No Point Diversifying?

There are still some who think it is worthwhile to diversify their stock holdings into various countries. If we were to look at the falls from highs to lows during the subprime crisis (USA) in 2008-2009, and the recent sell down owing to the Euro-crisis (July till now), there is really nowhere to hide.



The drop from highs to lows during the USA Subprime mess:

AMERICAS

United States (SPY): -47%

Canada (EWC): -54%

Mexico (EWW): -59%

Brazil (EWZ): -59%

Chile (ECH): -51%

Comment: The US markets actually held up pretty well, it is their neighbours that fared poorly. I guess if you are smallish and is largely dependent on trade/tourism/consumption by the bigger affected country, you will be marked down heavily.

EUROZONE

Germany (EWG): -54%

France (EWQ): -51%

Italy (EWI): -60%

Netherlands (EWN): -57%

Spain (EWP): -57%

Austria (EWO): -64%

Belgium (EWK): -62%

Comment: Surprisingly, Europe fared a lot worse that the US. There could be a multiple of factors, some of the subprime mess did occur in EU nations and a large number of big EU banks were involved as well. However, methinks the biggest pull down must be due to a selling of equity positions to stem the tide of outflow of funds to compensate those who withdrew monies from managed funds. Again, the smaller you are, the bigger the hits (Austria, Belgium, Italy).

EUROPE

United Kingdom (EWU): -53%

Switzerland (EWL): -44%

Sweden (EWD): -50%

Russia (RSX): -74%

Comment: Herein lies the big difference for countries which chose NOT to be in the EU. They did remarkably better. Yes, they did not have as large a banking exposure (even though UK did) but each country gets their report card assessment based on their own economics and their ability to adjust and tweak their financial levers - something the EU countries could not do so easily. Russia is a completely different kettle of fish of course.

MIDDLE EAST AND AFRICA

Turkey (TUR): -66%

Israel (EIS): -40%

South Africa (EZA): -53%

ASIA

China (FXI): -52%

Japan (EWJ): -39%

Hong Kong (EWH): -48%

Taiwan (EWT): -46%

Malaysia (EWM): -34%

Singapore (EWS): -53%

South Korea (EWY): -57%

Australia (EWA): -54%

India (EPI): -54%

Thailand (THD): -51%

Comment: Most also will fall in tandem. Japan fell the least, probably because it was already falling for the past 15 years and did not really perk up prior to the crisis. Plus the yen was seen as the next best safe haven after the USD. Malaysia fell the least after Japan, wonderful fundamentals? I believe it says a lot about the "lack of foreign institutional investors" in Malaysian stocks. Secondly, the way big local funds have been controlling more and more of the indexed stocks. Both are highly not positives.

The drop from highs to lows from July 2011 till now:

AMERICAS

United States (SPY): -21%

Canada (EWC): -28%

Mexico (EWW): -27%

Brazil (EWZ): -34%

Chile (ECH): -37%

Argentina (ARGT): -41%

Colombia (GXG): -23%

Peru (EPU): -25%

Comment: The Euro-crisis is just dragging along everything.

EUROZONE

Germany (EWG): -38%

France (EWQ): -36%

Italy (EWI): -39%

Netherlands (EWN): -30%

Spain (EWP): -32%

Austria (EWO): -44%

Belgium (EWK): -29%

Ireland (EIRL): -27%

EUROPE

United Kingdom (EWU): -23%

Switzerland (EWL): -23%

Sweden (EWD): -34%

Russia (RSX): -42%

Norway (NORW): -35%

Poland (EPOL): -41%

Comment: This time around a Euro-crisis will drag also those which chose not to be in the union, so the markets are affected whether you are in it or not, at least the country would not be burdened with "funding the bailout".

MIDDLE EAST AND AFRICA

Turkey (TUR): -33%

Israel (EIS): -32%

South Africa (EZA): -25%

Egypt (EGPT): -38%

ASIA

China (FXI): -34%

Japan (EWJ): -19%

Hong Kong (EWH): -30%

Taiwan (EWT): -26%

Malaysia (EWM): -23%

Singapore (EWS): -30%

South Korea (EWY): -34%

Australia (EWA): -28%

India (EPI): -33%

Thailand (THD): -32%

Indonesia (IDX): -58%

New Zealand (ENZL): -24%

Vietnam (VNM): -26%

So, there is really no good reason to diversify anymore? I guess you must still diversify, but NOT across countries. You need to diversify and pick the industries. If you are in developed nations banking, you are dead. But if you are in palm oil, you are still OK.  Diversification has a lot more to do with the industries you select rather than the countries you invest in. 


The other thing to remember is that correlation will be very high during the initial weeks and months of extreme volatility, investors will only try to distinguish between valuations proper after the volatility has subsided.



Diversification for currencies exposure, thats a potent subject. I think its only worthwhile to consider that if your portfolio is more than a couple of million USD. Safest havens: the HKD, the SGD, the Ringgit. HKD because it is still stupidly pegged to the bloated USD, thus undervaluing the real HKD effectively. Very soon, they will have to switch the HKD peg to a basket of currencies which will include the yuan, the euro and the yen - which in effect will be a sizable revaluation.

Liquidity Creeping Into The Markets

One sure fire way to anticipate a bull run is access to liquidity. I have been hearing this more than a couple of times over the past two weeks, bankers are flying in from Singapore and HK to offer decent loans to listed corporations at highly undemanding rates.



The last 6-7 years saw much of the liquidity in Asia gravitating towards supporting property loans. Hence equity markets did not get much of a boost from the excess liquidity in the system. There has been a dramatic shift in property outlook in HK, Singapore and Malaysia. Most have gone neutral or hold from buys. What that means is that banks are too flushed with liquidity and have to keep them working.

Local banks are doing the same but apparently the foreign banks are a bit more aggressive. Ringgit loans of RM50m to RM300m can be had at 2% or 3% below BLR. The juiciest one is USD loans can be had at just 0.1%. Many of the top tier companies do not really need the funds, so the bankers are going second tier and soon I think not so blue companies as well.


The natural chain of events would be that once they take the loans, they have to put it to work, usually expansion or asset acquisition, hence more corporate developments. I see this as the beginning of a bull run cycle and it would probably take another 2-4 months to ripen.


Liquidity is a massive force in charging a bull run. You have been warned.