Exploring Frontier Markets

Finding successful emerging market investment ideas has been a tough slog over the past year, but a necessary one for anyone operating on a global market mandate.

And you need just such a mandate, if you want to maintain a healthy, well-balanced portfolio.

Our task has been complicated by massive valuation shifts as a result of the billions of dollars that quantitative easing has been pumping into the emerging markets. As the Federal Reserve intended, savers haven been forced to stretch their risk tolerances to realize higher yields on their investments, but stimulus has had the effect of pushing them farther afield then the central bank expected.

As a result of that unintended consequence, from the time the US markets bottomed the emerging markets vastly outperformed the Dow Jones Industrial Index, topping out at a 136.4 percent gain versus a 51 percent increase for the Dow by mid-2011.

But since talk of the Fed’s taper began in earnest, those leadership roles are shifting yet again.

Global growth is still nowhere near its pre-recession base line and the outlook has become even murkier. The International Monetary Fund (IMF) cut its world growth forecast for this year and next to 2.9 percent and 3.6 percent, respectively. While the IMF cited budgetary squabbling in Washington, DC as one factor affecting its outlook, it also cited the prospect of fund tapering as a damper on emerging market growth as a major contributor.

Consequently, while developed world economies are not growing as quickly as they once did, they are at least growing again. Investors are having less trouble meeting their baseline expectations in mature economies. At the same time, emerging markets are likely to suffer from the slowing flow of “hot money,” weighing on their growth and causing another shift in market leadership positions.

As investors have grown more comfortable with the deve! loped markets and the outlook for Fed tapering, they’ve begun reaching even further out on the risk spectrum in the search for superior returns.

As you can see from the graph “Exploring New Frontiers” below, since early September the iShares MSCI Frontier 100 Index (NYSE: FM) has begun pulling away from the iShares MSCI Emerging Markets Index (NYSE: EEM).



The frontier markets haven’t been getting much respect for the past couple of years, as hot money has run up many emerging market indexes. Because of those attractive gains, there was little reason to take a chance on diving into what are generally perceived to be higher risk markets.

Paradoxically, though, the shifting economic tides are actually serving to make the frontier markets less risky. Since the frontiers haven’t attracted hot money in recent years, they won’t suffer from the reversal of those flows. At the same time, since they’re still relatively isolated in terms of global trade given their miniscule size, they aren’t as subject to the vagaries of global trade flows.

That makes frontier market investing more about domestic demand and growth in those countries, resulting in very different market performance when compared to the developed or even emerging markets.

While there is always the risk inherent in the fact that frontier markets are relatively small and illiquid, these markets show low correlations to emerging market indexes and even less to developed market ones. Those correlation gaps have also been widening over the past month or so, as growth expectations for both the developed and emerging markets have been declining while the frontier market outlook has been stable.

Prospects are increasing for the Fed to begin tapering sooner rather than later; the latest Fed minutes show that it is likely to begin in the next six months or so. As a result,! we&rsquo! ;ll start hearing a lot more from the talking heads about frontier markets in the coming months. That will contribute to a frontier market rally just as this “chatter” helped drive the emerging markets over the past few years.

For now, iShares MSCI Frontier 100 Index is both the easiest and purest play on the frontier markets. While it is heavily weighted towards the Middle Eastern countries of Kuwait (25.7 percent of assets), Qatar (18.7 percent) and the United Arab Emirates (14 percent) by virtue of their size and liquidity, it also provides exposure to several of the other frontier markets found in Africa, Eastern Asia and South America.

The fund’s top sector weighting is financials (55.6 percent of assets), since these holdings tend to be among the first listings on young stock exchanges thanks to their need for capital. However, it is closely followed by infrastructure plays such as telecommunication companies and industrials, which lay the groundwork for growing economies.

So while the fund will be more volatile than developed market plays, at this stage of the economic cycle it also offers more potential upside than emerging market ones.

For risk tolerant investors, iShares MSCI Frontier 100 Index is a good buy up to 41.

'Attaboys' for websites that ran Mohammed cartoons

  #JeSuisCharlie floods social media NEW YORK (CNNMoney) Many news organizations stayed away from the Charlie Hebdo cartoons depicting the Prophet Mohammed following this week's attack on the French satirical magazine.

But a number popular news websites eagerly republished the controversial images.

The Daily Beast's executive editor, Noah Shachtman, said his site hasn't drawn any negative reaction for its slideshow of Charlie Hebdo's most "shocking" covers, which included a 2011 image of the prophet.

