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2015-05-27 04:43:30

Posted by
Elaine Chen
Sales Trader
International Business Division
Guosen Securities
Contributor
Macro

GUOSEN Closing Bell (May.27)

NEWS

*The director general of BusinessEurope said in a recent interview with Xinhua that China-EU cooperation can help realize growth potential in China's digital economy. Markus J. Beyrer, director general of BusinessEurope, an association of enterprises in 33 European countries, said the digital industry is a game changer for the global economy and will have a huge impact on EU competitiveness. Intelligent, interconnected systems now seamlessly support industrial activities along the entire value chain, he added. Europe will have to reap the benefits of this huge potential, putting in place a real strategy to digitize all sectors of the economy. (China Daily)

*The majority of China's billionaires has increased or maintained their financial investments but has shown less interest in putting their money into traditional industries, according to a report. It said that more than 50 percent of respondents will increase investment in the financial sector and 43 percent will maintain the current level of their financial investments. It also found that more than one-third of Chinese high net worth individuals surveyed said they expect to increase their investment in innovative industries such as information technology, biotechnology and alternative energy. High net worth individuals are defined as having investable assets of more than 10 million yuan ($1.6 million). (China Daily)

*BYD Auto's share price reached new high repeatedly. The company said it plans to raise funds from the market by way of private additional share offering to support the company's development. The investment direction will points to the fast-growing new energy car business. (AAstocks)

MARKET

Chinese stocks closed slightly higher today, with the benchmark Shanghai Composite Index ended at 4941.71 points. The market fluctuated around 4900 points most of the time. Coal and building sectors led the gains; while building and bank sector led the falls. Combined turnover for both markets was 2152.6 bn yuan, down 0.07% dod.

 

CLOSE

%CHG

VOL (bn yuan)

%YTD

SH Composite

4941.71

+0.63

1116.2

+52.77

SZ Component

16963.52

+0.36

1036.4

+54.01

CSI300

5181.43

-0.34

777.8

+46.63

ChiNext

3628.67

+0.29

198.2

+146.55

 

Sector

Top 1

Led by

Top 2

Led by

Upward-leading

Coal

000571

Building

000511

Downward-leading

Building

002325

Bank

600000

 

FUND FLOW

This article is from Guosen Securities Co., Ltd. and is being posted with Guosen Securities Co., Ltd.’s permission. The views expressed in this article are solely those of the author and/or Guosen Securities Co., Ltd. and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-27 02:42:30

Posted by
Darren Chu, CFA
Founder
Tradable Patterns
Contributor
Technical Analysis

VIX (VX) Bouncing off Downchannel Support on Weekly and Daily Charts

The VIX (VX) surged yesterday, reinforcing the bounce off downchannel support (on the weekly and daily charts), and breaking downchannel resistance (on the 4hr chart).  The weekly RSI and Stochastics along with daily RSI, Stochastics and MACD are all bottomish.  The weekly MACD however, still slopes downwards, suggesting a fair amount of downward pressure remains.  Until the weekly MACD flattens out, any rally attempts will likely be capped at the weekly chart's downchannel resistance.  I exited my long yesterday at 14.9 and am looking to re-enter slightly lower at 14.8 today, and will target upside at weekly chart downchannel resistance.

 

VIX (CFE VX Jun15) Weekly/Daily/4hr/Hourly

 

Tradable Patterns was launched to demonstrate that the patterns recurring in liquid futures, spot FX and equity CFD markets can be traded consistently profitably. Tradable Patterns’ daily newsletter (blog) provides technical analysis on a subset of ten to twelve CME/ICE/Eurex futures (commodities, equity indices, interest rates), spot FX and US equity markets, which it considers worth monitoring for the day/week for trend reversal or continuation. For less experienced traders, tutorials and workshops are offered online and throughout Southeast Asia.

