Tuesday, April 28, 2015

Portfolio diversification: How does it boost investment?

One of the most common advice given to investors is,' Do no put all your eggs in your basket'. This essentially means that investments should be spread across different asset classes. This suggestion also brings forward the concept of portfolio diversification which propagates allocation of investible amount into different asset classes based on certain parameters. However, the problem with investors is that they ignore the most critical ingredient of diversification which is known as correlation. They invest with the belief that investment in different assets automatically results into diversification. On the face of it the portfolio looks diversified, but pratically lacks benefits of diversification. In order to make diversification work, the correlation between different asset classes should be clearly understood.

In order to understand benefits of correlation, let us first look at the concept of correlation. Correlation shows relationship between movements of different asset class. In simple words, when one asset class ,say shares, give positive return while another asset class  gold gives negative return, it can be concluded that the correlation between shares and gold is negative. It is important for investors to understand correlation factor before allocating investments across asset classes. Let us look at some examples where correlation can give benefits of investments:

Equity and debt often show opposite return behavior: It has been often seen that when rate of interest goes up, the value of equity shares goes down, while the return from debt instruments goes up. So in a rising rate of interest scenario, it will in interest of investors to have more of debt in the portfolio and reduce equity exposure. As rate of interest goes down, the reverse can be done. This decision primarily is driven by the fact that rate of interest or return from debt and equity are generally inversely related. Diversification works well in this kind of scenario. Also high rated debt instruments are almost risk free. This helps in diversification of portfolio by keeping portfolio relatively risk free.

Two schemes of mutual funds do not essentially result into diversification:  Investors often invest with the assumption that investments in different schemes of mutual funds will result into more diversification. However, reality is different from this. As an investor, you need to check whether different schemes of mutual funds selected by you are investing in different kind of stocks. If you end up selecting two schemes in which there are commonalities in terms of investments, diversification benefits will be limited. So ensure that mutual fund schemes selected by you are well diversified themselves.

Combining high beta stocks with defensive stocks: In rising market, high beta stocks give you high return while in falling markets these stocks become drain on your investments. In order to avoid the downside risk and avail benefits of diversification, it will make sense to combine these high beta stocks with defensive stocks such as FMCG and Pharma stocks. The experience of last five years shows that while stock market has not given good returns in general, pharma and FMCG stocks have been consistent performers. Diversification of equity portfolio will work for an investor if this kind of investment strategy is adopted.

Gold as an asset class adds to diversification benefits: It is often said that gold continues to perform when all asset classes fail to do so. Investors often switch to gold as an asset class during periods of crisis. It makes sense to hold gold in your portfolio to minimize portfolio risk. Gold has a negative correlation with many of the asset classes such as equity and debt. For investors holding commodity such as crude in their portfolio, gold works as an asset which gives diversification benefits.

It is extremely important to note that diversification does not mean more assets in portfolio, it means having assets whose correlation is well defined. Benefits of diversification is maximized when portfolio is created on correlation benefits.

Monday, April 20, 2015

Thai Stocks Biggest Losers in Asia as Protests Spur Swings

Thailand's stocks are falling at the fastest pace in Asia as an amnesty bill for political protesters spurs demonstrations in the streets of Bangkok and threatens to delay the nation's biggest-ever infrastructure spending plan.

The SET Index, which rose 328 percent from October 2008 to this year's high on May 21, has since dropped 13 percent through yesterday as shares of Krung Thai Bank Pcl (KTB) and billionaire Dhanin Chearavanont's CP All Pcl (CPALL) tumbled. Stock swings in Thailand have almost tripled in the past six months while trading volumes fell 52 percent, the most among 45 emerging and developed markets.

Police closed roads around parliament this week on concern as many as 5,000 people may join rallies against the ruling Pheu Thai party's bill, which would exonerate protesters jailed after the nation's military coup in 2006. Debate over the legislation may delay approval of Prime Minister Yingluck Shinawatra's $64 billion plan to build high-speed trains and highways across Thailand, where government spending accounts for about 24 percent of the economy.