"All I've heard is attaboys," Shachtman said.

The Huffington Post's Washington bureau chief, Ryan Grim, said he believes the site's massive readership expected to see the cartoons.

"I haven't seen any serious negative reaction, and my sense is our readers were equally unsurprised and gratified that we published them," Grim said. "There was really never any question that we would, but it's still important to make the statement that terror won't chill free speech -- in fact quite the opposite."

Gawker editor-in-chief Max Read said the reaction to his site's republication of the Mohammed cartoons has been muted. According to Read, Gawker took far more grief for a memorable 2013 article.

"Unlike our piece publishing the results of a public-records request for the names of New York gun owners, which garnered us almost non-stop threatening phone calls to our tips line, the Charlie Hebdo images have resulted in silence," Read said.

Lachlan Markay of the Washington Free Beacon said his tribute to Charlie Hebdo, which included the magazine's Mohammed cartoons, generated a considerable response.

"I've received more emails on this than on any story I've ever written," Markay said. "With a single exception, they've been entirely positive. One person even offered to send me a check to help with office security and legal expenses. I said I didn't think that would be necessary."

He added, "The one negative reaction I received was actually from a self-described Christian who objected to offensive religious imagery in general."

All four journalists said their publicati! ons haven't received any threats for publishing the images.

The depiction of Mohammed is a serious affront to some Muslims that's led to violence in the past.

Two other high-profile outlets, The Washington Post and BBC, declined to comment when asked about the response to their use of the images.

Regurgitated Private Equity, Billions in Secondaries

Most investors generally think that private equity firms exit most of their investments by initial public offerings or by outright resale of a whole company. There is actually another private equity exit strategy, and that is the secondaries market for pieces of prior private equity deals.

The Carlyle Group LP (NASDAQ: CG) announced this week that its AlpInvest Partners reached $4.2 billion for its secondaries program. The AlpInvest Secondaries Fund V closed at its cap with $750 million raised. In a sense we would consider this regurgitated private equity where one private equity firm acquires stakes of existing companies from other private equity sellers. Generally these are thought of as stakes of a company which were involved in a private equity syndicate that have come for sale by one of the prior buyers, but is also very common is that some of the limited partners of a syndicate (or effectively the private equity clients) are looking to exit certain positions.

The news that the AlpInvest Secondaries Program has reached $4.2 billion is far more than we would have assumed. Many of these deals are never really discussed because the stake sales are not exactly being filed for sale at the SEC and the books are generally not being shown to the public. This $750 million raised was listed as the hard cap and was above the initial target of $500 million, bringing in 18 new investors which included sovereign wealth funds, public pensions, corporate pensions, insurance companies, asset managers, and foundations from around the world.

The secondaries market in private equity is rather large, but the public often never gets to hear about it. This will show you just how large it is: AlpInvest said that it has committed $9.1 billion through some 84 transactions in secondaries in the past 11 years.

Do not take the term “regurgitated” as a bad meaning here because it is merely for simplification. This secondaries effort for private equity brings both investment and liquidity solutions to private equity investors and the partners. It is a much needed sector of private equity, particularly during parts of the business cycle when the IPO markets and M&A markets are not going very strong.

Many other private equity firms use the secondaries markets as well. The Blackstone Group LP (NYSE: BX) was shown earlier this month by PEHub to have launched a sixth fund which was targeting $3.5 billion to $4 billion. That is even after a deal earlier this year to acquire Credit Suisse’s private equity efforts.

Many more firms participate in this market as well.

Investing in TIPS with Less Risk

Funds that invest in Treasury inflation-protected securities, or TIPS, were supposed to be insulated from big bond market selloffs. At least that's what a lot of investors thought. Even in 2008, a miserable year for most investment categories, the Barclays U.S. TIPS index lost only 2.4%.

See Also: Floating-Rate Notes Are Treasury's New Option for Savers

Then came the bond market's recent mini-meltdown. The TIPS index tumbled 7.1% in the second quarter. That was almost five percentage points worse than the Barclays U.S. Aggregate Bond index, a measure of the overall investment-grade portion of the market. A lot of investors have responded to that unexpected drubbing by yanking money out of what they mistakenly thought was a low-risk investment.

But instead of giving up on TIPS, they should consider a new index fund launched last October. Vanguard Short-Term Inflation-Protected Securities Index (VTAPX) offers inflation protection but comes with relatively little of the interest-rate risk of longer-term TIPS funds. The new Vanguard index fund invests in TIPS with maturities of up to five years. (Vanguard also launched an exchange-traded version of this fund; its symbol is VTIP.)