 

This article is from Tradable Patterns and is being posted with Tradable Patterns’ permission. The views expressed in this article are solely those of the author and/or Tradable Patterns and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-27 02:37:09

Posted by
Darren Chu, CFA
Founder
Tradable Patterns
Contributor
Technical Analysis

Nasdaq100 (NQ) Weekly Chart Ascending Wedge Near Complete

The Nasdaq100 (NQ) sold off yesterday, reinforcing the ascending triangle resistance line (on the daily chart) and increasingly close to completing an ascending wedge (on the weekly chart).  NQ is turning down on its weekly and daily RSI and Stochastics.  I will look to establish an intraday short today in the 4487-4500 range.

 

Nasdaq100 (CME NQ Jun15) Weekly/Daily/4hr/Hourly

 

Tradable Patterns was launched to demonstrate that the patterns recurring in liquid futures, spot FX and equity CFD markets can be traded consistently profitably. Tradable Patterns’ daily newsletter (blog) provides technical analysis on a subset of ten to twelve CME/ICE/Eurex futures (commodities, equity indices, interest rates), spot FX and US equity markets, which it considers worth monitoring for the day/week for trend reversal or continuation. For less experienced traders, tutorials and workshops are offered online and throughout Southeast Asia.

 

This article is from Tradable Patterns and is being posted with Tradable Patterns’ permission. The views expressed in this article are solely those of the author and/or Tradable Patterns and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-27 02:35:30

Posted by
Darren Chu, CFA
Founder
Tradable Patterns
Contributor
Technical Analysis

S&P500 (ES) Weekly Chart Ascending Wedge Near Complete

The S&P500 (ES) is increasingly wobbly following yesterday's selloff that leaves it just above a near completing ascending wedge's support (on the weekly chart).  On the daily chart, the ES appears to be gravitating towards upchannel support, and is turning down on its weekly and daily RSI and Stochastics.  I will look to establish an intraday short today in the 2110-2113 range.    

 

S&P500 (CME ES Jun15) Weekly/Daily/4hr/Hourly

 

Tradable Patterns was launched to demonstrate that the patterns recurring in liquid futures, spot FX and equity CFD markets can be traded consistently profitably. Tradable Patterns’ daily newsletter (blog) provides technical analysis on a subset of ten to twelve CME/ICE/Eurex futures (commodities, equity indices, interest rates), spot FX and US equity markets, which it considers worth monitoring for the day/week for trend reversal or continuation. For less experienced traders, tutorials and workshops are offered online and throughout Southeast Asia.

 

This article is from Tradable Patterns and is being posted with Tradable Patterns’ permission. The views expressed in this article are solely those of the author and/or Tradable Patterns and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 15:30:40

Posted by
Andre Rouillard
New Constructs, LLC
Contributor
Stocks

Why You Can't Judge a Fund by its Cover

This week we’re putting RidgeWorth Mid Cap Value Fund (SAMVX), which has $4.6 billion in assets under management, in the Danger Zone for a number of reasons:

  1. Poor stock picking
  2. Very high total annual costs with high front end load and transaction costs
  3. A misleading “Mid Cap Value” tagline
  4. A “value” designation despite investing in heavily overvalued companies

As a result of its poor portfolio and high costs, SAMVX earns our Very Dangerous rating. SAMVX is a perfect example of why investors need to do their own diligence on the funds they allocate to. We think that SAMVX wouldn’t be nearly as large if more investors knew what was going on under of the cover of this fund.

Bad Stock Picking No Matter How You Spin It

We rate each of the ETFs and mutual funds under our coverage based on the quality of stocks they hold. SAMVX gets our Dangerous Portfolio Management rating primarily because 46% of SAMVX’s holdings earn our Dangerous or Very Dangerous ratings while only 16% of SAMVX’s holdings are allocated to Attractive or Very Attractive stocks.

Compare these holdings to those of SAMVX’s benchmark, the iShares Core U.S. Value ETF (IUSV). We rate only 39% of IUSV’s holdings as Dangerous or Very Dangerous, while almost 20% of its holdings earn Attractive or Very Attractive ratings.

Figure 1: SAMVX Stacks Up Poorly to Its Benchmark

Sources:  New Constructs, LLC and company filings.

Don’t Be Fooled by the Low Expense Ratio

Investors would have a right to expect mediocre stock picking from SAMVX if it were a cheap fund. However, this isn’t the case.