"Political tension and economic slowdown will be the main risks to the Thai market," Petcharat Powattanasatien, the head of equity investment at Bangkok-based Kasikorn Asset Management Co., the nation's biggest private money manager with $27 billion of assets, said in a July 31 phone interview. "Any delay in the government's spending on new infrastructure projects will have a negative impact."

Volatility Jumps

Thailand's SET index (SET) rose 1.2 percent to 1,447.16 today after better-than-estimated Chinese trade data eased concern that the biggest emerging economy is slowing.

The gauge's 30-day historical volatility jumped 180 percent to 25.2 as of Aug. 6 from 9 at the end of January. That compares with a 33 percent drop for the Standard & Poor's 500 Index (SPX) and a 16 percent increase for the Shanghai Composite Index in China, the biggest emerging market, according to data compiled by Bloomberg.

Thirty-day average volume in the $390 billion equity market, the 11th-biggest in Asia, declined to about 9.8 billion shares from 21 billion in January, which was within 5 percent of a record high. Volume fell to 4.7 billion shares on Aug. 5, the lowest since Nov. 21.

The last time trading in Thailand slowed this much, in November 2010, the SET index dropped about 4 percent during the next 12 months. That compares with a 3.7 percent gain in the S&P 500, the data show.

Relative Value

The SET gauge has more than quadrupled since November 2008 as bond purchases by the U.S. Federal Reserve spurred demand for riskier assets in emerging markets. The Thai economy rebounded from a 7 percent contraction in the first quarter of 2009 to post an average expansion of 4.9 percent during the following three years. Growing consumer demand in the nation of 67 million people boosted car sales to an all-time high in March and lifted earnings at SET index companies to a record.

The Thai stock measure will probably climb about 15 percent this year as earnings growth lures foreign investors, said Korawut Leenabanchong, the chief investment officer at UOB Asset Management (Thailand), which oversees about $6.4 billion. Profits in the SET will probably climb 28 percent in the next 12 months, versus 14 percent for the MSCI Emerging Markets Index, according to data compiled by Bloomberg.

The SET Index is valued at 12.5 times analyst earnings estimates for the next 12 months. That compares with a multiple of 18 for the Philippine equity gauge, 16 in Malaysia and 14 for Indonesia. The MSCI emerging markets index is trading at a multiple of 9.9.

Fed Concern

"Thai stocks have been overpunished," said Korawut, whose Thai Value Focus Equity-Dividend Fund has returned 16 percent this year, according to data compiled by Bloomberg. "The overall fundamentals of the Thai market remain strong."

Equities have rebounded after past periods of political tension. While the SET Index lost as much as 13 percent in four months after Thai military leaders sent tanks to block Bangkok's Government House and said they'd seized control of the capital on Sept. 19, 2006, the gauge recouped its losses by May 2007.

The SET index's decline from its 19-year high on May 21, the day before Fed Chairman Ben S. Bernanke said in congressional testimony that the central bank could reduce stimulus if the economy improves, is the largest among equity gauges in 18 Asian nations tracked by Bloomberg. Foreign investors sold a net $2.7 billion of Thai shares since the end of March, data compiled by Bloomberg show.

'First Cracks'

"Trading should slow and volatility will remain high in the second half with investors' lingering concern about the U.S. Fed's monetary policy," Charamporn Jotikasthira, president of the Stock Exchange of Thailand, said in an interview in Bangkok on July 23. The "economy will also face risk from economic slowdown as exports and domestic consumption are still weak."

Manufacturing production declined 3.5 percent in June from a year earlier and exports dropped 3.4 percent, according to government data released on July 26. The Thai Retailers Association cut its 2013 forecast for retail and wholesale revenue growth to 9 percent from 12 percent on July 25. The nation's gross domestic product expanded 5.3 percent in the first quarter.

