Archive for February, 2013

Overview of Brazilian Investment Banks – Market Realist

Wednesday, February 27th, 2013

According to Market Realist’s Emerging Market’s Analyst:

In a previous article we reviewed the main Brazilian Retail banks to give investors in EWZ some background on MSCI Brazil Index’s 25% exposure to the Brazilian financial sector.  This article will focus on the domestic investment banks.

Santander and HSBC occupy the #6 and #7 spots in the Top 10 Brazilian Banks by assets, with shares of 8% and 3% respectively.  Other major foreign banks such as Citi, J.P. Morgan, Credit Suisse and Deustche Bank are small market players in the retail banking arena, each with shares between 0.5% and 1% of the total banking assets.

While most of these banks are not leaders in the Brazilian retail banking landscape, all these foreign banks are part of the top 10 banks by investment banks by fees for Latin America (consisting mainly of Brazil and Mexico).  This classification includes fees for M&A (merger and acquisitions advisory), loans (credit lending), DCM (debt capital markets, i.e., bonds) and ECM (Equity Capital Markets, i.e. stock issuance).

The local Brazilian investment banks

The only local banks within the top 10 investment banks are BTG Pactual (leading the table), Itau BBA, and Santander BBI.  The table below shows the league table rankings as of Aug 2012:

BTG Pactual has an interesting story and has been referred to by some as the Goldman Sachs of Latin American or its “tropical version”.  The bank was sold by Brazilian investment banker Andre Esteves to UBS in 2006 for US$3.1bn when he was just 37 years old.  Three years later he bought it back for USD2.5bn when UBS hit a rough patch during the financial crisis.  Pactual currently has a joint venture with Caixa Economica Federal that jointly owns Banco PanAmericano.  This is BTG Pactual’s first acquisition of a retail bank.

Itau BBA, the investment bank arm of Itau Unibanco Holding, was created in 2002 when Itau acquired Banco BBA-Creditanstalt in 2002.  In 2011 it achieved third place in the Top 10 Brazilian Investment Banks table; as of August it was placing fourth for 2012.  Earlier this year it received the Best Investment Bank for Brazil 2012 Award by Euromoney.

Bradesco BBI was #7 in the Top 10 table for 2011 and so far this year its holding the #8 spot, followed closely by foreign banks Santander and HSBC.  Earlier this year it also received the Best Investment Bank – Brazil 2012 Award, this one was awarded by Global Finance.

For more information, please visit Market Realist’s emerging market section: Emerging Markets

Emerging market ETFs are over 50% concentrated in Asian equities – Market Realist

Wednesday, February 27th, 2013

According to Market Realist’s emerging markets analyst:

The MSCI Emerging Markets Index covers the performance of 817 emerging market stocks across 21 emerging markets. The index covers 85% of each country’s free float adjusted market cap, meaning it takes into account only the publicly available shares, as opposed to the total issued shares. In emerging markets it is common for companies to have low free-float percentages (e.g., in Latin American values as low as 10-15% are observable) as many family owners own a large portion of the outstanding stock, making it unavailable to the general public. Naturally countries with larger more and developed stock markets have larger market capitalizations and larger free-float percentages, and therefore end up having the lion’s share of the index.

The chart below shows the concentration for the top 5 countries in the index. China, South Korea and Taiwan account for 44% of the index. Approximately 10% more is accounted by the remaining Asian countries: Malaysia, Indonesia, Thailand and Philippines. Latin America accounts for c. 20% (driven by Brazil) and Africa for less than 10%. The two main ETFs tracking this index, Vanguard’s Emerging Markets ETF (VMO) and iShares Emerging Markets ETF (EEM) suffer from the same bias.

MSCI states that it frequently revises the composition of the index based “extensive discussions with the investment community”, though South Korea is still part of the index despite it is considered an “advanced economy” by the IMF and CIA, a “high income economy” by the World Bank, and a “developed market” by Dow Jones, FTSE and S&P. Additionally, Taiwan is considered an advanced economy by the IMF. Coincidentally, South Korea and Taiwan make up over 26% of the index.

The graph below shows the share by country grouped by regions for VMO, which closely tracks the MSCI EM Index:

For more information please see the full article link: Emerging market ETFs are over 50% concentrated in Asian equities

Avoid the “contango” of commodity ETFs, as it can lower returns – Market Realist

Wednesday, February 27th, 2013

According to Market Realist’s commodities analyst:

Commodity ETFs like USO and UNG often do not track the performance of the underlying indices due to contango, or the market state where the price of an energy futures contract trades above the expect spot price at maturity. Since commodity ETFs purchase commodity futures contracts to mimic spot performance, they fall victim to contango as they roll their futures positions from one month to the next.