Despite the fund’s stated expense ratio of 1.59%, SAMVX actually has Very Dangerous total annual costs of 4.02%. The reason for these high costs is SAMVX’s high front end load of 5.75% and its high transaction costs of 0.23%. The reason for these transaction costs is the fund’s high turnover rate of 108%.

What do these high costs mean? Consider that IUSV has total annual costs of just 0.10%. To justify the additional costs above its benchmark, SAMVX must outperform IUSV by 3.92% annually over three years. What’s concerning is that this outperformance hasn’t happened. Over the past three years, IUSV has delivered an 18% annualized return while SAMVX has delivered just a 16% annualized return. In addition, any outperformance going forward doesn’t look likely due to SAMVX’s inferior stocks relative to IUSV.

In short, investors are paying higher fees for inferior performance.

What Style Are Investors Getting in SAMVX? (Hint: It’s Not Mid Cap Value)

SAMVX bills itself as a “Mid Cap Value” fund. If you look closer though, SAMVX more closely resembles an All Cap Value fund with a blend of large and small cap stocks mixed in with the mid caps.

For example, SAMVX’s top equity holding is SanDisk (SNDK), a $14 billion company. Its fifth largest holding is NetApp (NTAP), an $11 billion company, and its seventh largest holding is the $17 billion Hartford Financial Services Group (HIG). You know how the saying goes: never judge a book by its cover.

A look at SAMVX’s Morningstar page would not help either, as Morningstar does not actually include the “All Cap” designation. Rather, the firm averages SAMVX’s holdings’ market caps, which yields a “Mid Cap Blend” classification — which is clearly inaccurate based on the market cap of some of SAMVX’s top holdings above.

No matter SAMVX’s actual style, both the Mid Cap Value and All Cap Value styles earn a Neutral rating in our 2Q15 Style Ratings report. It’s disappointing that SAMVX cannot earn at least a Neutral portfolio management rating despite selecting from so many large cap stocks outside of its supposed “Mid Cap Value” constraints.

About That “Value” Focus…

Last on our list of concerns with SAMVX is the fund’s misleading “value” investing style. For more on SAMVX’s selection methodology, we’ll turn to the fund’s prospectus, which states that the fund intends to “key in on those companies that are in the lower third of their own historical valuations.

We think that this valuation methodology is weak and subjective. It is certainly not comparable across companies and gives little weight to the underlying health of the businesses it invests in. Let’s use an example from SAMVX’s own portfolio: its second largest holding Omnicare (OCR). This aforementioned methodology wouldn’t take into account the $877 million in deferred taxes that Omnicare (OCR) owes (10% of market cap).

As a result of senior claims on cash flows like these, OCR has a price to economic book value ratio (PEBV) of 3.6. In fact, SAMVX’s holdings have a weighted average PEBV of 3.7. This number implies that the market’s average expectation for the profits of this portfolio’s companies is for profits to increase by 370%. Does this sound like value investing to you?

So in Summary:

SAMVX has poor portfolio management relative to its benchmark and style and high total annual costs despite underperforming its benchmark. Its self-classified style is also misleading based on a brief look at its top 10 holdings and its “value” focus is simplistic and flawed. These conclusions are perfect examples of what just a little diligence can tell you about whether or not a fund’s name is backed up by its substance.

Disclosure: David Trainer and André Rouillard receive no compensation to write about any specific stock, sector or theme.

Click here to download a PDF of this report.

 

About New Constructs

We find it. You benefit. Cutting-edge technology enables us to scale our forensics accounting expertise across 3000+ stocks. We shine a light in the dark corners of SEC filings so our clients can make safer, more informed decisions. Our stock rating methodology instantly informs you of the quality of the business and the fairness of the stock’s valuation. We do the diligence on earnings quality and valuation so you don’t have to. Learn more about New Constructs. Get a free trial. See what Barron’s has to say about our research.

In-depth risk/reward analysis underpins our stock rating. Our stock rating methodology grades every stock according to what we believe are the 5 most important criteria for assessing the quality of a stock. Each grade reflects the balance of potential risk and reward of buying that stock. Our analysis results in the 5 ratings described below. Very Attractive and Attractive correspond to a "Buy" rating, Very Dangerous and Dangerous correspond to a "Sell" rating, while Neutral corresponds to a "Hold" rating.

