Prices of the largest and most diversified U.S. equity index known as the S&P500 continue to increase faster relative to company earnings, leading to an overvalued U.S. market. The problem is what to do next.
Graph 1
If the trend in graph 1 continues, the chances of a market correction will continue to increase, and if a correction occurs, investors will lose value on their investments. The biggest problem with corrections is that investors holding the most stable companies with the best fundamentals tend to be driven down along with the market. This type of risk is known as systemic risk. Although this presents a buying opportunity, it could also mean taking considerable losses for other investors.
Graph 2
Figure 1
Running for Cover
To avoid this problem, many money managers have already started to shift their investments to European markets. However, this will not necessarily lead to investment outperformance due to the positive correlation of U.S. and European markets in the past year as shown in graph 2. Even more worrisome is the fact that the chance of another European crisis is very high[i], which could eat away at investment returns. More importantly, volatility lowers the risk-to-reward ratios, such as the Historical Sharpe ratio, as shown in Figure 1.
Emerging Markets
One asset class that has the potential to outperform the S&P500 over the next few years is known as the emerging market economy (EME). Regrettably, there are a limited number of emerging economies that can be accessed by the average investor. The best way to invest in these markets recently has been through equity traded funds (ETFs). These ETFs provide opportunities to investors that would like to invest in a single asset group. In the case of emerging markets, ETFs can offer low-expense ratios that are relative to actively-managed mutual funds. ETFs allow the investor to buy a single financial product that reflects the economic growth of a single country and that is composed of different industries (utilities, financials, industrials, etc.).
Graph 3
Unfortunately, many emerging market ETFs have been underperforming over the past few years due to the low commodity prices. Even worse, many emerging market economies suffer from being overdependent on one or more commodities. For example, Nigeria is highly dependent on the price of oil for its economic growth. This over-dependence has made ETFs specializing in single commodities popular with investors, but if this is the case, investing in a single commodity may be the smarter move. Graph 3 shows that the Brent Crude Oil Spot Price correlates strongly with the Global X MSCI Nigeria ETF price. As a result, if the goal is to outperform the market on a risk-to-reward basis, single commodity country dependent ETFs may not be the best choice if the ETF fails to offer diversification among various industries.
The right emerging market ETF would need to have a significant chance at being positively impacted by near future events. It would also have to be diversified enough to have a significant chance of outperforming the S&P500 on a risk-to-reward basis. More importantly, the ETF would need to serve as a hedge against S&P500 systemic risk.
Graph 4
China
Since the end of 2015, Graph 4 shows that industrial metals such as zinc and copper have signs of recovery[ii]. As the biggest consumer of industrial metals, this recovery has been driven by Chinese investment in their infrastructure. This spur in demand should continue to increase this year as the Chinese party will inaugurate its 19th National Congress party in October[iii]. Historically, change in leadership can create political upheaval within the Chinese party, which is why investors expect the Chinese government to continue to increase infrastructure spending in the hopes of maintaining political stability. Additionally, China’s infrastructure initiative, “One Belt, One Road” (OBOR), should keep driving up the price of industrial metals such as zinc and copper[iv][v]. The problem with zinc, however, is that China is the largest producer and consumer of zinc in the world. This makes it much harder to profit from this metal without a significant amount of systemic risk. The bottom line is that investing in zinc exposes individuals to China’s production and consumption whims. The result is that investing in zinc would overexpose the investor to China; then, we must look at the biggest producer of copper, Chile.
Chile
Although 60% of Chile’s export is copper, it only drives 20% of its GDP, leaving room for industry diversification[vi]. 63.4% of Chile’s economy is moved by the service sector and 32.4% by industry but only 4% by agriculture[vii]. This is an important fact because economies that are driven by services tend to have a greater elastic labor force. Additionally, Chile’s human capital is much higher than other emerging market countries[ix]. Although the country is politically stable, high tax policies and regulations have started to have an impact on the Chilean economy. Fortunately, this can be reversed given a change in leadership[x].
Sebastian Piñera
In November of this year, Chile will be having elections, and leading the polls is Former President (2010-2014), Sebastian Piñera[xi]. This self-made billionaire and Ph.D. Harvard-trained economist is promising pro-business policies and double digit growth if he wins the presidency[xii]. He argues that the Chilean economy is in trouble, not because of fundamentals, but because of over-taxation and over-regulatory policies originated by the current president, Michelle Bachelet[xiii].
Donald Trump
A tax plan, that would include infrastructure spending in the U.S. could also drive up the price of copper, which should positively influence the Chilean economy[xiv]. Although a bill has not been presented to the Senate yet, House Representative Paul Ryan assured that a bill would be introduced before August of this year[xv]. In another interview, Treasury Secretary, Steven Mnuchin stated that an infrastructure bill should be signed by the end of this year[xvi]. During the presidential election, Donald Trump promised that one of his biggest priorities would be a one-trillion-dollar infrastructure bill[xvii]. If this bill is passed, it could spur a copper rally as investors speculate on the future price of copper.
Graph 5
Copper and the USD
Graph 5 shows that copper tends to have an inverse relationship with the USD, which serves as a hedge against inflation for U.S. investors[xviii]. Although many metals, including gold, generally hold this inverse relationship, few commodities will be influenced in the next couple of years by many political and economic variables such as copper. If this inverse relationship stays constant, a decline in the USD could be good news for copper.
