 was a clear indication that we are still on track as far as recovery after the period of the Global Credit Crisis is concerned. Macroeconomic news from various countries across the world indicated that we are still in a V-shaped scenario of recovery. Skeptics continue to warn us that recovery might follow a W-shaped scenario, but for the time being we do believe that the V-shape is the more likely one. And that explains to quite some extent why a big of good/reasonable news during weeks 45 and 46 led to rebounds that more or less offset the negativity of week 44.
Ideas that the US dollar might start its recovery vis-à-vis the Euro and other major currencies (both in the developed and emerging world) did not really materialize. When looking at the currency situation (see graph 1 below) the bulk of Emerging Markets is indeed showing appreciation vis-à-vis the US greenback. Bernanke’s interest policy (the FED chief indicated that the easy money policy with low interest rates that the US is currently following to stimulate the economy is not over yet) was of course part of the story. But another important part is related to the fact that Emerging Markets – even the commodity rich ones – struggled way too much during the Global Crisis period. Countries like Russia, Brazil, Korea and Indonesia did therefore see their currency appreciate strongly compared to the US dollar. Malaysia, Philippines, Hungary and India form a strong second layer of countries that saw their currency appreciate. With the exception of a minor depreciation in politically-turbulent Pakistan, the US dollar was the weakest currency during the End-of-August (week 36) to November 13 (week 46) 2009 period.


Graph 1; Currency Returns - Dollar Strenghtening?
When looking at the four Emerging Markets model portfolios, two of the four showed excellent recovery during weeks 45 and 46: MORFAV posted returns of 4.22% and 3.50% in these two weeks, while EMWIN scored returns of 2.12% and 3.56%. Our Frontier portfolio (EMNXT11) did quite well with positive returns of 0.06% and 2.60% respectively. Not as good as the two portfolios that have the MSCI EM index as their relevant benchmark, but that was logical because the MSCI FM benchmark had went through a terrible period. Not just did the Frontier Market index post two negative returns (-1.19% and -1.25%), but these negative returns were part of a period of now already 5 weeks in a row with negative returns! The cumulative return on the MSCI FM index is now -2.06% for the 11 week period. The Frontier index, representing the stock markets of the ‘newest’ and (still) poorest emerging markets, is therefore the worst performing one. All other indices post relatively ‘normal’ positive returns. We are therefore quite pleased with the performance of EMNXT11 which scored a 5.32% cumulative return over the same period. That is an outperformance of almost 7.5%!

Cumulative Return EMNXT11 - Outperformance

The cumulative performance of our other three model portfolios was positive, albeit that all three are lagging the MSCI EM index considerably. The MSCI EM has a cumulative performance of 13.04%, an extremely good return for a period of just 2.5 months. Our best model portfolio so far is the one created by the best managers according to Morningstar. MORFAV scored a cumulative return of 9.99%. The EMWIN portfolio scores 7.41%. Worst performer is EMLOS with a cumulative performance of 2.27%. Remarkable: because EMLOS was the best of the three halfway the period of 11 weeks. Tension in the Middle East is one of the main reasons explaining this: both National Bank of Pakistan (actually our best stock during the first half of the period under study) and Kuwait Finance House did poorly. NBP is still posting an almost 10 percent positive return, but we were close to selling this stock (due to it almost reaching our 30 percent sell-off trigger) earlier. Kuwait Finance House is now 12 percent cheaper than it was End of August 2009.

EMLOS - Losing during the last few weeks


EMWIN is doing better. Remarkable: this portfolio was our poorest during the first 4-5 weeks of the period under study and the best stock best then – Venezuelan Mercantil Servicios Financieros – is now its only negative performer. Three stocks are now carrying the portfolio, giving it momentum: Petrobras, the Brazilian oil giant, Malaysian conglomerate Sime Darby and the Chinese Industrial and Commercial Bank.

The EMWIN portfolio: After a bad start doing much better now

But clearly the best of the four model portfolios at the moment is MORFAV with a cumulative return of 9.99 %. Five holdings post returns in excess of 15% appreciation since August 2009, namely Hong Kong-based TPV Technology, Indian ICICI Bank, Hungarian Bank OTP, Russian Energy giant Gazprom and Bovespa, the Brazilian stock exchange (itself listed on itself!). TPV Technology did even post a return of 32.80%; more than our sell-off rate. We did therefore decide to sell TPV Technology and replace it by the next highest (in a list with all the top-10 recommendations of top managers) firm with either (or both) a background in Hong Kong/China or in the Electronics industry. Samsung Electronics (South Korea) was our choice. The portfolio did already contain Samsung, but so far we didn’t score on this holding. This gives us an opportunity to increase our Korea exposure while at the same time increasing the opportunity to improve our Electronics track record even further.

The MORFAV portfolio - The best of our 4 model portfolios

When looking at the individual stocks in our four portfolios, the top 3 of best performing stocks is composed of:
1.       TPV Technology (HONG KONG) 32.80%
2.       ICICI Bank (India) 29.55%
3.       OTP Bank (Hungary) 23.77%
Remarkable, all three stocks were from the MORFAV portfolio. This is a clear indication that the top managers didn’t do a bad job. Also: when comparing the portfolio that we constructed using top ideas of top managers, we created a portfolio with – on average – smaller stocks than the three that we created picking super-large stocks from countries selected for the Winner, Loser and Next-11 portfolios. This gives us another interesting reason why the MSCI EM was so difficult to beat during the period under study. The index has a larger percentage of mid- and small-sized stocks. These stocks are characterized by a larger percentage of shareholders from within Emerging Markets. And that is another way of saying that the bulk of panic in Emerging Markets (not just in week 44, but also in the two years behind us) is caused by stockholders from Developed nations!!
It is therefore not surprising that the three biggest losers are relatively large in their respective markets too. Our bottom-3 consists of:
1.       Kuwait Finance House (Kuwait) -12.10%
2.       Cemex (Mexico) -10.10%
3.       MTN Group Telecom (South Africa) -9.01%

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