 

This article is from New Constructs, LLC and is being posted with New Constructs, LLC’s permission. The views expressed in this article are solely those of the author and/or New Constructs, LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 14:52:35

Posted by
Neil Azous
Founder & Managing Member
Rareview Macro LLC
Contributor
Macro

The World is One Trade - US Buybacks Under-Performing

The below illustration is the S&P 500 divided by the S&P 500 Buyback Index and overlaid with the US Treasury 5-30 year yield curve.

Capital redeployment is made up of share repurchases and dividends. Historically, during an interest rate hiking cycle stock buybacks are the first to be adjusted as a dividend cut generally requires a decision at corporate board level whereas a buyback can just be slowed or postponed.

Additionally, when the yield curve flattens to a certain point – and it is slightly different in each cycle – it is reflective of market participants becoming more reluctant to invest further out on the risk curve as they pull forward their expectations of the next recession. If you think of a risk curve simply as T-bills being the least risky asset and penny stocks being the most risky, during easy monetary policy and strong growth, investors move “out” on the risk curve into equities and lower-quality credit instruments, and when monetary conditions tighten and growth peaks, the opposite occurs. The end result is that credit spreads will start to widen across high grade and high yield, and equities tend to slow their ascent.

We have mentioned previously in Sight Beyond Sight that we view the next US monetary policy tightening cycle as one that will look very different from every other one in the past. As a result, we don’t look at the first 25 bps increase in interest rates by the Federal Reserve as the “first” hike, but more like the sixth or seventh in terms of how tight policy will be at those levels. What that means is we are more sensitive to how tight policy will be at a Fed funds rate of 0.5%, and what the collateral impact will be on other parts of the market, such as corporate issuance and investor risk appetite.

We realize a lot of noise is being made about corporate buybacks as the largest marginal buyer of US equities and to be clear we are not calling for them to stop. What we are saying is that while buybacks may still provide an inherent put option in a company’s stock price, that theme is no longer out-performing the broader market as it has done for the past three and a half years. That is important to recognize as that buyback under-performance would only accelerate if interest rates rose and credit issuance slowed. This under-performance is already happening despite the breathless pace of corporate issuance to buy back stock.

 

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

 

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 14:39:36

Posted by
Waverly Advisors, LLC
Technical/Quantitative Market Research
Contributor
Technical Analysis

Waverly Advisors Summary Stats

%Chg: percent change from the previous day’s close

SigmaSpike: the day’s change expressed as a standard deviation of the last 20 trading days. Values inside +/- 1.0σ are generally insignificant, +/- 2.5σ are large (for the volatility of the particularly instrument), and +/-4.0σ are very large.

C/DayRng: the current price as the pipe “|” within the day’s range. Can easily see at a glance if trading near high or low of the day. The day’s open is “:”. You can read more about this indicator in my book.

For sectors: analysis is done using the State Street Sector SPDRs (XLE, XLF, etc.) %Chg is the day’s change for the SPDR, and Excess is the Excess Return for the day (the SPDR’s return – the S&P 500 return).

 

For more information about Waverly Advisors please click here.

 

This article is from Waverly Advisors and is being posted with Waverly Advisors’ permission. The views expressed in this article are solely those of the author and/or Waverly Advisors and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 14:37:07

Posted by
Waverly Advisors, LLC
Technical/Quantitative Market Research
Contributor
Technical Analysis

Waverly Advisors Update: Largest Advances / Declines

The individual stock tables are simply ticker lists showing the largest values for the following criteria:

SigmaSpike: Largest volatility-adjusted moves. (Note that this measure, though we might call it a “standard deviation spike”, does not assume that anything is normally distributed. You’ll see a handful of +/-4.0σ moves on many days, and +/- 10σ do happen.)

GapOpen: The stock’s opening gap, expressed as a SigmaSpike.

FromOpen: Stocks often reveal stronger trending character by their relationship to their opening print, rather than to the previous day’s close. This screen evaluates the move off the open as a SigmaSpike.

