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Investing in emerging markets does make sense

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Investing in emerging markets

When the Financial Times asks the question “Does investing in emerging markets still make sense?” and implies “no” in its answer, the question is loaded. Why? Because China and India are excluded from the FT’s group of slow-growing EMs.

This exclusion hints at the nature of the problem . . . and suggests its solution. The widely used MSCI EM equity index as currently constituted is far too varied to be truly meaningful for investors and contains within it “a giant panda in the room”: China.

EMs as an investment class are fast approaching a watershed. The incremental approach that heretofore has allowed for updates to the EM index “operating software”, so as to reflect the evolution of its constituent markets, has run into overtime. What is required is a fundamental overhaul of how we think about classifying the various and increasingly varied markets in this country grouping.

This reformulation will not undermine the validity of the wider EM asset class. Far from it: indeed, it is the outsized success of some EM countries that demands this overhaul. My proposal envisages investors henceforth being presented with two asset classes for the price of the current one.

As each class will have its own far more logical risk-reward profile, this division will add to the choices that investors face and substantially clarify their options. As a result, each sub-set would be a more attractive asset class. Besides, it is extremely unlikely that developed market (DM) investors will satisfy their demands for income and capital returns in the 2020s without accessing opportunities in EMs.

The following suggestion works immediately for EM equities but — as the developed world’s bond markets are sucked into the black hole of negative yields, a hole from which no income light radiates — it is likely soon to be appropriate for EM fixed-income investing too.

In the benchmark MSCI EM equity index, China is already weighted at 32 per cent, a total set to rise fast in the next few years as the staggered admission of its domestic market continues. Add India and the duo total more than 40 per cent. Add in Korea and Taiwan — both of which should have graduated to a more developed index, Korea being larger than Spain, Taiwan larger than Sweden — and this Asian quartet amounts to 64 per cent of the EM index. The rest of Asia accounts for a further 11 per cent, creating an Asian total of 75 per cent. Russia, eastern Europe, Africa and Latin America share the remaining 25 per cent.

The simple fact is that Asia’s leading mainland economies have become too big for their old-style EM equity breeches.

Investors have faced this sort of dilemma before. In the 1980s — when the Japanese stock market bubble left the Tokyo Stock Exchange of 1990 with 60 per cent of world market capitalisation — “too big” Japan was excluded from most world indices: the “world ex-Japan” index became known as the Kokusai. No one is today suggesting that China’s stock market is in a bubble: rather it is simply too big to be accommodated in the EM index in one go . . . hence its staggered entry. Yet deep down most investors see even this gradual approach as a “faulty patch”: something more radical is required.

If China becomes the world’s largest economy in the next decade as most observers think likely, should it really still be classified as an EM? And if it is, will China have become the gigantic panda in the bath of the MSCI EM index? A solution to this impending paradox needs to be sought and, for investors, the sooner they have a sense of what that solution might look like, the better.

Perhaps what is needed is the creation of a standalone Asian index to be excised mostly from the MSCI EM index. For equities, its initial country constituents would be China, India, Korea and Taiwan. Singapore and Hong Kong might even be added back from the DM index. As and when further Asian nations qualify — Thailand, Malaysia and Indonesia would be next in line — they would be added to this Asian Index. Or they might even be included ab initio.

For fixed income, a similar regional solution might be constructed, but only over time. A number of the main EM bond indices used — the JPMorgan GBI-EM Broad Diversified Composite, for example — feature caps, as individual countries are otherwise deemed too big. In the latter index, the Chinese and, for now, still less sophisticated Indian bond markets each weigh in at a maximum of 10 per cent; Indonesia, at 8.9 per cent, is edging towards being capped. Some indices — the JPMorgan GBI-EM Global Diversified Composite, for example — exclude China and India altogether.