Why worry about inflation now? After all, inflation is currently running at less than 2% annually —below its long-term average of 3%, much less the double-digit rates it reached in the 1970s. But history tells us that inflation can surge at any time. And the time to buy inflation protection, as with any investment, is when it's dirt cheap. That's the case today, with the prices of ten-year TIPS assuming annual inflation of about 2% over the next decade. If inflation is higher, TIPS will rise in value.

Let's back up a bit. What are TIPS, anyway? They are Treasury-issued securities designed to protect against inflation. Like ordinary Treasury bonds, they make regular interest payments to investors. But the coupons on TIPS are lower than those on ordinary Treasuries because the government promises to pay you more in the end based on what happens with inflation. Every six months, the value of TIPS goes up by the increase in the consumer price index. So if you buy TIPS at $100 and the CPI rises by 1.5% over the next six months, Uncle Sam adjusts the value of your TIPS principal to $101.50. Because TIPS's principal rises, you also receive slightly higher semi-annual interest payments. TIPS are issued in maturities of five, ten and 30 years, with a minimum initial purchase of $100, but many investors purchase them through funds, such as Vanguard Inflation-Protected Securities (VIPSX).

The problem is that TIPS march to two different drummers. Not only do their prices rise along with expectations for inflation, but they also rise and fall along with bond yields. When yields spike, as they did in May and June, TIPS crater. "Investors should take it for granted that TIPS have interest-rate risk," says Michelle Canavan, who covers TIPS funds for Morningstar.

When Treasury yields were declining — as they had virtually without pause since TIPS were first issued in 1997 — TIPS funds did just fine. Over the past ten years, Vanguard Inflation-Protected Securities returned an annualized 5.3%, beating the Barclays U.S. Aggregate Bond index by an average of 0.5 percentage point per year. What many investors doubtless didn't realize was that they were making money, in part, because bond yields, including TIPS yields, were plummeting. (All results in this article are through July 24.)

Bond prices and yields move in opposite directions. So when bond yields rose sharply between May 2 and July 5, TIPS nosedived in price. What's more, TIPS were hammered even worse than ordinary Treasuries with similar maturities. Why? Because the market drove Treasury yields higher but continued to foresee benign inflation. That was the worst of both worlds for TIPS investors.

Like most bond funds, the short-term Vanguard TIPS fund is subject to interest-rate risk. But the short maturities of the TIPS it owns limits that risk. If short-term TIPS yields were to rise one percentage point, the price of the short-term TIPS fund would be expected to fall about 2%. In contrast, if long-term TIPS yields were to rise one percentage point, the long-term Vanguard TIPS fund would probably plunge more than 8%. The long-term fund has lost 6.3% over the past 12 months. In the second quarter, the long-term fund plunged 7.3%, but the short-term fund lost just 2.4%.

In a normal bond environment, TIPS, as well as regular Treasuries, would boast much higher yields and, consequently, much lower sensitivity to changes in interest rates. But these are not normal times — with the Federal Reserve keeping short-term interest rates near zero and buying $85 billion a month in government-backed bonds to keep long-term yields low. (Indeed, some shorter-term TIPS now sport negative yields. That doesn't mean the Treasury is going to take money from you for owning TIPS. It means your return for owning a TIPS will be less than the inflation rate. For example, if you invest in a TIPS with a negative 0.5% yield and inflation runs at a 2% annual rate for the time you hold the bond, your annual return will be 1.5%.)

We've had a 30-year bull market in bonds. I think it's probably over given the selloff in May and June. But thanks to Vanguard, there's still a way to get inflation protection without getting killed in what I think will be a protracted period of rising interest rates.

One last point: Unless inflation soars as it did in the 1970s, TIPS aren't going to make you rich. Short-term TIPS are good, conservative instruments. But assuming normal inflation of, say, 2% to 4%, I think stocks will provide much more generous returns.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

Investors should buy Gold on any correction

Last month's sharp sell-off set gold into a consolidation mode. During the month, gold prices traversed in a broad range of $100 from USD 1,725 to USD 1,625. Considering the significant influence that Dollar movements had on gold prices, gold appears to have regained its negative correlation with the US Dollar. Another rather interesting cause of the large swings noticed in gold markets has been "The Bernanke Factor" - the comments and criticism unleashed by Fed Chairman generating market reactions causing volatility in gold and other asset markets as well.