"We are starting to see the first cracks around the edges" for the economy, Mark Matthews, the Singapore-based head of Asia research at Bank Julius Baer & Co., said in an Aug. 6 e-mail.

Thaksin Ouster

The amnesty bill, proposed by ruling party lawmaker Worachai Hema, would exonerate protesters involved in demonstrations stretching from the coup in 2006 until May 10, 2011. The legislation is designed to help innocent people in prison as a result of political conflict, Worachai said on Aug. 5, according to a comment posted on the party's website.

Former Prime Minister Abhisit Vejjajiva, now an opposition leader who faces murder charges for authorizing soldiers to use weapons during political unrest in 2010, has rallied supporters to protest the legislation.

The bill will undermine the country's judiciary by freeing people who were convicted of serious criminal acts, and may lead to a pardon for Yingluck's brother Thaksin Shinawatra, who was removed from power during the 2006 coup, Abhisit told a rally in Bangkok on Aug. 5.

Demonstrations by Thaksin's supporters and opponents since 2006 have led to an airport seizure, business center blockages and arson attacks in Bangkok.

Trading Slump

Thaksin has lived overseas since 2008, when he fled a jail sentence stemming from charges filed by an army-appointed body. His party won two general elections since the coup even as two prime ministers he endorsed were removed by the constitutional court. Thailand has had nine military coups and more than 20 prime ministers since 1946.

"There is a bit of nerves ahead of the amnesty bill in the next parliament session as this might cause more protests," Andrew Yates, the head of international equities at Asia Plus Securities Pcl, the country's second-biggest stock brokerage by market value, said by phone on Aug. 2. Trading volumes have dropped to levels normally seen around holiday periods, he said.

A draft bill to approve 2 trillion baht ($64 billion) of spending over seven years is stuck in parliament. The legislation would lead to construction of high-speed trains, railway tracks and superhighways as part of the Yingluck administration's attempt to reduce energy consumption and transportation costs.

Forecast Cut

At the same time, about 350 billion baht earmarked for water management projects in the second half has been held up by a court order for the assessment of their impact on health and the environment.

The delays may weigh on the economy and heighten concern among foreign investors, Finance Minister Kittiratt Na-Ranong told reporters in Bangkok on July 24. Credit Suisse Group AG cut its 2013 economic expansion forecast for Thailand to 4 percent from 4.7 percent on Aug. 5, citing investment delays and weaker-than-estimated exports.

Investors should reduce Thai equity holdings and increase cash because of the political outlook, according to Maybank Kim Eng Securities (Thailand) Pcl (MBKET), the nation's largest stock brokerage. Downside risk and volatility in stocks may increase this month amid street protests, the Bangkok-based firm said.

"Political tension may prolong and pressure the stock market even though no major violence is expected," Sukit Udomsirikul, the head of research at Maybank Kim Eng, said by phone on Aug. 5. "Investors should wait and see until the political situation has been settled."

Wednesday, April 15, 2015

Choice Properties REIT Lifting IPOs Above TSX: Corporate Canada

Real estate investment trusts led by Choice Properties REIT (CHP-U) are helping initial public offerings outpace Canada's benchmark index for the first time in four years on speculation dividend payers will hold up better than commodity shares as global economic growth slows.

Eight stocks that began trading in Canada in 2013 have advanced 3.5 percent as of July 12, according to data compiled by Bloomberg on companies with a market value of at least C$100 million ($96.1 million). That compared with a 0.2 percent gain in the Standard & Poor's/TSX Composite Index (SPTSX), the first time since 2009 IPO stocks have outperformed the commodity-heavy benchmark over a comparable period.

More than half of the initial offerings this year have been REITs. The largest, Choice Properties, which holds the real estate properties of grocer Loblaw Cos. (L), had risen 1.5 percent this year after its C$400 million initial offering on July 5. Choice gained 1 percent to C$10.15 at 4 p.m. in Toronto trading today.

