Non food commodity exports to China as a share of total exports to ChinaDownshifting: Emerging Markets and Londongrad

The Financial Times has ranked EM countries by vulnerability/exposure “to a slowdown in net non-food commodity exports to China.”  Chile, Colombia, Russia, South Africa and Peru top the list.  Meanwhile, here are a few trends and considerations to keep in mind as emerging market countries expand their middle class and shift to consumer-based economies.  Furthermore, Western investors may get into trouble if we rely on assumptions for predicting future shifts and growth.  For example, “in India, it isn’t unusual to see a family of four on a motor scooter, so we expect them to want a car.  Which they do — until too many people get cars, and then people want scooters in order to get around the cars that are stuck in traffic.”  Meanwhile, “over the last four years, big investors have sunk $325 billion into stocks and bonds issued by Russian companies and the country’s government…of that, $235 billion has been directed toward corporate borrowings by the likes of Gazprom and state-owned banks like Sberbank.”  As tensions build in Crimea, some large socially responsible emerging market funds will have to decide “whether the changing geopolitical situation will alter the calculus.”  Take Pimco’s Socially Responsible Emerging Markets Bond fund, for example, which has over 30% ($90mn) of the fund invested in Russian corporate and government bonds.  If Russia were to leave certain global equity indexes or become underweight due to heightened governance risk, Russian companies and bond investors could be at the mercy of billions of dollars flowing out automatically.  Also, Western sanctions are threatening Londongrad dealmakers: “Russian companies have made $180 billion in deals globally in the past two years, providing steady profits to London bankers, lawyers, and image crafters as the city has become a hub for such transactions.”  Finally, Russia’s Warren Buffet is dumping American and buying Chinese: Alisher Usmanov sold his $100mn in Apple shares and ~10% stake in Facebook for Chinese tech and internet companies (e.g. Alibaba).

ETF Stories Come With Plot Twists; Hedging Adds Speculation

Thematic ETFs have been gaining popularity recently, as investors appear to be drawn to investing in portfolios as a constructed investment thesis or story (or sometimes they drink too much Guinness and, well).  We should be careful, however, not to jump to any conclusions about specific theme’s market performance when there may be other factors at work.  Take the Workplace Equality Portfolio Fund (EQLT) for example.  EQLT “tracks U.S. companies that provide equal benefits for lesbian, gay, bisexual and transgender employees, [and] is a progressive new spin on the socially conscious investment theme.  [However,] when you dig into how EQLT works, a different story line emerges.  Like many of its thematic peers, EQLT tracks an index that weights stocks equally…Right now, an equal-weighting strategy is paying off for many theme ETFs.  Small-cap stocks have outperformed large-caps by a wide margin over the past five years.”  Also, investors should be cautious with currency-hedged ETFs, as conventional wisdom regarding their volatility and market performance may be wrong.  Indeed, “nominal equity prices and the currency they are quoted in are fundamentally connected and reflect economic reality in tandem.”  Furthermore, hedging “is really speculation and not investing.  It depends not on the profitability of the underlying businesses, but on macroeconomic forces.  And those forces are notoriously hard to predict.”  Meanwhile, Barry Ritholtz has a chart depicting how “simple beats complex, and low cost trumps expensive” over the last decade.  And there’s a persuasive argument for asset allocation in there, too.

USA: Wall Street Trains Fire On Idea Of A Bank Tax (alt)

BofA, Citi, Goldman and JPM “are marshaling opposition on Capitol Hill to kill a proposal by House Ways and Means Committee Chairman Dave Camp (R., Mich.) to tax the nation’s largest financial firms…The proposal has galvanized Wall Street in a way largely unseen since the financial crisis.  While banks have pushed back on postcrisis regulation, they rarely act as one, since the rules affect firms differently.  This time, banks large and small are coordinating the resistance.”  “We’re going to beat this like a rented mule,” said Cam Fine, President of the Independent Community Bankers of America.

USA: Inflation Muted Despite Food Price Increases; Housing Starts Slip

 USA: S&P 500 Companies Blame The Weather

EU: EU Auto Demand Revs Up; New Car Registrations Rise 8% In February (alt)

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