Thick as a BRIC

[tidal]

The latest from Bill Bernstein (of Efficient Frontier)

Thick as a BRIC http://efficientfrontier.com/ef/0adhoc/bric.htm

<<"You say you’re invested in fuddy-duddy old nations like the U.S., France, Japan, Australia, Canada, and Sweden? Good grief, man, their slice of the global investment pie is shrinking. Dump ’em and load up where the action is before the world leaves you behind!">>

and two referenced papers from same....

DreamingWith BRICs: The Path to 2050 http://www2.goldmansachs.com/insight/re ... rts/99.pdf
From Goldman Sachs, oddly from October 2003, but I guess Bernstein just looking for a good exhibit for growth=good investment....

Economic growth and equity returns http://bear.cba.ufl.edu/ritter/PBFJ2005.pdf
"It is widely believed that economic growth is good for stockholders. However, the cross-country correlation of real stock returns and per capita GDP growth over 1900–2002 is negative... Countries with high growth potential do not offer good equity investment opportunities unless valuations are low."

Too bad, cannot find the Journal of Investing article, that indicates ongoing dilution rates to equity issues in emerging markets of Asian economies of 30% per annum...

Fwiw, I have had to endure the marketing babble from Excel India, a great deal of which suggests that not only are you going to get a huge investment lift from rapid GDP growth rates, but even better, as total stock market cap as a % of GDP grows from, say, 20%, to a more US-like 100% (sorry, I am pulling those numbers from my head - just an illustration), you get this return as well!!!! Of course, this implies that if you are currently invested in the market you are going to participate in this proportional CAP/GDP growth, conveniently ignoring the reality that most of it will come from privatization of state businesses, newly public companies, etc., which you cannot currently own... Anyway, it is an exciting story though! (And, since it is simply a handy data point, my father's investment in Excel India, made in April 2000 after returning from a trip to India, has compounded at a whopping 4.3%....)

[Shakespeare]

Countries with high growth potential do not offer good equity investment opportunities unless valuations are low."

That's the conclusion of Jeremy Siegel in "The Future for Investors".

[Bylo Selhi]

Hold the presses!

Jay Ritter, writing in Pacific-Basin Finance Journal, noted once again the negative correlation between growth and returns, and formulated several alternative hypotheses, the most promising of which being that managers expropriate wealth from minority shareholders. (In plain English, they steal.)

[tidal]

For what it is worth, I think this is the "Speidell, et al" article that Bernstein references, although he indicated that it was in the Journal of Investing, not CFA Digest...

http://www.cfapubs.org/doi/abs/10.2469/ ... alCode=dig

30% dilution per annum????????

[IdOp]

Wouldn't a more appropriate acronym be CRIB, since that's related to emerging growers?

[The Wealthy Boomer]

Keep in mind that another popular Jethro Tull album (in addition to the one specified in the thread title) was "Passion Play."

[HurtinDoud]

Whether you like the BRIC idea or not, there will quickly be some product to capitalize off the press....

see Richard Kangs post on www.seekingalpha.com regarding the new BRIC ETF launched by Claymore.

[Bylo Selhi]

Jethro Tull album...specified in the thread title

So what happened to Korea?

[The Wealthy Boomer]

At last week's annual pilgrimmage to the Templeton Growth Fund meeting, Mark Mobius showed a chart of the populations of BRIC nations vs developed countries. At the top were China and India, each with more than 1 billion peple. Then there was the EU, followed by the US, both with roughly 300 to 400 million. Then just a little behind were Brazil, Russia and Japan, all at or below 200 million. He had lots of stuff on relative valuations as well.

[tidal]

At last week's annual pilgrimmage to the Templeton Growth Fund meeting, Mark Mobius showed a chart of the populations of BRIC nations vs developed countries. At the top were China and India, each with more than 1 billion peple. Then there was the EU, followed by the US, both with roughly 300 to 400 million. Then just a little behind were Brazil, Russia and Japan, all at or below 200 million. He had lots of stuff on relative valuations as well.