"Anything yield-oriented is still doing well, outside of that it's hard to get anyone excited about putting money into resource exploration companies or energy companies," said Anil Tahiliani, fund manager with McLean & Partners in Calgary, who helps manage about C$1 billion.

The S&P/TSX's slight gain this year compares with a 12 percent advance in the MSCI World Index, which tracks equity markets from developed nations. Raw-materials and energy stocks make up 58 percent of equities in the S&P/TSX.

China GDP

Gross domestic product in China, the world's biggest consumer of commodities, is expected to grow 7.6 percent this year and next, according to the median estimate of economists surveyed by Bloomberg, down from a five-year average of 9.3 percent from 2008 to 2012.

The International Monetary Fund cut its projection for global growth in 2013 for a fifth time on July 9, to 3.1 percent from 3.3 percent in April. China's growth was lowered to 7.8 percent from 8 percent.

Chinese Finance Minister Lou Jiwei signaled July 11 the world's second-biggest economy may expand less than the government's 7.5 percent target this year and that growth as low as 6.5 percent may be tolerable in the future.

Canada's economy is expected to grow 1.7 percent this year and accelerate to 2.4 percent growth in 2014. The U.S. economy will advance 1.8 percent and 2.7 percent this year and next.

Gold IPOs

"Companies that come to market are coming from sectors that work," said Brian Huen, managing partner at Red Sky Capital Management Ltd. in Toronto. He helps manage C$220 million with the firm, and participated in the offerings for Choice Properties, Information Services Corp., and Ski-Doo maker BRP Inc. (DOO) "People certainly aren't bringing any gold IPOs to market. So investors are focusing on buying deals in the right markets, as opposed to the wider market which has exposure to resources."

The underwriters have also done a good job of properly pricing IPOs, including underpricing in some cases, to create after-market demand that will send the stocks higher, Huen said.

"This is a one-time opportunity that you don't have in the public market," he said. "As long as the banks are pricing them properly and there's investor appetite, they will do well."

The weak returns of several REIT IPOs this year through July 12, including a 5 percent drop for WPT Industrial REIT and a 5.3 percent decline for Agellan Commercial REIT, has been a matter of timing, said Matthew Merkley, a lawyer who specializes in advising on REIT initial offerings with the firm Blake, Cassels & Graydon LLP in Toronto.

Wider Market

"The trading down, it's about the wider market and not about their individual performance," Merkley said.

Craig MacPhail, a spokesman with WPT Industrial, said Scott Frederiksen, chief executive officer at the company, could not immediately be reached for comment.

A voicemail message left with Frank Camenzuli, chief executive officer at Agellan Commercial, on July 12 wasn't immediately returned.

Dividend-yielding stocks, including REITs, utilities, telephone companies and industrials, slumped in June after the U.S. Federal Reserve said it may begin tapering its bond purchasing program as early as this year.

"The whole interest-sensitive sector has been greatly oversold," said David Baskin, president of Baskin Financial Services in Toronto. His firm manages about C$500 million. "People who got carried away selling will at some point recognize that the distributions of REITs are still much higher than you'll get from a bond."

REITs Slump

REITs, which are taxed differently by the government, invest in income-producing real estate and pay out most of their income to investors through unit distributions.

Since tumbling to an 18-month low on June 24, the S&P/TSX Capped REIT Index rallied 4.8 percent through July 12. The index, which tracks 15 of Canada's largest real estate trusts, has slipped 7.7 percent this year, compared with a 30 percent plunge in materials stocks.

"Choice went to market recently and it's sort of clogged the pipeline of new REITs a bit, cast a bit of a shadow," Merkley said. "I expect we'll see a lot of pent-up supply and demand come the fall."

BRP, a former division of Bombardier Inc. (BBD/B) that manufactures jet skis and other recreational vehicles, is the best-performing IPO stock in Canada this year, soaring 24 percent to C$26.61 from its initial offering of C$21.50 on May 22. It doesn't pay a dividend. Information Services, which provides registry services to the province of Saskatchewan, has risen 3.1 percent since trading began on July 9.