 

For more information about Waverly Advisors please click here.

 

This article is from Waverly Advisors, LLC and is being posted with Waverly Advisors, LLC’s permission. The views expressed in this article are solely those of the author and/or Waverly Advisors, LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 14:32:44

Posted by
Waverly Advisors, LLC
Technical/Quantitative Market Research
Contributor
Technical Analysis

Waverly Advisors Afternoon Update

Largest Rel Volume: Stocks with the largest multiple of their 20 day average volume. Note that the “average” value for this number will change as the trading day progresses, but the relative position of a stock within this list should show some persistence. These are likely stocks in the news, or stocks experiencing a sharp flow of new information.

Largest Rel Ranges: First, we express each stock’s daily range as a % of the 20 day average range, and then choose the 10 with the largest values of that measure. These are the stocks with the largest daily ranges, relative to their own typical daily ranges.

Gap Analysis shows stocks with open gaps (today’s high < yesterday’s low or today’s low > yesterday’s high) remaining.

Stocks with Open Gaps (for the Day): ACM, ADSK, AEM, AGCO, AIG, ALB, ALL, AME, AMGN, AMZN, ASHR, AZN, BA, BEN, BERY, BP, BUD, BWA, CA, CAM, CAT, CB, CENX, CHK, CHRW, CNQ, CNX, COH, COP, CSC, CTSH, CVC, CVX, DB, DK, ECL, EOG, ETN, FCX, FIS, FLR, FLS, FNF, FOSL, FSLR, GG, GMCR, GOOG, GOOGL, GSK, HOG, HON, HSBC, IBM, INTC, IR, ITW, IYE, JEC, JPM, LNC, LVS, LYB, MA, MAC, MDT, MET, MMC, MON, MOS, MPEL, MXIM, NBR, NCR, NEM, NTRS, NVS, OI, OMC, ORCL, PAYX, PM, POT, PSX, PTEN, PWR, RDS.A, RDS.B, RES, RIO, ROK, RY, SDRL, SGY, SLW, SM, SNY, STO, STT, TCK, TD, TEX, TJX, TMO, TOT, TRV, TS(E), TTM, TWC, UCO, UN, UNM, UPL, VTV, WMT, WPZ, WYNN, XLE, XOM, YHOO, YOKU

 

For more information about Waverly Advisors please click here.

 

This article is from Waverly Advisors, LLC and is being posted with Waverly Advisors, LLC’s permission. The views expressed in this article are solely those of the author and/or Waverly Advisors, LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 13:45:38

Posted by
Singapore Exchange

Contributor
Futures

SGX MSCI Taiwan Futures Offers Opportunity to Ride Taiwan Stock Rebound

  • Taiwan equities saw strong inflows in May. According to the Financial Supervisory Commission, flows from foreign institutional investors into Taiwan stocks reached a record of US$203.6 billion as of 4 May.
  • SGX MSCI Taiwan Index Futures demonstrates high correlation with the top 5 Taiwan ETFs, which makes it a suitable tool for hedging. Its quanto feature is an advantage which protects investors from currency fluctuations.
  • The island state’s export-oriented economy should benefit from robust demand for Apple iPhones. GDP growth numbers were revised upwards by the government in February.

Taiwan Stocks Revive

After a year in the wilderness, Taiwan equities saw a revival in November after the municipal elections, as the rally in China ignited institutional investor interest in China-related companies.

“Investors looking for North Asia exposure should now consider Taiwan, a market that is unique in Asia in that it is the only one trading at a discount to its five-year history. All other markets trade at a premium,” HSBC wrote in a report.

SGX MSCI Taiwan Futures’ Notional Turnover

Source: Bloomberg

According to the Financial Supervisory Commission, foreign fund flows into Taiwan equity markets reached a record of US$203.6 billion as of 4 May. The numbers represent cumulative totals from January 1991 when the government first released foreign institutional funds flow data after lifting its ban on foreign institutions investing in Taiwan's stock market at the end of 1990.

On the back of strong foreign institutional buying, the weighted index on the Taiwan Stock Exchange repeatedly breached the 10,000 point mark on 27 and 28 April before profit-taking set in.