I have seen Mobius speak on several occasions, although not recently. He always has entertaining and compelling charts and factoids about the markets and companies he follows, the phenomenal growth prospects, the inevitability of economic shift to emerging market dominance, the unbelievable cheapness of the companies versus developed market comparables...

Unfortunately, the most compelling and telling Mobius chart is this one:
http://globefunddb.theglobeandmail.com/ ... UBLIC_FUND
He hasn't been able to translate the "story" into investment results, and is largely still in the game because of one remarkable year (late 92 to late 93).

As Shiller says "much of human thinking that results in action is not quantitative, but instead takes the form of storytelling and justification.... those who sell stocks to the general public often tend to tell a story about the stock, a vivid story describing the history of the company, the nature of the product, and how the public is using the product. The sales call does not often engage in discussions of quantities or probabilities, or whether the price is at the right level in terms of quantitative evidence about future dividends or earnings. These quantitative factors are not as congenial to the narrative-based decision making that comes naturally to people."

Capital is sloshing around the world looking for investment opportunity, and it is does a remarkable job of finding it. It would be one wacky world if you got outsize returns just because you heard that "China and India are growing really fast"... Who is the rube selling to you at distressed prices, hmmmm? Sure, some exposure to emerging markets, especially if you are prepared to rebalance to some target weight. But a free lunch... no likely...

[tidal]

At last week's annual pilgrimmage to the Templeton Growth Fund meeting, Mark Mobius showed a chart of the populations of BRIC nations vs developed countries. At the top were China and India, each with more than 1 billion peple. Then there was the EU, followed by the US, both with roughly 300 to 400 million. Then just a little behind were Brazil, Russia and Japan, all at or below 200 million. He had lots of stuff on relative valuations as well.

I have seen Mobius speak on several occasions, although not recently. He always has entertaining and compelling charts and factoids about the markets and companies he follows, the phenomenal growth prospects, the inevitability of economic shift to emerging market dominance, the unbelievable cheapness of the companies versus developed market comparables...

Unfortunately, the most compelling and telling Mobius chart is this one:
http://globefunddb.theglobeandmail.com/ ... UBLIC_FUND
He hasn't been able to translate the "story" into investment results, and is largely still in the game because of one remarkable year (late 92 to late 93).

As Shiller says "much of human thinking that results in action is not quantitative, but instead takes the form of storytelling and justification.... those who sell stocks to the general public often tend to tell a story about the stock, a vivid story describing the history of the company, the nature of the product, and how the public is using the product. The sales call does not often engage in discussions of quantities or probabilities, or whether the price is at the right level in terms of quantitative evidence about future dividends or earnings. These quantitative factors are not as congenial to the narrative-based decision making that comes naturally to people."

Capital is sloshing around the world looking for investment opportunity, and it is does a remarkable job of finding it. It would be one wacky world if you got outsize returns just because you heard that "China and India are growing really fast"... Who is the rube selling to you at distressed prices, hmmmm? Sure, some exposure to emerging markets, especially if you are prepared to rebalance to some target weight. But a free lunch... no likely...

[Bylo Selhi]

Jeff Troutner weighs in on Submerging Markets [PDF]

Should we continue to invest in emerging market stocks? When you consider their extreme volatility, their increased correlation to the U.S. market, the unique risks associated with developing countries (social, political, financial, legal, etc.), and the fact that we have a very good alternative in small value stocks of developed countries, my inclination is to say no. Simulated models that substitute international small value stocks for emerging markets suggest that portfolio returns could be enhanced by twenty basis points (0.20%) with less risk. I’ve seen financial academics drool over just few basis points improvement!

And contrary to what some experts might say, I believe seeking “better” diversification and higher expected returns using emerging markets small and/or value stocks has the potential of putting good money after bad. Or, as my cousin in Kentucky might ask, “Isn’t that like putting lipstick on a pig?”

[DanH]

I've read more than a couple of papers or books suggesting that emerging markets are an inefficient way to obtain diversification (i.e. too little return given the risk exposure). Could, then, emerging markets debt be a better compromise?

