Chartwell ETF Investment Letter
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The Chartwell Global Investment Letter describes model portfolio performance, allocation changes, updates on global markets and economic and political trends that I am watching closely. This section also summarizes strategies outlined throughout the website.
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Monday, May 01, 2006
Dear Client,
International markets in Europe and Asia forged ahead in April while US markets largely went sideways. Chartwell's portfolios performed well with all but the global and international handily beating their benchmarks. The Core is up 9.53% so far this year buoyed by allocations to gold and energy. The Global was up 12.1%, International, 13.4%, Asia, 17.2% and the New Venture up a nice 12.3%. Keep in mind that 15% of the Core allocations move opposite the market. In contrast, this year the S&P 500 is up 5% and the MSCI World index is up 9.7%.
The Gone Fishing portfolio, which has been part of our ETF Starter Kit is up 9.5%, so far this year. Please see article below and holdings at the end of this report.
Europe continues to be surprisingly strong as global fund managers move a bit away from emerging markets and are unsure of US prospects. The strength of the Euro and an anticipated up tick in eurozone growth and market reforms are also driving capital inflows.
Japanese growth and consumption are picking up some momentum. Japan's GDP growth in 2005 was second to only America amongst members of the G-7 and the numbers in the fourth quarter were especially strong. Capital expenditures and machine tool orders continue to grow and a potential labor shortage is a hot news topic. GDP growth is the last quarter of 2005 came in at 5.4% with consumer spending up 3.5%. Apple sold 14 million iPods in Japan during the last quarter of 2005 and Coach's sales were up 20% as well.
Our April stock of the month pick of Honda (HMC) did well moving from $31 to $35.4 after a 2-1 split. This is a gain of 14% over 30 days for Japan's third largest auto maker.
Here is what I said last month: "Toyota stock is trading at 13.5 times earnings and it has an impressive $30 billion in cash reserves. At present levels, I would rather buy Honda which is trading at 10.9 times earnings and has $10 billion in cash."
I still like Germany primarily because so many dislike it. The German iShare has first class global companies, interest rates are very low, its high savings rate has to come down and will fuel consumption and growth plus home ownership at 42% will also surely rise as well.
According to Morgan Stanley, "America's imports of tradable goods are currently 89 percent larger than US exports of manufactured products. This astonishing mismatch between purchases of goods made abroad and overseas sales of American-made products is an important outgrowth of a huge surge in import penetration into the United States over the past 20 years. Goods imports rose to 37 percent of America's domestic purchases of goods in 4Q05--up dramatically from readings of 27 percent in 1995 and 20 percent in 1985.
The U.S., with 5% of the world's population, buys 20% of world production right now. Having Germany and Japan consume more helps everyone and will bring things more into balance."
The US trade deficit looks like it will exceed $900 billion this year. To put this in perspective, there are only 9 other countries in the world with a GDP higher than $900 billion. Amazing. Meanwhile, China's foreign reserves totaled $853.7 billion as of February, surpassing Japan's US$831.6 billion to become the largest reserves in the world.
The trend of a weaker US dollar and appreciating Asian currencies which I was expecting from the start of the year seems to be developing. In the near term, this could hurt export-oriented Asian markets but Taiwan and South Korea now sell more to China than to the U.S. of course, the Asian country iShares are not hedged so we do benefit from currency appreciation. Japan's higher interest rates although still insignificant could lead to more money coming home. I agree with Citigroup which is predicting a 5% appreciation of the Chinese yuan by the end of the year.
The US dollar is at a 20 year low against the Canadian dollar and at an 11 month low against the euro.
The India Fund (IIF) is bouncing around as valuations of the SENSEX 30 companies have investors on edge. Recent data shows for the first time in the last eight quarters export growth accelerated, slightly exceeding import growth for the quarter ending March 2006. When measured as a percentage of GDP, the trade deficit held steady at about 4.9%. India is adding about 25 million people - the size of Canada's population- to its middle class each year.
