Monday, November 24, 2014

International Quant Movers

After their strong performance on Friday and since domestic equities failed to maintain their daily highs, it’s not surprising that the ETFG list of Behavioral Quant Movers would include some of the larger international ETFs.  

Call it “Central Bank Friday” beginning in the east where the PBOC cut rates for the first time since 2012 amid slowing growth to Europe where Mario Draghi’s statements that inflation needs to be brought back to 2% “without delay” lit a fire under European equities that had already been trending higher following his press conference on 11/6.

The larger iShares MSCI EMU ETF (EZU) saw its behavioral score rise 16.5 points while the Euro-hedged WisdomTree Europe Hedged Equity Fund (HEDJ) was up nearly 25 points and has risen all the way to number 11 on our list of top 25 ETF’s behavioral scoring ETFs where it joins 7 other international ETFs.

And while China may have been the only emerging market on anyone’s mind last Friday, the real action was south of the border where the ETFG Latin America Index was up 5.41% as investors found a whole bunch of new reasons to love Brazil again.  In many ways, the story of Brazil and Mexico closely resemble the European model; in Brazil the story of rising rates, weak growth and political uncertainty surrounding the re-election of Dilma Rousseff contrasts sharply with Mexico where a stronger economy with its deep ties to the U.S., combined with the election of Enrique Peña Nieto and promises for major reforms to the state-dominated energy sector has helped make the country a darling for international investors.  

Mimicking the relative underperformance of perennial problem child Italy to relatively more stable Spain, before Friday’s rally the iShares MSCI Mexico Capped ETF (EWW) is up .68% in 2014 compared to a negative 3.41% for the iShares MSCI Brazil Capped ETF (EWZ) while over the last three years EWZ has an annualized return of-5.97% to EWW’s 10.41%. 

What prompted this stunning reversal of relative momentum?  On the surface, EWW enjoyed a solid 1.44% advance on Friday as investors digested lower economic growth forecasts for 2014 and 2015 while EWZ rallied sharply, up 6.83% and with the Real gaining ground against the dollar for the first time in almost a month on news that President Rousseff may be close to a new economically savvy finance minister.  

But on deeper inspection, the real story may be the shift in political instability from Brazil to Mexico. President Peña Nieto continues to deal with the fallout from allegations of crony capitalism as well as the murder of 43 student teachers while the instability surrounding the recent elections in Brazil as well as alleged corruption at Petrobas begins to fade.  Given the weight of Brazil in the largest Latin American tracking ETF, the iShares Latin America 40 ETF (ILF), at 45% compared to Mexico’s 31.7% and the relative underperformance of EZW to EWW over the last three years (-5.97% to 10.41%), a change in relative momentum could help lift ILF from its multiyear momentum lows versus the S&P 500.       

While the recent outperformance of Brazil among Latin American markets may yet prove to be short-lived, it does raise the question of whether Mexico can expect to trade-in line with its peers to the south or its larger trading partner to the north.  Given the highly integrated nature of our two economies, Mexican stocks could find themselves lagging other international markets if U.S. equities do begin to lag as investors seek out markets with more liberal monetary policies.  Porfirio Diaz may have it right after all.

Thank you for reading ETFG Perspectives!

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