Since Ben Bernanke's prior public speeches did not hint at another round of Quantitative Easing, there was no expectation of any further monetary stimulus in the near term. As a result, gold prices dipped sharply at the end of last month. However, he recently defended the Central bank's very low interest rate policy and the continuing of its accommodative policies, and also spoke about how the US economy needs to grow more quickly in order to bring down unemployment. This recent statement gave rise to speculations that money-printing exercises would continue, and thus, reinstated investor's preference for gold, causing prices to appreciate. 

The volatility in gold prices can be credited to this lack in clarity from policymakers, who despite what they may say, prove in action that they still believe that the economy can only be strengthened through more monetary inflation, further credit expansion and increased government spending. 

Other factors such as the developments in the Euro zone and geopolitical concerns, also influence the value of the dollar and in turn that of gold.

Though it may appear that gold is moving along with risk assets, it is actually simply following its historical relationship with the dollar. The immediate economic concerns have been papered over by the policy makers and therefore before we see a fresh bout of crisis, this movement will likely continue until then. 

The possibility of a decline in the gold consumption of key countries, viz India and China, could also have an adverse impact on gold markets. The economic growth target announced by China is probably the lowest in seven years and has worked against global growth, curbing prospective demand for commodities including gold. On the other hand, the Indian Government, in a bid to improve its surging current account deficit, has further raised its customs duty by 2%. Duties and taxes now add more than 5% to the gold price. The government has also introduced an excise duty of 1% on non-branded jewelry and a consumer tax of 1% on cash transactions for gold purchases exceeding Rs. 2, 00,000 in value. 

While the industry did go on a nationwide strike to oppose these custom hikes, the shutting of shops only further contributed to a decline in demand. Even markets expect that weighing on prices, demand would be impacted, at least in the short term. However, demand from these key consumption centers would likely remain buoyant over the long run baring any short term sentimental impact on demand in the near term.  

Outlook: The global economy is shrouded in various uncertainties. The long term issues of rising deficits and debts are still in want of some meaningful resolution. The western world is still grappling with a massive and unrealistic heap of sovereign debt. These high levels of debt, combined with slow economic growth have compelled central banks around the world to 'print' more dollars (and other currencies), stimulate the economy and inflate away the debt burden with an intentional plan of currency devaluation. Countries such as Iran who has stubbornly carried on with its efforts to develop nuclear plants despite all the talks and sanctions impinged on them; have added to the prevailing uncertainties.

In the light of these macro events, gold appears to remain favorable, as an effective portfolio diversifier. Investors should keep allocating to gold in a systematic manner and could use any corrections as an opportunity to buy in.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Celgene: European Decision Not Best Case Scenario, Not Worst Case Either

Celgene (CELG) today announced that a European regulatory committee had issued a positive opinion on its cancer drug Revlimid. Bernstein’s Geoffrey Porges and Wen Shi explain the significance:

Boston Globe via Getty Images

This morning, the European Committee for Medicinal Products (CHMP) announced a positive opinion recommending the expansion of the Revlimid EU label to include front-line usage in multiple myeloma. The new indication reads “Revlimid is indicated for the continuous treatment of adult patients with previously untreated multiple myeloma who are not eligible for transplant.” The positive CHMP opinion is an important step as Celgene looks to significantly expand Revlimid’s market potential in the EU. This is consistent with expectations but is not the best case scenario for Celgene since it excludes the transplant eligible population.  However, the label is not confined to the elderly or any other population subgroup, and therefore is better than the worst case scenario.

Given the market’s reaction, that sounds about right. Shares of Celgene have gained 1.1% to $117.74 at 2:28 p.m. today, just about in line with the gains in other big biotech companies. Regeneron Pharmaceuticals (REGN) has risen 1% to $428.20, Amgen (AMGN) has advanced 1.1% to $170.34 and Biogen Idec (BIIB) is up 1.5% at $359.11.

3 Ways to Retire Early

There may be nothing more in keeping with the American Dream than achieving a level of financial security that allows for early retirement. Yet most people fall short of that goal. In a bid to change that, three of The Motley Fool's analysts share their best ideas on how to retire early. Read on to learn what they suggest.

Leo Sun
The key to retiring early is to start saving as early as you can.

