XML Feeds

What is RSS?

Categories

Top Rated

    How does quality perform in different market conditions

    There is an argument that a quality business will tend to outperform the average, while some investors would contend that growth, profitability and superior reputation is quickly priced in, leaving investors no better off in buying quality.

    The correct answer possibly lies somewhere in the middle, depending on how quality or the lack thereof is measured and on the performance periods used. But some research from Standard and Poors (S&P) has indicated that quality, as calculated using their metrics, outperforms in certain markets.

    In June this year, the Standard and Poors, announced the launch of two S&P500 Quality Rankings indices. The first the S&P500 High Quality Rankings and the second the S&P500 Low Quality Rankings. While they have been ranking shares for over 50 years, they created the indices for the use by exchange tracking funds (ETF’s)

    S&P has ranked shares using earnings and dividends rankings to determine the quality of companies for over 50 years. The rankings reflect variability of growth and stability of earnings and dividends, so that companies with long term growth, stability of earnings and dividends over a 10 year period rank highly and vice versa.

    S&P’s analysis is that the quality premium – i.e. the difference in return between high and low quality – is positive in down markets and negative in up markets. This says that a quality company will tend to provide a cushion in a down market.

    Research conducted by S&P looked at the quality premium under various market regimes to test the hypothesis that high quality stocks act as a cushion in a market downturn relative to low quality stocks. They looked at 4 different investment scenarios over 13 years, namely,

    • A declining equity market
    • Deteriorating credit market
    • Rising volatility
    • Rising interest rates

    In each of these 4 investment scenarios, quality stocks outperformed during a down market, while under formed (but by less margin) in an up market. During periods of high volatility, widening credit spreads and a steepening yield curve, the quality premium tends to be higher.

    Looking at the output of two of these scenarios – i.e. bull/bear markets and market volatility – the result was as follows:


    Source: Standard and Poors

    Looking at this analysis against the backdrop of the global markets over the last 12 and 18 months, it is understandable then that in general quality shares have tended to underperform the market. But with this general underperformance in the strong up markets, perhaps investors should now be focusing back on quality again.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2010-12-07, 16:17:02, by ian Email , Leave a comment

    Emerging Market Currencies

    Much has been said and written about a few of the larger Developed Market (DM) currencies, and how the governments of those countries are doing everything in their power to weaken their own currency relative to the others. As currency pricing is a zero sum game for one currency to strengthen another needs to weaken (i.e. unlike stock markets that can collectively go up or down). Over the past few years we have seen a steady flow of money into Emerging Markets (EMs) and as such we have seen currencies in many of these countries appreciating.

    While investors, particularly from the developed countries, like to lump emerging countries together it is clearly evident that the performance of the different regions’ stock markets and currencies can vary greatly. More specifically Brazil, Russia, India, and China often get lumped together as the so called BRIC countries.

    A large reason for the amalgamation of EM countries by investors sitting in developed countries is that they don’t have the expertise to gather sufficient information on the companies in EMs to make informed investments. Company reporting in developed markets can generally be relied on as a good indicator as to what is actually happening in the company, while financials in some EMs can’t always be relied on. Investors need the expertise and resources to ‘look under the hood and kick the tyres’ in these countries that can’t be conducted in London or New York.

    Because there is a lack of ability in analysing EM companies, many DM investors invest into the region through broader geographic funds or through a range of ETFs listed on the various exchanges. By doing this the investor can play the EM themes without taking on large positions in specific risks (i.e. Brazil oil companies). There is therefore a gap for investors specialising in investing in EMs.

    The chart below shows the movement of the various BRIC countries, Aussie dollar, Botswanan pula, and US dollar versus the rand over the past 4 years. The line moving up indicates a currency strengthening versus the rand and vice versa.

    It is evident from the chart that one brush doesn’t paint all of the EMs. You will also notice that some countries use the US dollar as peg. Over this period the Aussie dollar, Brazilian real, and the Chinese renminbi have been the best performing currencies, while the Russian rouble and Botswanan pula have struggled the most. The rand has strengthened by around 5% against the US dollar.

    While choosing the right currency will have provided a massive windfall, the converse is also true if the wrong one is chosen. Investors therefore like to diversify their investments across the regions. At Seed we prefer those investment managers who have the skills and resources to make to more informed decisions. Merely investing into Russia because it forms part of a BRIC grouping isn’t a good investment strategy. At the same time the managers we choose won’t take overly concentrated risks.

    For updates on what’s happening in the investment world and links to articles of interest become a Fan of the Seed Investment Consultants page on Facebook by clicking here.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2010-12-06, 17:18:05, by Mike Email , Leave a comment

    Emerging Market Currencies

    Much has been said and written about a few of the larger Developed Market (DM) currencies, and how the governments of those countries are doing everything in their power to weaken their own currency relative to the others. As currency pricing is a zero sum game for one currency to strengthen another needs to weaken (i.e. unlike stock markets that can collectively go up or down). Over the past few years we have seen a steady flow of money into Emerging Markets (EMs) and as such we have seen currencies in many of these countries appreciating.

    While investors, particularly from the developed countries, like to lump emerging countries together it is clearly evident that the performance of the different regions’ stock markets and currencies can vary greatly. More specifically Brazil, Russia, India, and China often get lumped together as the so called BRIC countries.

    A large reason for the amalgamation of EM countries by investors sitting in developed countries is that they don’t have the expertise to gather sufficient information on the companies in EMs to make informed investments. Company reporting in developed markets can generally be relied on as a good indicator as to what is actually happening in the company, while financials in some EMs can’t always be relied on. Investors need the expertise and resources to ‘look under the hood and kick the tyres’ in these countries that can’t be conducted in London or New York.

    Because there is a lack of ability in analysing EM companies, many DM investors invest into the region through broader geographic funds or through a range of ETFs listed on the various exchanges. By doing this the investor can play the EM themes without taking on large positions in specific risks (i.e. Brazil oil companies). There is therefore a gap for investors specialising in investing in EMs.

    The chart below shows the movement of the various BRIC countries, Aussie dollar, Botswanan pula, and US dollar versus the rand over the past 4 years. The line moving up indicates a currency strengthening versus the rand and vice versa.

    It is evident from the chart that one brush doesn’t paint all of the EMs. You will also notice that some countries use the US dollar as peg. Over this period the Aussie dollar, Brazilian real, and the Chinese renminbi have been the best performing currencies, while the Russian rouble and Botswanan pula have struggled the most. The rand has strengthened by around 5% against the US dollar.

    While choosing the right currency will have provided a massive windfall, the converse is also true if the wrong one is chosen. Investors therefore like to diversify their investments across the regions. At Seed we prefer those investment managers who have the skills and resources to make to more informed decisions. Merely investing into Russia because it forms part of a BRIC grouping isn’t a good investment strategy. At the same time the managers we choose won’t take overly concentrated risks.

    For updates on what’s happening in the investment world and links to articles of interest become a Fan of the Seed Investment Consultants page on Facebook by clicking here.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2010-12-02, 16:54:47, by Mike Email , Leave a comment