Year-to-date (30 April 2015), the Taiwan Stock Exchange Weighted Index (TWSE) and MSCI Taiwan IndexSM chalked up 5.51% and 5.29% total returns respectively.

Taiwanese equities are starting to offer value versus South Korean equities again, HSBC said in its report.

Taiwan’s benchmark stock index may rally 15% to approach a record this year as earnings prospects and a presidential election in January lure foreign funds, Tony Chen, vice president at Schroder Investment Management (Taiwan), said in a report.

But if the Federal Reserve kick-starts an interest rate hike cycle later this year, a stronger US dollar may prompt foreign institutional investors to move their funds out of the region, which could affect the performance of Taiwan stocks.

Growth Revised Upwards

Taiwan revised its 2015 economic growth target to 3.78 %, highest since 2011, from a preliminary growth estimate of 3.5%, the Directorate General of Budget and Accounting Agency said in a statement on 16 February. The economy expanded 3.5% the previous year.

The island’s trade balance stood at US$4.76 billion in April 2015, up from US$2.53 billion in January 2014.

Taiwan Trade Balance

Source: Bloomberg

For the moment, Taiwan's top-notch technology companies will benefit from the frenzied demand for Apple’s newest smartphones, as well as the upcoming iWatch. Taiwanese companies produce components that make up the bulk of Apple's iPhones, from semiconductors to camera lenses and home buttons and casings.

Apple, probably the biggest single customer of Taiwan’s tech suppliers, posted record quarterly revenue of US$74.6 billion and record quarterly net profit of US$18 billion. The company guided for revenue between US$52 billion and US$55 billion in the second quarter.

What is good for Apple should benefit electronics makers such as Taiwan Semiconductor (“TSMC’) and Hon Hai, which presently account for more than 30% weighting in the MSCI Taiwan IndexSM.

Although Taiwan’s economic data is not as strong as in the late 1990s, it does appear relatively firm compared with its regional peers, said Jefferies in a report.

High correlation between Top 5 ETFs and MSCI Taiwan IndexSM

The top Taiwan ETFs – IShares MSCI Taiwan ETF and Yuanta/P-shrs TW Top 50 ETF – have a combined capitalisation of more than US$5 billion as at end of March. Both ETFs demonstrated a weekly correlation of more than 0.70 with the MSCI Taiwan IndexSM over the past year.

Correlation between Taiwan ETFs and MSCI Taiwan IndexSM

Price Performance of Taiwan ETFs and MSCI Taiwan IndexSM

Source: Bloomberg

The iShares MSCI Taiwan ETF tracks the MSCI Taiwan IndexSM, while the Yuanta/P-shrs TW Top 50 ETF attempts to replicate the performance of TSEC Taiwan 50 Index. As the TSEC Taiwan 50 Index shares the top 10 constituents of the MSCI Taiwan IndexSM and their respective weightings, the correlation is fundamentally sound. In addition, the MSCI Taiwan IndexSM also shares nine of the top 10 constituents of the TAIEX Index.

Taiwan Indices

Source: Bloomberg (11 May 2015)

As the SGX MSCI Taiwan Index Futures uses the MSCI Taiwan IndexSM as the underlying, it has a strong correlation with the ETFs, which make it suitable as a hedging or trading instrument.

The SGX MSCI Taiwan Index Futures recorded a daily traded notional of  US$2.3 billion, out of which 15% is transacted during after-market hours. Trades are at an average bid-offer spread of 2.9 basis points during onshore trading hours, and 3.5 basis points during after-market hours.

The T+1 hours cover a good portion of the ETF trading hours, which makes the contract  an ideal tool for arbitrage or hedging against the cash portfolio.

Settled in US dollars, the SGX MSCI Taiwan Index Futures is a quanto product – a type of derivative in which the underlying is denominated in one currency, but the instrument is settled in another currency at some fixed rate. In other words, this quanto feature removes the FX exposure by settling all profits and losses in US dollars.

 

This article is from Singapore Exchange and is being posted withSingapore Exchange’s permission. The views expressed in this article are solely those of the author and/or Singapore Exchangeand IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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