Major Equity Market Value Update – Jan. 2009


This multi currency update has three portions. First we see anther inflation indicator. Second we update our search for value. Third we end with some answers to questions from lesson one of our new updated primer course.

Recent inflationary events include the support by US authorities of Bank of America with a guarantee of liquidity and capital. B of A faces losses of up to $118 billion dollars.

The government gets shares in the bank worth $20 billion.  In other words the government stumps up about $88 billion (that it does not have).  This is inflation.

Citibank in trouble as well.

Jyske Global Asset Management wrote in its last market update three days ago:

Fears of further credit losses and rumours of another large US bank being nationalized dragged the international stock market down this week. The New Year rally last week is already forgotten, and investors are anticipating new lows in 2009.

Citigroup Inc. posted an $8.29 billion loss, only a few days after the announcement of their plans to sell the control of Smith Barney to rival Morgan Stanley.

Sales at U.S. retailers dropped in December for the sixth consecutive month (first time since 1992) and the most in three years.

S&P cut Greece’s long-term credit rating to A- with a stable outlook, due to its public and private debt and the budget deficit. The downgrade makes Greece the lowest rated country in the Euro zone.

Market participators are now speculating whether a Euro exit may become an option for some members of the Euro-bloc, analysts view Greece as the weakest economy within the Euro zone.

The European Central Bank (ECB) Thursday cut the Euro zone interest rate to the lowest level in more than 3 years.

As expected the main policy rate was cut by a half percentage point to 2%. The Danish Central bank followed the ECB with an even bigger cut of 75 basis pts to 3%.


Falling interest rates are indicators for increased activity in share markets.  Combine this with the fact that stock funds saw huge redemptions in 2008.

Add in the next fact that international equity funds were among the most redeemed losing about a fourth of their total assets in 2008.

U.S. stock funds only had redemptions of about 10% of their assets.  Bond funds on the other hand experienced positive flows in 2008.

This increases my enthusiasm for international shares…especially in Europe.

Low interest rates plus markets that are oversold plus inflation.

There are four ways to fight inflation:real estate, your own business, commodities and equities.   So international equities in an atmosphere of low interest rates spells opportunity.

These are the elements that create value because value investors are generally bucking the trend.

This is why last year my biggest equity position was in the Jyske Invest European Equity fund.  I picked a fund that was invested mostly in markets that Michael Keppler viewed as having the top value.

Keppler has changed some of his rankings this month so let’s review the change and see if my position still makes sense.

If you are a new reader and are not aware of Keppler Asset Management, please click here.

Here is Keppler’s Recent Developments & Outlook

Major Markets equities finished one of the worst years in history on a mixed note.

In December, the Morgan Stanley Capital International (MSCI) World Index (with net dividends reinvested, December 1984=100) gained 1 % in local currencies and 3.2 % in US dollars.

However, due to a 9.5 % recovery of the euro versus the dollar, it lost 5.8 % in euros.

In 2008, the benchmark for global equities dropped 38.7 % in local currencies, 40.7 % in US dollars and 37.6 % in euros.

To put these devastating returns into perspective, here are the ten worst 12-month total returns of the MSCI World Index in local currencies since its inception at the end of 1969 (based on month-end figures):

– 39.8 % (November 2008) – 29.1 % (March 2003)

– 38.7 % (October 2008) – 28.7 % (August 1974)

– 38.7 % (December 2008) – 27.6 % (September 2001)

– 37.4 % (September 1974) – 26.3 % (December 1974)

– 31.9 % (October 1974) – 25.9 % (February 2003)

The euro finished the year 2008 at 1.3901 versus the US dollar — up 9.5 % in December 2008, but down 4.9 % from 1.4621 at the end of 2007.

Ten markets had positive returns in December and eight markets declined.

Performance is shown in local currencies, unless mentioned otherwise. Norway turned in the best monthly performance with a 4.8 % gain, followed by Hong Kong (+3.8 %) and the United Kingdom (+3.7 %).

Denmark (-5.4 %), Switzerland (-4.8 %) and Austria (-3.6 %) finished at the bottom in December.

There was no place to hide in 2008: all markets covered here declined. The United Kingdom (-28.5 %), Canada (-31.8 %) and Switzerland (-34.7 %) fared best, i.e. lost least.

Austria (-66.8 %), Belgium (-64.7 %) and Norway (-53.9 %) declined most.

There were two changes in our performance ratings last month: Hong Kong is upgraded to “Buy” from “Sell” and Spain is downgraded to “Hold” from “Buy”.

The Top Value Model Portfolio now holds the nine “Buy”-rated markets Austria, Belgium, France, Germany, Hong Kong, Italy, Norway, Singapore and the United Kingdom at equal weights. According to our analyses, these markets offer the highest expectation of long-term risk-adjusted performance.

Keppler’s SELL CANDIDATES (Low Value) are: Canada, Denmark, Singapore, Switzerland , U.S.A.

Keppler’s NEUTRALLY RATED MARKETS are: Austria , Australia , Japan , Netherlands, Norway, Spain, Sweden .