Finding Opportunity in Emerging Market Debt

Abstract

Emerging market debt is a more stable asset class now than it was 10 years ago. Improvements in macroeconomic fundamentals and political stability make this a safer market for diversification and yield and less prone to event risk. As spreads on sovereign debt denominated in U.S. dollars have narrowed, investors have sought higher yields offered by local-currency-denominated debt, thereby displaying an appetite for currency risk. Sovereign issuers are showing a preference for raising funds in their own markets, and the commensurate demand from foreign investors has led to the development of new performance indices for local currency bonds.

The full paper also shows a table listing several EM countries that boast investment-grade credit ratings from Moody's and S&P.

[Jo Anne]

Nothing particularly riveting....

The new avatar is an absolute hoot.

Just had to tell you.

[DanH]

Nothing particularly riveting....

The new avatar is an absolute hoot.

Just had to tell you.

Thanks. If the site's size requirements were a little bigger, you'd see the white boxers he's wearing.

[uhoh]

Nothing particularly riveting....

The new avatar is an absolute hoot.

Just had to tell you.

Thanks. If the site's size requirements were a little bigger, you'd see the white boxers he's wearing.

This way we can leave it to our imaginations, size requirements or not

[Taggart]

I've read more than a couple of papers or books suggesting that emerging markets are an inefficient way to obtain diversification (i.e. too little return given the risk exposure). Could, then, emerging markets debt be a better compromise?

Finding Opportunity in Emerging Market Debt

Abstract

Emerging market debt is a more stable asset class now than it was 10 years ago. Improvements in macroeconomic fundamentals and political stability make this a safer market for diversification and yield and less prone to event risk. As spreads on sovereign debt denominated in U.S. dollars have narrowed, investors have sought higher yields offered by local-currency-denominated debt, thereby displaying an appetite for currency risk. Sovereign issuers are showing a preference for raising funds in their own markets, and the commensurate demand from foreign investors has led to the development of new performance indices for local currency bonds.

The full paper also shows a table listing several EM countries that boast investment-grade credit ratings from Moody's and S&P.

I tried to bounce the idea of having emerging market debt in a portfolio, with Larry Swedroe, a few weeks ago. He would have none of it. Richard Ferri could see the rationale, but then again he's had emerging market debt as part of the sample portfolios in the books he's authored.

A few years ago, Burton Malkiel co-auhored a book on emerging markets (including debt). Since then, (aside from having positive mention of investing in China) he seems to have gone fairly quiet on the subject of emerging markets.

If one day I ever decide to purchase, no more than 5% allocation to the RSP's from a couple of closed-end funds listed in the U.S.

Here's an idea of the bumpy ride one can achieve. Under Time (to your left), click "All Data", and you'll see what I mean.

[DanH]

I tried to bounce the idea of having emerging market debt in a portfolio, with Larry Swedroe, a few weeks ago. He would have none of it.

Swedroe a big DFA supporter. And DFA's fixed income product is based on Fama and French's two-factor fixed income model. In short, they think most of bond returns are explained by credit (high quality is best, they say, in part because of the high liquidity) and duration (shorter is better, they say).

They are also proponents of diversifying globall to the extent those two factors are satisfied but they tend to hedge foreign currency exposure. That's their model and Swedroe is quite devoted to it so his disdain for EM debt is not surprising.

[Taggart]

I tried to bounce the idea of having emerging market debt in a portfolio, with Larry Swedroe, a few weeks ago. He would have none of it.

Swedroe a big DFA supporter. And DFA's fixed income product is based on Fama and French's two-factor fixed income model. In short, they think most of bond returns are explained by credit (high quality is best, they say, in part because of the high liquidity) and duration (shorter is better, they say).

They are also proponents of diversifying globall to the extent those two factors are satisfied but they tend to hedge foreign currency exposure. That's their model and Swedroe is quite devoted to it so his disdain for EM debt is not surprising.

Yes, I agree. The only big difference I see from Swedroe and DFA is his allocation of a commodity fund in a portfolio for what he terms as a diversification and hedging tool.