For example, an investor should be able to see clearly that during West Texas intermediate (WTI) crude oil’s recovery from January 2009 to April 2011, from $35/barrel to $112/barrel (+320%), USO, the United States Oil Fund LP ETF, only rose from $24 to $45 (87.5%).


The worst commodity performer in terms of contango is natural gas, represented by the UNG ETF. The roll cost for UNG can be greater than 8% per year, which can cause steep losses for the retail investor, despite a price appreciation in the underlying commodity. In the graph below, you can see that the value of the ETF has fallen 96.4% in 4 years, while natural gas prices have only fallen about 79%. This has been terrible for investors trying to capture the price movements of natural gas.

Reducing your exposure to financials in Brazilian ETFs – Market Realist

Wednesday, February 27th, 2013

According to Market Realist’s emerging markets analyst:

Several Latin America oriented ETFs such as MSCI Brazil Index Fund (EWZ) or Global X InterBolsa FTSE Colombia 20 ETF (GXG) have a larger proportion of their holdings concentrated in the financial sector. These holdings are usually concentrated in nature, with a few large cap securities accounting for most of the sector exposure. While the increased concentration may be seen as a negative by most investors, the keen investor may be able modify his or her exposure to the sector accordingly.

An example of an ETF with too much financial exposure is GXG. A quick glance at its fact sheet will reveal that the ETF’s financial sector exposure is almost 25%. First of all, investors need to avoid being mislead by the category titles. For example, GXG’s exposure to the Financials sector seems to be only 17%, but there is an additional 7.5% within a  category called Financial Services. Reviewing the Top 10 Holdings in the fact sheet will show that Bancolombia, Grupo Aval and Banco Davivienda are the main financial stocks in the portfolio, and that they account for c. 22% of holdings. Investors not familiar with the emerging market companies highlighted in fact sheets can perform a quick Google Finance search to define the industry classifications for unknown tickers.

Below we illustrate how to neutralize the exposure to the financial sector by selectively shorting the ETF holdings. The process is as follows:

  1. Find the ETF portfolio holdings for which exposure is to be eliminated.
  2. Calculate the weight of those companies within the ETF and get the equivalent dollar value for the investment in the ETF.
  3. Divide the dollar share of each company by its price to get the number of shares to short.

For example, Bancolombia is currently trading at COP27,600, equivalent to $15.19.  Bancolombia has a weight of 12.1% in GXG, so assuming a $1,000 investment in GXG, the dollar share of Bancolombia would be $121.In order to eliminate the exposure to Bancolombia, one would have to  sell short the equivalent amount of shares, which is obtained by dividing the dollar exposure by the share price: $121.00 / $15.19 = 8 shares. The 8 shares sold short would cancel out the $121 of exposure to Bancolombia. The same could be done for the other three banks, as shown below. Note that the number of shares may not be a whole number, in which case one can round to the closest whole number, keeping in mind the hedge will not be perfect.

To see the entire article and table, please see the following Market Realist link: Reducing Financial Exposure in Brazilian ETFs

S&P 500 P/E Ratio Still Below Long Run Average – Market Realist

Wednesday, February 27th, 2013

According to Market Realist’s senior financials analyst:

As the S&P 500 index approaches new highs not seen since 2007, the current market’s P/E is some 2 multiple points lower than in ’07 which means that stocks are not as expensive despite being close to making new highs. In concert with this more favorable valuation currently for stocks, we point out there is still ample cash on the sidelines that could be invested which could fuel even further gains for equities.

As the stock market approaches the all-time high for the S&P 500 of 1,565 which was hit on October 10th, 2007, we note that the current valuation of the S&P 500 in early 2013 is substantially cheaper than that high level made in ’07. This could mean further gains for stocks as investors continue to adjust their asset allocation. The current day’s market level of 1,507 represents $108 in all S&P 500′s company’s earnings per share (EPS) resulting in a price to earning’s ratio of just 13.9x. This $108 in EPS for the index currently is a much improved number from the earnings level expected in 2007 which was only $95 per share. This valued the market at 16.5x earnings at the time in 2007, or over 2 multiple points higher than the current valuation now.

For the full article, please follow the link below: Market Realist S&P500 P/E Ratio Below Long Run Average