In answer to the FT’s central argument that questions the rationale for investing in EMs, the GDP and productivity growth for nearly every Asian nation named has well exceeded that of DMs post-2000. This not merely negates the logic that one cannot invest in this Asian group because of their economic underperformance relative to DMs; rather it would reinforce the rationale for doing so. As it is, the contention that there is a tight correlation between growth and investment returns is widely contested. What few contest is that the 2020s are likely to offer ample opportunities for both income and capital gain in the world beyond DMs.

The question that then remains is, where does this leave the residual, largely non-Asian EM asset class?

The answer has two parts. For fixed income, the residual EMs will offer yield in an otherwise yield-denied world. Within five years, it is distinctly possible that the US Treasury market will enter the black hole of negative yields, and — post the settling down of the Brexit fallout — so too will UK Gilts; the bond markets of nearly every other developed nation are already in or on the edge of that abyss. EM bonds — both Asian and non-Asian — will then offer what DMs will not: income, albeit at a higher risk. For equities, the EM residuals will offer deep value, value that will probably be realised either when the US dollar is weak — a near-term possibility — and, as would then be likely, commodity prices run.

As a final aside, in such a fluid and fast-changing investment landscape, where previously unknown and so unresearched investment opportunities would be presenting themselves almost daily, it is hard to imagine the active investment manager not being able to harvest alpha, both from stock selection and asset allocation.

The FT’s article highlights the need for a shake-up in the way DM investors are forced to look outside the developed world. Scratch the surface of this new Asian grouping and you will discover those countries that will — in the next decade — move towards the centre of the investment story worldwide.

Whether the investors in today’s DMs can overcome their home biases and acknowledge this epochal shift by spreading their risk capital more globally will arguably be the great investment challenge of the 2020s.

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Space Companies Are Investing Big in 5G Technology

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Space companies worldwide want to bring more data to your devices, faster than ever before.

Entities ranging from SpaceX to Amazon are launching (or may launch soon) huge numbers of new satellites that can carry the extra bandwidth. And cellular network providers around the world are upgrading their equipment on the ground to meet the expected future demand.

This new technology is being built out for new 5G networks. It’s touted as a big leap over current 4G technology, which allows you to do data-intensive things like stream Netflix.

5G will be even better, Will Townsend, a senior analyst for market research firm Moors Insight & Strategy, told Space.com. Users will experience less latency, he said. Latency refers to the time it takes to send a packet of data to a receiver (like a cellphone) on a network. 4G networks have about 50 milliseconds of latency, and 5G networks are expected to be 10 times better, with latencies of less than 5 milliseconds.

This will result in a “faster and more responsive” experience, Townsend said in an email. “For consumers, this will equate to faster downloads and a non-buffered video playback experience,” he said. “Mobile gamers will appreciate fast responsiveness.” Business applications will range from remote manufacturing to telesurgery, he added, and there will be a “richer retail experience bridging online capabilities.” The growth of 5G will also help to address the rise of the internet of things, or the proliferation of network-connected, or “smart,” devices. There are already smart fridges, stoves and security systems, for example, and consumers are also using wearable devices that share bandwidth on crowded mobile networks.

Meanwhile, businesses have embedded tracking devices in locations such as shipping containers, oil and gas lines, and power generators, with each device providing real-time information on the status of the thing being tracked. This information is meant to make it easier for companies to respond if something breaks and to keep better track of shipments crossing the globe with manufactured goods. Whole industries may change with the rise of connected devices, such as driving (with the use of autonomous vehicles) or factories (with production lines that may be able to monitor themselves).

When is 5G coming?

In the United States, the big four carriers — AT&T, Sprint, T-Mobile and Verizon — have already launched mobile 5G in a handful of metro areas. For example, as of July, Sprint had deployed mobile 5G in parts of Atlanta, Chicago, Dallas-Fort Worth, Houston, and Kansas City, Missouri, according to an article Townsend wrote for Forbes. And deployment will continue for all carriers through the rest of 2019 and into 2020, he said.