Market Share

"We believe BRP should trade at a premium to its competitors given its strong brand equity, leading market share and top-ranked position in several power sports categories," said Anthony Zicha, analyst with Scotia Capital Inc., in a note to clients July 9.

Zicha initiated coverage of BRP with a sector outperform rating, the equivalent of a buy, and a one-year price target of C$29. He expects the company will increase its sales at a rate of 8.5 percent a year through 2015. The stock has six buys and one hold recommendation, according to data compiled by Bloomberg.

IPO stock performance in Canada remains mediocre when compared with global performance. Year-to-date, global IPOs of $100 million or more have advanced 12 percent in trading, compared with the 3.5 percent growth of Canadian IPOs. Canadian IPOs through the same period have underperformed world IPOs since 2005, data compiled by Bloomberg show.

"This is going to continue," said Paul Taylor, chief investment officer with BMO Harris Private Banking in Toronto. His firm manages about C$16.5 billion. "The factors that caused the Canadian equity market to falter are still in place and that is weak commodity prices and a housing market stalling. These are two things that the Canadian economy, equity market and by association the IPO market will struggle with. The opportunities are better elsewhere."

Saturated Market

With 12 REIT IPOs in Canada since the beginning of 2012 and at least another coming from retailer Canadian Tire Corp. (CTC) in the near future, Taylor said the market has become saturated.

"Throughout the year the windows of opportunity for IPOs will open or close," Bill Demers, the Canadian IPO leader for Ernst & Young LLP, said in a phone interview from Toronto.

The current window for REIT IPOs is "kind of closed for the next couple of months until people see REIT prices come back, which may not happen until this fall when people are less concerned about rates going up," said Tahiliani with McLean & Partners. "The rising tide lifts all boats, whether it's an IPO REIT or a regular REIT it will do well."

Sunday, April 5, 2015

5 of Last Week's Biggest Winners

What's better than momentum? Mo' momentum. Let's take a closer look at five of this past week's biggest scorchers.

Company

June 28

Weekly Gain

Halozyme Therapeutics  (NASDAQ: HALO  )

$7.90

28%

Westport Innovations  (NASDAQ: WPRT  )

$33.60

17%

American Superconductor  (NASDAQ: AMSC  )

$2.65

17%

Molycorp  (NYSE: MCP  )

$6.12

14%

GT Advanced Tech (NASDAQ: GTAT  )

$4.16

11%

Source: Barron's.

Let's start with Halozyme Therapeutics. The biotech's goal of getting a breast cancer drug administered by subcutaneous injection cleared an important hurdle this past week, when a European regulator gave it a positive recommendation. Going the subcutaneous injection route shaves a lot of time for doctors and patients when compared with the current intravenous treatment.

Westport Innovations fueled higher as low natural gas prices make it more cost effective for fleets to swap out gas or diesel engines for systems powered by liquefied natural gas. Westport also announced small acquisitions on Friday that will make it the largest player in the North American light duty natural gas vehicle market.

American Supercondutor rose after a U.S. prosecutor charged a Chinese wind turbine company with stealing trade secrets from American Superconductor. China's Sinovel was American Superconductor's largest customer, accounting for more than two-thirds of its business four years ago. American Superconductor is seeking $1.2 billion in damages in Chinese courts.

Molycorp moved higher after announcing on Thursday night that the SEC completed its investigation of the rare-earth minerals specialist's public disclosures. The SEC is recommending that no enforcement action be taken at this time. 

GT Advanced Technologies was upgraded -- from "hold" to "buy" -- at Canaccord Genuity. Analyst Jonathan Dorsheimer thinks orders for polysilicon equipment should pick up in about a year, and without expecting an actual eruption in solar demand, he's comfortable in boosting GT's price target from $4 to $5.

Keep the good vibes coming
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