The Global X FTSE Andean 40 Index ETF (NYSE: AND) is trading down 20% over the past 52 weeks due to lower consumption and commodity prices. For instance, Chile's central bank recently lowered its growth estimate for 2014 to between 3.75% and 4.75% while cutting interest rates by 25 basis points to 4.75% in order to lighten the drop.
For many emerging markets including the Andean region, the withdrawal of stimulus from the U.S. Federal Reserve is the largest overhanging risk. Low interest rates in the U.S. have helped bolster many emerging markets and a higher dollar could impact spending power abroad. External financing conditions could also tighten and put a damper on growth prospects.
Iceland experienced the largest banking crisis in history after three of its banks collapsed in 2008. After the collapse, the country was forced to accept a bailout from the IMF and a coalition of nordic countries. The bailout package came with a number of conditions, including austerity measures to keep spending under control and a repayment plan for banks' debts.
Unlike Greece or Ireland, Iceland negotiated with the IMF and its bailout lenders to spare social programs from budget cuts. The country also introduced a debt forgiveness for its citizens and tax cuts for its poor in order to spur consumption. As a result, Iceland was able to return to growth after just two years and is on track to repay its debts more quickly.
While there are many key differences between Iceland and European countries undergoing austerity, there are many lessons that Europe could learn from the way it handled the crisis. Investing in social net programs and forgiving some personal household debt could play a key role in reigniting consumption and returning to economic growth more quickly.
Mortgage real estate investment trusts ("REITs") hold over $500 billion in assets, according to the International Monetary Fund ("IMF"). These REITs invest in mortgages and mortgage-backed securities to capitalize on the difference between their returns and U.S. Treasury returns.
The problem is the potential for higher interest rates set by the U.S. Federal Reserve. Higher interest rates would reduce the attractiveness of these mortgages and mortgage-backed securities. Investors moving out of the market could lead to strong selling pressure in the mortgage market, posing a systemic risk.
Bloomberg recently proposed a solution in an article on the topic: Purchasing serving rights from mortgage originators could help balance those losses with fee income similar to how commercial banks hedge against rising interest rates. But, it remains to be seen if this advice will be taken.
Emerging market bonds have largely declined over the past year, according to JPMorgan's EMBIG Index that follows the market. So far this year, the index is down around 7% as U.S. Treasury yields have increased. While the U.S. Federal Reserve plans to continue easing, Barclays expects a 20% rise in emerging market bond issues next year keeping the space under pressure, according to a report on Reuter's Global Investing blog.
Despite the negative sentiment, PIMCO indicated in August that it sees the value in higher yields available in many emerging market bonds. Improved government balance sheets have increased the safety of these assets, while weak global growth should lead to investors paring their bets on higher interest rates, according to one source quoted in a Bloomberg story. Whether that happens remains to be seen, but for now, the space remains under pressure.
Growth and value investors may seem like opposites, but their performance has been roughly the same over the past 12 months. The iShares MSCI EAFE Value Index (NYSE: EFV) and the iShares MSCI EAFE Growth Index (NYSE: EFG) are trading 24.16% and 23.42% higher, respectively, over the past 52 weeks, mirroring each other's moves quite closely.
Over the past five and ten year periods, however, growth has significantly outperformed value by 13.37% and 25.32%, respectively. A significant portion of this outperformance has likely come from emerging markets, which have been outperforming their developed market peers after the global financial crisis crippled much of North America and Europe.
Most business cycles involve relatively clear stages, including growth, peak, recession, trough, and recovery. But, the most recent business cycle has caused a bit of a stir, resulting in nearly every single sector of the S&P 500 trading up at least 10%. The three most successful sectors have been technology, financials, and healthcare, up roughly 5% in October alone.
While the relative underperformance of utilities and consumer staples is expected, healthcare has outperformed due to the new insurance mandates that will require all U.S. citizens to hold insurance. Meanwhile, consumer discretionary and industries have been showing signs of strength despite the lack of meaningful improvement in unemployment.
In the end, investors may want to keep an eye on this sector rotation, particularly as the market appears to be trading at lofty multiples given the lack of improvement in the unemployment rate.
The U.S. and eurozone recoveries helped boost South Korea's exports by 7.3% to a record $50.5 billion in October, while its trade surplus reached $4.89 billion. According to United Press International, exports to the U.S. were up 23.2% year over year, while those to the European Union rose 16% over the same timeframe, with signs of further gains ahead.
The October surplus compares favorably to the country's $3.73 billion surplus last October and its $3.68 billion surplus last month. Semiconductors and automobiles were largely responsible for the growth, while the Ministry of Trade expects exports to continue growing throughout the rest of the year, potentially creating an opportunity for investors.
So far this year, the iShares MSCI South Korea Index Fund (NYSE: EWY) is trading up 1.28%, but the ETF saw particularly strong gains over the past 3-month period, where it has surged more than 13% due to the recent strength in its trade balance.
Put options provide investors with the right to sell their stock at a given price and time on or before a certain date in the future. Since the days of Alan Greenspan, the financial markets have become accustomed to a central bank put that has traditionally provided price floor. That is, if equities fell too far, the U.S. Federal Reserve would intervene to boost them higher.
In the days of Alan Greenspan, this was known as the Greenspan put, while it's now known as the Bernanke put in the popular media. Unlike the Greenspan put, which was focused on equities, the Bernanke put has largely focused on the bond market using quantitative easing. But, the party can only last so long, so the central bank can fulfill its other mandate - inflation.
The two big questions for investors are now: When will the Federal Reserve pull the plugin on quantitative easing and cheap money? And, how inflated are equity prices in the current market (e.g. how far do they have to fall to fair value)? The first question can be answered by the unemployment rate - the Fed's second mandate, but the second has become a difficult one.
Private equity firms are increasingly looking towards Africa for growth with nearly $12 billion invested and $10 billion raised, according to Ernst & Young and the African Private Equity & Venture Capital Association (AVCA). Reuters has pointed to the continent's growing economic output - tripling over the past 10 years to $2 trillion - as a key driver of these trends.
U.S. private equity firms have already begun committing capital to the region. For example, Blackstone Group completed the Bujagali Hydroelectric Power Station in Uganda in 2012, investing $116 million to build the $900 million dam that significantly increased electricity within the frontier market economy, in addition to other energy projects in the region.
Altogether, private equity firms have invested some $850 million in 36 deals across sub-Saharan Africa during the first half of 2013, according to a CNBC report, representing a 6% growth in number of deals and a 45% growth in capital compared to the same period in 2012.