[drejmd]

I've read more than a couple of papers or books suggesting that emerging markets are an inefficient way to obtain diversification (i.e. too little return given the risk exposure). Could, then, emerging markets debt be a better compromise?

Finding Opportunity in Emerging Market Debt

Abstract

Emerging market debt is a more stable asset class now than it was 10 years ago. Improvements in macroeconomic fundamentals and political stability make this a safer market for diversification and yield and less prone to event risk. As spreads on sovereign debt denominated in U.S. dollars have narrowed, investors have sought higher yields offered by local-currency-denominated debt, thereby displaying an appetite for currency risk. Sovereign issuers are showing a preference for raising funds in their own markets, and the commensurate demand from foreign investors has led to the development of new performance indices for local currency bonds.

The full paper also shows a table listing several EM countries that boast investment-grade credit ratings from Moody's and S&P.

I tried to bounce the idea of having emerging market debt in a portfolio, with Larry Swedroe, a few weeks ago. He would have none of it. Richard Ferri could see the rationale, but then again he's had emerging market debt as part of the sample portfolios in the books he's authored.

A few years ago, Burton Malkiel co-auhored a book on emerging markets (including debt). Since then, (aside from having positive mention of investing in China) he seems to have gone fairly quiet on the subject of emerging markets.

If one day I ever decide to purchase, no more than 5% allocation to the RSP's from a couple of closed-end funds listed in the U.S.

Here's an idea of the bumpy ride one can achieve. Under Time (to your left), click "All Data", and you'll see what I mean.

Any more recent thoughts on a 5% allocation to emerging market debt using US-listed CEFs?

[randomwalker]

I wanted some exposure to socalled "emerging markets" and have recently established half a position in a new ETF run by Wisdom Tree. I'll take a wait and see before buying the rest. I'm looking at a long term buy hold and DRIP. The symbol is DEM and trades on the NYSE.

WisdomTree Launches Emerging Markets High-Yielding Equity Fund (DEM)
Thursday July 12, 8:00 am ET
ETF Offers Diversified Exposure to High Dividend-Yielding Stocks of 19 Emerging Markets Nations

http://biz.yahoo.com/bw/070712/20070712005131.html?.v=1

===============================================

WisdomTree Emerging Markets High-Yielding Equity Index

http://www.wisdomtreeindexes.com/index- ... indexid=80

[drejmd]

I wanted some exposure to socalled "emerging markets" and have recently established half a position in a new ETF run by Wisdom Tree. I'll take a wait and see before buying the rest. I'm looking at a long term buy hold and DRIP. The symbol is DEM and trades on the NYSE.

WisdomTree Launches Emerging Markets High-Yielding Equity Fund (DEM)
Thursday July 12, 8:00 am ET
ETF Offers Diversified Exposure to High Dividend-Yielding Stocks of 19 Emerging Markets Nations

http://biz.yahoo.com/bw/070712/20070712005131.html?.v=1

===============================================

WisdomTree Emerging Markets High-Yielding Equity Index

http://www.wisdomtreeindexes.com/index- ... indexid=80

We also have a small (3%) position in emerging market eqiuty (CIBC index fund).
Any thoughts on emerging market fixed income/debt?

[Lyndon]

Randomwalker
How do you DRIP the dividend ( distribution), it is paid as interest income ????
In my opinion this is one of the major obstacles to foreign ETFs-no reinvesting of distribution....no compounding effect.

[AltaRed]

How do you DRIP the dividend ( distribution), it is paid as interest income ????

All that matters in a DRIP is that distributed cash is re-deployed on a pre-tax basis back into shares. How the income is taxed is between you and your friendly CRA.

[randomwalker]

Randomwalker
How do you DRIP the dividend ( distribution), it is paid as interest income ????

(DEM) is not a an interest yielding instrument but rather dividend yielding ETF held inside an RRSP. Prior to my purchase I checked with my broker that DEM was in fact eligible for dividend re-investment. Come Monday I will re-confirm DRIP eligibility.