In many cases, however, you won’t be able to access the network with your older device. Once the infrastructure equipment is upgraded, consumers will need to buy new cellphones. Check your preferred brand carefully. “Samsung and Android devices will lead Apple by 18 to 24 months in handsets,” Townsend said. But there is big potential for carriers, who “are spending billions globally to upgrade the networks because they see the potential in monetizing new services,” he added.

On the business side, one of the big arguments for moving to 5G is the ability to participate in “Industry 4.0,” or the fourth industrial revolution. This term commonly refers to factories embedded with wireless connectivity in their machines and equipment. Using emerging artificial intelligence, the goal is for the factory to monitor its own production line and to make changes as needed for safety, efficiency or other needs. Some analysts worry that AI could replace jobs and make unemployment rise, while others are optimistic, saying new job opportunities will arise with the new technology.

Which space companies are working on 5G?

Many space entities are rushing to be trendsetters in 5G. For example, SpaceX has received approval to launch nearly 12,000 Starlink internet satellites (and recently applied to loft up to 30,000 more). In May, SpaceX launched its first 60 Starlink craft, which operate at a low-Earth-orbit altitude of about 342 miles (550 kilometers). (For comparison, the International Space Station orbits about 250 miles, or 400 km, above Earth.)

OneWeb has satellite-internet plans as well. The company plans to assemble a constellation of nearly 650 satellites to make web access easier around the world. OneWeb launched the first group of six satellites in February aboard a Soyuz rocket provided by European launch company Arianespace. These satellites circle Earth in near-polar orbits, at an altitude of roughly 750 miles (1,200 km). Amazon and Facebook are among the other companies planning 5G satellite networks.

What are the risks of 5G?

The proliferation of 5G satellites in orbit raises a number of questions from industry observers. A big one is the rising risk of collisions, which could, theoretically, spawn huge populations of orbital debris. The world got an inkling of this risk last month, when a European satellite made a precautionary maneuver to dodge a potential collision with one of the SpaceX Starlink satellites.

There also are worries about radio-frequency interference with all of these coming satellites. Operators of weather satellites, in particular, are concerned about some of the authorized 5G frequencies approaching the 23.8-gigahertz frequency commonly used in weather forecasts. At this bandwidth, “water vapor in the atmosphere gives off a feeble signal,” and the satellites can examine humidity in the atmosphere, even if the region is cloudy, Popular Mechanics reported. That said, both NASA and the U.S. National Oceanic and Atmospheric Administration are negotiating with the Federal Communications Commission (which allocates spectrum frequencies to U.S. companies) to protect weather satellites, according to Popular Mechanics.

There’s also concern that the abundance of satellites will interfere with sky observations. In June, the International Astronomical Union (IAU) expressed concern that thousands of satellites could interfere with the ability to examine dim and distant objects, not to mention the lives of nocturnal animals. “We do not yet understand the impact of thousands of these visible satellites scattered across the night sky, and despite their good intentions, these satellite constellations may threaten both,” IAU officials said in a statement at the time.

As the 5G providers work out these kinks, there may be unpredictable effects of the new mobile technology, Townsend said. “Case in point: 4G LTE brought the capabilities required to make ride sharing a reality; no one really predicted that use case,” he said. Townsend called this a positive development, as it “disrupted a multibillion [dollar] taxi cab industry [and] created new income opportunity” for individuals.

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Investing in teachers is investing in children

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While Isabel Teotonio’s article demonstrates that parents and students understand the negative impacts of educational cuts, we still have to ask when will the Ford government notice that teachers are a fundamental part of the overall success of students? It has been stated that the Ford government wants to cut back on the number of teachers for cost benefits, but at what expense? It is at the expense of students like myself, who will be our future. This cut will not only increase class sizes and require more online learning, which studies have proven have no positive impact on one’s learning, but it also reduces the amount of one-on-one time students can receive from their teacher, which is a key aspect for active and progressive learning. This impact will be reflected in future generations to come. Along with current students who are confused and struggling in an overcrowded class, all because there is not enough time for all the students to receive the individualized help they need and are entitled to. In an era where face-to-face communication is already limited and technology takes over every aspect of a child’s life, we’d hope at least while in school these students could learn socialization and communication skills, but instead they will be lost in the large classes, just because the Ford government wants to hypothetically save money.