Latin America markets are taking a breather as well though up strongly for the year. The presidential election in Mexico has tightened considerably and President Fox is out working hard to support the more conservative contender. President Lula of Brazil is up for re-election in October but seems to have little opposition. Liquidity and the energy and materials sector is driving Latin markets but large cap stocks are fully priced. Interest rates are declining and local participation in the market is increasing.
Hong Kong has performed well as global money manager catch up and overweight China weightings. Keep in mind that the China iShare (FXI), one of this years strongest country markets, is made up of H shares listed on the HKSE. Since October 2005small bank and property stocks are up 37% while large caps are up 7-10%. Rotation to larger cap stocks should buoy the Hong Kong iShare (EWH). Hong Kong is riding the wave of strong growth, low interest rates, falling US dollar (HK dollar pegged to US dollar) and global liquidity. I also like HSBC which is an often overlook global bank with excellent numbers.
Earlier this year big global fund managers raised their allocations to China and pulled back from South Korea. During 5 out of the last 7 months, funds have been net sellers of Korea. Singapore has been strong up 17.5% with Hong Kong up 12.3% this year. A recent KPMG study determined that Singapore and Canada are the most inexpensive places to conduct a business. The US was ranked 7th cheapest although New York joined Frankfurt London and Tokyo as the most expensive cities
China raised its benchmark one year interest rate from 5.58% to 5.85% with the goal of slowing down credit expansion and economic growth which has been accelerating. One year bank deposits earn 2.25% interest
Taiwan is acting better in April as investors perceived its strengths and are becoming more comfortable with the China-Taiwan issue. President Chen in a lengthy interview with the Wall Street Journal balanced worries about being dominated by China with more openness towards rapidly increasing commercial relations between Taiwan and China. I think Taiwan iShare is undervalued and will do well this year. China may lift ban on Chinese tourists visiting Taiwan by the end of the year which will surely lead to a tourist boom.
We sold the Indonesia Fund (IF) after noticing that it was trading at a 49% premium to its net asset value. The Thai Fund (TF) jumped 21% during April with the handoff of power from embattled Prime Minister Thaksin to a caretaker after intervention by the king. It is still a bit of a precarious situation but we will hold the small position in the Asia portfolio (see article below).
Speaking of infrastructure, we added the iShares transportation sector index fund to two portfolios last month. I look at it this way, even with $900 billion trade deficits someone still has to move all these imports around. 25% of our GDP is attributed to production and logistics/transportation. I am sure we spend more money moving goods than producing them. UPS, Fed Ex shipper etc are all part of this ETF which is up 12% already this year.
Toyota stock keeps moving ahead and Asian automakers collectively have developed a commanding lead despite contrary market share data. GM's union deal will help but check out this amazing statistic: of the total market cap of all world automakers, Toyota, Nissan, Honda and Hyundai account for 73%. This group also sells 43% of all passenger cars.
Toyota's market cap is double that of GM, Ford and DaimlerChrysler combined! The markets are telling us the winners already. If US automakers do engineer a turnaround, investors coming in now will make a killing.
The S&P 600 small cap index has now beat the S&P 500 for six straight years. It could go the other way but I think only marginally so unless some events force investors to seek more stable earnings and much more emphasis on value over growth. A study by a couple of Harvard guys pointed out that 75% of the value of a global brand company like P&G is not even captured in its financial statements. For example, brand name, goodwill, staff, international network and distribution relationships etc.. Some of these companies like Dell are relatively cheap.
China has now surpassed France and the U.K. to become the fourth largest economy in the world. The profile of 2005 economic output was similar to the previous year: robust economic growth was underpinned by exports and fixed asset investments, which surged 28.4% and 25.7% respectively; meanwhile industrial production and retail sales grew more modestly at 16.4% and 12.9%, respectively.
India's government has taken a small step towards fully opening up India's nascent retailing industry to foreign participation by allowing single-brand retailers to own a 51% stake in retail joint ventures. In a separate move aimed at improving the existing infrastructure, the government has awarded contracts for privatization of two of India's key airports, New Delhi and Mumbai, to private operators.
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