A Forbes analysis revealed that if people started saving 10% to 15% of their annual income at the age of 20 to 25, they were generally able to retire comfortably (i.e., with their current living standards) by their late 60s. For those who wait until age 40 to start a savings account, that percentage soars to 43.2%. But if a person can save up 30% to 40% of their annual income at the age of 25 -- which might be achieved by scoring a high-paying job, living frugally, or working overseas -- an early retirement could be a realistic goal.

Those alarming figures highlight the importance of contributing to your Roth IRA and building up a stock/fund portfolio as early as possible. Maxing out your annual Roth IRA contributions and your 401(k) contributions, then investing the remainder in well-researched stocks or mutual funds could pave the way toward an early retirement.

That plan doesn't take into account student debt, job changes, or family emergencies. But the key takeaway is to constantly have an annual savings percentage in mind and to strive to meet that goal every year.

Matt Frankel
If you want to retire as early as possible, it's important to take advantage of the retirement savings options available to you, such as your 401(k), IRA, or other tax-advantaged retirement account.

For the 2015 tax year, the IRS will allow you $18,000 in elective 401(k) contributions (or $24,000 if you're 50 or older), which doesn't include any employer match or mandatory contributions. And you can save an additional $5,500 ($6,500 if you're 50 or older) in a traditional or Roth IRA. If you're self-employed, there are several other tax-advantaged options to you, such as a SIMPLE IRA, SEP-IRA, or individual 401(k) plan, so look into those options if they're available to you.

Just to put the power of these accounts and their tax-free compounding into perspective, consider that if you max out your IRA and 401(k) contributions ($23,500 per year) and achieve 8% average annual returns on your investments -- a realistic return, given that the S&P 500 has averaged 9.4% over the past 20 years -- you'll have over $1 million in just 20 years. After 27 years, you'll hit the $2 million mark. And these returns don't even consider any additional 401(k) contributions from your employer.

So, by contributing as much as possible to the tax-advantaged retirement accounts available to you, you can achieve early retirement more easily than you may think.

Dan Caplinger
As both Matt and Leo point out, investing as much as you can as early as possible will certainly improve your odds of being able to retire early. But the part of the equation that many people never address is clamping down on your expenses as much as possible, getting any debt you've incurred paid down as soon as possible, and then setting aside as much of your paychecks as you can to go toward your investment accounts.

Learning to live with less has a dual benefit in terms of retiring early. Not only will you be able to save more, but you won't need as large of a nest egg to support a more modest standard of living than you would if you had more expensive tastes.

How best to achieve reduced expenses varies from person to person. Some people are comfortable living in lower-cost areas of the country or moving to different places across the globe that are more affordable. But you don't have to make extreme moves in order to save more. In many cases, simply being mindful of the money you spend every day will put you in a position to make painless cuts that will leave you with more to put toward savings -- and thereby hasten the day you can retire for good.

One great stock to buy for 2015 and beyond
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Stocks: 4 things to know before the open

Click chart for in-depth premarket data. LONDON (CNNMoney) What does the market have in store today?

Here are four things you need to know before the opening bell rings in New York:

1. Strong dollar: The U.S. dollar was strengthening versus other global currencies, and gold prices were declining by about 1%.

Simon Smith, an economist at FxPro, said the dollar's strength against other currencies is now at a level "last seen in mid-2010 when the euro was getting hammered in the early stages of the eurozone crisis."

The dollar was 0.4% firmer against the euro, continuing a recent trend driven by growing divergence in monetary policy between the U.S. and the eurozone, where the economy has stalled.

2. Bad Apple: Shares in Apple (AAPL, Tech30) were showing signs of weakness premarket after the company withdrew its latest software update following widely reported technical problems. Social media is also buzzing over customer reports that the new iPhone 6 Plus is bendable.

Apple's popular products frequently face a backlash soon after their release, but then complaints from die-hard consumers tend to calm down.

3. Mixed signals: U.S. stock futures were barely budging Thursday after posting a solid rebound over the previous session. On Wednesday, the Dow Jones industrial average gained 154 points, the S&P 500 rose 0.8%, and the Nasdaq closed 1% higher.

European stock markets were broadly firmer in early trading, tracking Wall Street's gains and helped by the dollar's strength.

But shares in retail chain H&M (HNNMY) fell by 4% in Sweden after the company warned of weak September sales because of unusually warm weather.

Asian markets ended with mixed results. The Nikkei was a stand-out performer with a 1.3% gain.

4. Earnin! gs and economics: Nike (NKE) will report quarterly earnings after the closing bell.

The U.S. government will report weekly jobless claims at 8:30 a.m. ET.