Wednesday 5 March 2014

Looking for Trouble in Emerging Markets (Portfolio Buy)

For better or worse, the DIY Income Investor portfolio has a big bet on Emerging Markets.

However, 'Emerging Markets' is a real rag-bag of a label, including diverse states such as the BRIC and MINT countries as well as dozens of smaller administrations.

It's time for a review: is this reckless madness or inspired opportunism?

First, what are 'Emerging Markets'?
  • Wikipedia defines is as 'a country that has some characteristics of a developed market but is not a developed market'. Err... right.
  •  Investopedia is a bit more helpful: 'Emerging markets generally do not have the level of market efficiency and strict standards in accounting and securities regulation to be on par with advanced economies (such as the United States, Europe and Japan), but emerging markets will typically have a physical financial infrastructure including banks, a stock exchange and a unified currency.' A bit clearer...maybe?
  • Look at the map...

I like to think of EMs as the 'Wild West' of investing (or possibly the 'Wild East').

Some time ago I decided that basing the portfolio on the economic fortunes of the UK and the Pound Sterling was perhaps short-sighted. This led to a geographical diversification, facilitated mainly via Exchange Traded Funds (ETFs), which provide wide diversification at a relatively low cost and with no tax administration complications.

One portion of these ETFs is focused on Emerging Markets, including both dividend shares and fixed-income securities:

However, all of these are showing losses (in the case of EMDV, substantial losses) - although I have topped up 'on the way down'. So I'm a bit out on a limb here.

In addition the portfolio has other shareholdings that are aligned with the fortunes of Emerging Markets:

Why oh Why?

The reason for this enthusiasm in things emerging is simple: high yield. The strategy - such as it is - of the DIY Income Investor portfolio is to look for trouble - or rather to look for the higher yields that indicate that Mr Market is worried about particular investments. Having Mr Market lead us to these troubled investment opportunities, the only (!) thing left to do is make our own assessment of the risks and then maybe take a limited and calculated punt on his being over-cautious.

It will have escaped few DIY investors that one of the key developments of the past year has been a slump in the value of EM shares. There is a narrative to that which probably goes along the lines of:
  • reduced demand in China for raw materials from EMs
  • reduced demand in developed economies for the produce of EMs
  • financial or political instability in some of the EMs

However, this looks to me as if it has been overdone: the EMs have large populations and the most dynamic economies (unfortunately this can be dynamically down as well as up).

Ukraine if you want to

Events in Ukraine have shown how fragile investor confidence in these frontier markets can be. Putin's 'masterstroke' invasion of Crimea shows that even the most experienced and powerful leaders can screw up big time.

The markets reacted dramatically: down one day, up the next. In fact, as of the time of writing, it was remarkable how little the markets actually reacted to what was a textbook repeat of Hitler's invasion of Sudetenland. Mr Market has discounted the risks - he got is wrong on Day One but corrected on Day Two. Maybe.

Head for the sound of the guns

Having liquidated a chunk of the portfolio I am casting around for attractive opportunities. None seemed more attractive that CLIG (mentioned above). At a current yield of 10% this tops my yield league table. Moreover, the latest update (March 2014) portrays a situation that appears to be stabilising, plus a commitment to the existing dividend policy. There will be a further update in July 2014.

With my Wild West Stetson on my head I have bought some more CLIG - quite a lot actually, and in two lots - making this the portfolio's largest single holding.

Wish me luck!

[Purchase price: £2.5039 and £2.55]

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. DIY.

    Interesting. I too hold CLIG & APF. APF seems to be going through a transition from the days when it was run by a bunch of keen eyed accountants. However, I think the two years aligned with probs in Oz have put them on the back foot. The divi is always one of my key considerations and they have scored well here but the cover looks mighty thin for now. I hold EMDV & EUDV. The latter has done OK but the former has been a disaster! No more ETF's for me. Just too vague for me. Never quite know what the hell is going half the time. I shall stick to IT's and companies in the future, worts and all!
    Last, I picked up some JRS the other day. I posted a chart on ADVFN which may interest you. Of course, topping up with CLIG is a good move in view of the Russian debacle as they are bullish on that front and of course pay out a much better divi. And of course, they know what they are doing which I probably don't!


  2. Few stock market investors really believe in these stories.The Stock Market today is not the traditional stock market that we knew before.

  3. Thanks Vatsa

    Yes, interesting ETF options - but the yields are too low to fit in with my 'high yield' approach, which uses yield as a key indicator for finding interesting opportunities. Although that means that there are large parts of the market that I don't even look at, I find it helps me make sense of it all the market noise.

  4. Thanks for highlighting CLIG, looked at their numbers and decided not to take a punt on them:
    1) The forecast yield is too good to be true - shouts value trap
    2) The dividend cover is 0.8, less than earnings
    3) Their revenue and profit are falling rapidly
    4) Their funds under management are shrinking
    5) As investment managers, they have underperformed a falling market and in addition to shrinking NAV, it seems investors are pulling funds and allocated away from emerging markets and/or this investment manager
    6) After the RDR, investment trusts are cutting their management fees to remain competitive with fee-cutting OEICs and as a relatively small investment manager it is hard to see how CLIG will escape this unscathed.

    I like that fact that it is a small market cap and management have significant skin in the game but it is not enough to offset the above. I am playing the EM recovery story by buying VFEM instead. I think the Korean stock market in particular offers good value the MSCI Korea index trades at forward P/E of 8.9, Pr/book of 1.1, Not cheap to invest in though, best I found was CSKR with TER of 0.65%

    1. Thanks for the comments - always good to have another view!

  5. Hi DIY
    not sure why you're devoting more time/effort to EFT's. From what I can see you're stock selection was/is very good!

    1. Hi

      Good question. The short answer is that I testing a very simple income-oriented approach based on ETFs: combining diversification, high yield but requiring (hopefully) limited input. Basically I want to pass on something that is easy to manage!