As a community, we need to invest in our children. These cutbacks will not only affect the children now but the adults that they will become, which in turn will be the adults governing us.

Diana Malatesta, Hamilton

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Stocks fluctuate as investors weigh trade plan

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U.S. stocks swung between gains and losses as investors debated the implications of the partial trade deal reached last week between the U.S. and China. European bonds gained.

The S&P 500 opened in the red after China appeared to pour cold water on a pact touted by Donald Trump, with people familiar with the situation saying it wanted to iron out details before signing it. A tweet from the Global Times’ editor-in-chief painted a more optimistic outlook, giving equities some support. U.S. debt markets are closed for the Columbus Day holiday.

“I think given we’ve had a bit of good news, chances are we’re going to be on the doubting side this week,” said Peter Jankovskis, Oakbrook Investments LLC’s co-chief investment officer. “That’s been the natural ebb and flow of the whole process.”

The Stoxx Europe 600 Index declined, while Asia stocks climbed earlier, helping sustain a rally in emerging-market assets after the positive conclusion of the latest round of trade talks. A dollar gauge advanced.

“I expect there will be a deal,” Treasury Secretary Steven Mnuchin said Monday on CNBC television. The sides made “substantial progress” last week in negotiations and Mnuchin said he expects Trump and President Xi Jinping to finalize the accord at a summit in Chile next month.

The pound extended its drop, after rocketing for the past two sessions, as European Union negotiators warned that Brexit plans from U.K. Prime Minister Boris Johnson are not yet good enough to be the basis for an agreement. Turkey’s stock market tumbled and its currency weakened as the U.S. and Europe threatened to impose sanctions over the incursion into Syria.

Elsewhere, West Texas crude oil dropped after surging the most in almost a month on Friday.

Focus will soon turn to earnings season that begins with big U.S. banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley.

Here are some key events coming up this week:

  • The International Monetary Fund and World Bank host meetings to discuss economic development and finance.
  • St. Louis Fed President James Bullard speaks at Bloomberg’s monetary and financial policy conference in London. Riksbank Governor Stefan Ingves also speaks there. Atlanta Fed President Raphael Bostic speaks in Atlanta. San Francisco Fed President Mary Daly gives a speech in Los Angeles.
  • Wednesday brings a monetary policy decision in South Korea.
  • U.S. retail sales are forecast to increase for a seventh straight month. Sales in the “control group” are also expected to rise. Consumer spending is carrying the weight of U.S. economic growth so the data will be monitored closely for any signs of slowing.
  • China releases third-quarter GDP, September industrial production and retail sales data on Friday.

Here are the main moves in markets:

Stocks

  • The S&P 500 Index declined 0.1% to 2,968.63 as of 11:28 a.m. New York time.
  • The Dow Jones Industrial Average advanced 0.1% to 26,832.80, the highest in two weeks.
  • The Nasdaq Composite Index was little changed at 8,058.23, the highest in almost three weeks.
  • The Stoxx Europe 600 Index sank 0.5 per cent to 389.63.
  • Germany’s DAX Index decreased 0.2 per cent to 12,483.32.

Currencies

  • The Bloomberg Dollar Spot Index advanced 0.2 per cent to 1,208.38, the biggest gain in a week.

Bonds

  • Britain’s 10-year yield declined seven basis points to 0.635 per cent, the largest decrease in three weeks.
  • Germany’s 10-year yield dipped two basis points to -0.46 per cent.

Commodities

  • West Texas Intermediate crude declined 2.8 per cent to US$53.16 a barrel, the largest drop in two weeks.
  • Gold strengthened 0.2 per cent to US$1,492.27 an ounce.

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