Remember that the overall market value is just one of many filters we should use when we review value. The seven steps we use in our reviews include

1: Are the shares traded in a good value market?
#2: Does the share trade at fair Price to Earnings and Price to Cash Flow ratios?
#3: Does the share pay a good value dividend?
#4: Do the share have a good value relative to their previous price?
#5: Does the company have rising earnings?
#6: Has the share price been rising?
#7: Is the company’s management good and is their product or service line in a wave of the future

Michael Keppler also reminds investors not to misinterpret the investment analysis implicit in the Country Selection Strategy. A country is BUY-rated based on the valuation levels reflected in the MSCI benchmark index of country. A BUY rating therefore does NOT imply that any stock in that country would be considered an attractive investment.

For more details on Keppler’s analysis, contact Roderick Cameron at 1-212-245-4304 or email roderick.cameron@kamny.com

To invest according to the Country Selection Strategy it is necessary to
construct diversified, risk-controlled, representative country portfolios in
every BUY rated country, weighting each country approximately equally in the
overall portfolio. It is not appropriate to instruct a stockbroker to simply to select stocks in the BUY rated countries.

Let’s look at the geographical breakdown of the Jyske Invest European Equities fund I hold now.

This fund has departed quite a lot from the synchronicity it enjoyed with Keppler’s top values when I invested two years ago.

UK  24%
Germany 16%
Switzerland 13%
France 12%
Spain 7%
Netherlands 4.5%
Sweden 4%
Spain 4%
Finland 3%
Italy      2%
Greece 2%
Denmark 1.5%
Norway 1.5%
Luxembourg .5%
Ireland  0.5%
Austria 0.5%

The fund value fell by 23.43% in the  fourth quarter of 2008; the benchmark
return was -21.98%.

Keppler’s nine top value markets, again are Austria, Belgium, France, Germany, Hong Kong, Italy, Norway, Singapore, United Kingdom.

The return for 2008 was -49.31%; the benchmark return was -43.65%.

The fund’s managers report:

There are prospects of uncertainty in 2009. The world economy is struggling
and the optimism has turned into pessimism. Central banks and  governments have been busy introducing rescue packages and  interest-rate cuts. The help has been offered, but is it sufficient and when will it begin to show an effect? We
expect that 2009 will bring wide swings in the equity market. A lasting upturn is not likely to be just around  the corner. We are still looking at a longer period characterised by uncertainty before the optimists outnumber the pessimists.

For the fund we prefer cheap shares with prospects of earnings growth. That type of shares has historically yielded the best returns.

Though this fund no longer has the same value synchronicity with Keppler it previously had, I’ll continue to hold this as I plan to increase my equity position. I can balance this fund’s holdings to better match Keppler’s rankings by adding Hong Kong, Singapore, Italian and other funds or ETFs.

On the subject of ETFs Lesson One of our Multi Currency Investing Primer looked at Currency ETFs.   A reader sent these questions about currency ETFs.

Question #1:  Since there is a Bid and an Ask price for these ETF’s, how do they track with the currency?

Answer #1: This is a question that would require enormous research and time to answer if all currencies and ETFs were reviewed.   The volumes in currency trading are so huge that the typical spread on pure currencies with a major forex dealer will be around 0.015% on major currencies and 0.030% on minor.  So if you buy $100,000 of a major currency and then resell it, you’ll lose $150. On a minor currency $300.

Trading shares like ETFs cost more than just trading a currency.  There are three main fees you pay in most pooled investments that are traded on a stock exchange, management fee (see below), bid and ask and brokerage commission.

The commission will vary from broker to broker. Ask.

The bid is what some is willing to pay for a share and the ask what someone is willing to seel. So if the bid and ask is $1 and $1.10 on a share, you can buy it for $1.10 and sell it for $1.  This that share has to rise 10% before you break even.

The difference is called the spread.

Many factors impact the size of the spread on an exchange traded security:

* The size of the fund.  Larger amounts have lower spreads.

* The volume of trading.  The more trading the lower the spread.

* The underlying liquidity of the assets held.  More liquid assets have a lower
spread.

* Finally market conditions will affect the spread. For example in 2008 spreads rose almost everywhere in all markets.

I am not a trader. Since many of my positions last for years buying and selling cost have little impact.  I look more at whether the investment vehicle gives me the exposure I want or not.

2.) Why is there a Distribution issued on some of these funds?

For the same reasons that interest is paid on a bank account.  Would you want to close part of a bank account to get interest? US Tax law also requires this.

3.) When it states an Expense Ratio of .45%, is that for the buy and the sell or the cost for a roundtrip? Is that a fixed percentage regardless of volume?

This is a annual management fee that runs from .35% to .45% and has nothing to do with the trade.   The manager will deduct this amount from the total amount of money it manages each year.

4.) What is a Repurchase Agreement?

Purchase and repurchase agreements relate large institutional investors. ETFs are bought and sold in two ways.  First the ETF creates a large block of units that are sold on a stock exchange. The shares are then traded on the exchange.

The second way is that large institutions buy and sell direct with the fund manager (not traded on the exchange) via purchase a repurchase agreements.
Until next update, good global investing

Gary

Join Merri, me and Peter Laub of Jyske Global Asset Management at OUR INTERNATIONAL INVESTING & BUSINESS COURSE IN ECUADOR. We review economic conditions, Ecuador real estate, my entire portfolio plus investing and business ideas for the months ahead.

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