International Capital Asset Pricing Model
The most popular ETF with exposure to the Chilean economy is called I-shares MSCI Chile Capped[xix] (ticker symbol: ECH). Before analyzing ECH, we can use a version of an old finance model to figure out whether we should look into this ETF further. The international CAPM model can serve as a quick benchmark before spending too much time looking into the potential foreign investment.
Figure 2
Figure 3
Figure 4
Using Ishares Core S&P500 (ticker symbol: IVV) as the benchmark:
Using 10-year bonds for the U.S. and Chile:
We get the following:
5.97% represents the minimum yield that we need to consider this investment.
Graph 6
Assuming a best case scenario of $79 per share for ECH, from Graph 6, we can calculate the holding period yield (HPY):
Figure 5
Because 79.54% is greater than 5.97%, and given the economic and political events taking place in the near future affecting copper and Chile, we can consider taking a closer look at ECH.
Treynor Measure
Looking at the three-month Treynor measure, we can see that ECH is becoming a good hedge against IVV.
Figure 6
Using ten-year bonds as our risk-free rate, we can calculate the three-month Treynor measure for ECH:
Now we can compare this Treynor measure to IVV:
Since the goal is to hedge against systemic risk from the S&P500, a negative Treynor measure due to a negative beta means that ECH has outperformed IVV on a risk-to-reward basis for the past three months[xx]. Although this is only one measure of risk-to-reward performance, ECH currently seems to be performing as a hedge against IVV.
Price Multiples
Looking into ECHs’ biggest sectors, utilities represent 26.6% of this ETF while financials represent 19.95%. Recently, a bill was introduced to the Chilean Congress proposing the adoption of Basel III[xxi] Rules, which should give the Chilean financial sector access to more capital by reducing sector risk if the bill is passed into law. One of the biggest financial holdings of ECH is Banco Santander Chile (ticker symbol: BASC), which accounts for 6.54% of this ETF. Using price multiples, we can find if this bank is correctly valued.
Using the 10-year average PE Method:
Figure 7
Using the current PS Method:
Figure 8
We can find our Historical Multiple Valuation Method using the PE and PS Method:
Figure 9
Because the current price of BASC is currently $25.53[xxii], we can see, using the PE and PS method, that historical-multiple valuations indicate that Banco Santander Chile is approximately 12.8% undervalued.
Graph 6
Given the market and economic conditions in the U.S., and the market correlation with European markets, ECH proposes a diversified alternative, given the global events taking place in the near future, to outperform the S&P500 on a risk-to-reward basis. The biggest drivers of this ETF currently seem to be dependent on future Chinese infrastructure investment, the upcoming Chilean elections, Donald Trump’s infrastructure plan, and the ability of Chilean banks to attract more capital, assuming they adopt new banking regulatory standards. This does not mean that you should invest in ECH but that some risk-to-reward measures indicate that investors looking to outperform the S&P500 on a risk-to-reward basis should consider looking further into ECH.
[i] https://www.ft.com/content/8fe6f7b6-5687-11e7-80b6-9bfa4c1f83d2
[ii] http://www.mining.com/copper-lead-zinc-prices-stay-boil/
[iii] https://www.ft.com/content/cca9dd28-20de-11e7-a454-ab04428977f9
[iv] http://www.mining.com/copper-best-performing-commodity-2017-analysts/
[v] http://www.cnbc.com/2017/05/22/one-belt-one-road-why-the-real-value-of-chinas-project-could-like-in-soft-power.html
[vi] http://www.economist.com/news/business/21576714-mining-industry-has-enriched-chile-its-future-precarious-copper-solution
[vii] https://www.cia.gov/library/publications/the-world-factbook/geos/ci.html
[viii] http://reports.weforum.org/human-capital-report-2015/report-highlights/
[ix] http://reports.weforum.org/human-capital-report-2015/report-highlights/
[x] https://www.ft.com/content/6e681350-2378-11e7-a34a-538b4cb30025
[xi] http://www.reuters.com/article/us-chile-politics-left-idUSKBN16T27J
[xii] https://www.forbes.com/profile/sebastian-pinera/
[xiii] http://www.emol.com/noticias/Economia/2017/05/03/856663/Sebastian-Pinera-propone-bajar-el-impuesto-a-las-empresas-y-crear-cuerpo-colegiado-en-el-SII.html
[xiv] http://thehill.com/policy/finance/330430-trump-tax-plan-likely-to-include-infrastructure-spending-report
[xv] http://www.newsmax.com/Newsfront/paul-ryan-tax-reform-long/2017/04/19/id/785320/
[xvi] http://money.cnn.com/2017/04/20/news/economy/mnuchin-tax-reform/index.html?category=economy
[xvii] http://fortune.com/2017/02/28/trump-congress-address-infrastructure-investment/
[xviii] https://www.thebalance.com/how-the-dollar-impacts-commodity-prices-809294
[xix] https://www.ishares.com/us/products/239618/
[xx] http://investexcel.net/treynor-ratio-excel/
[xxi] http://www.reuters.com/article/us-chile-banks-idUSKBN1932BC
The article went into great detail on emerging markets and how they work. The graphs in combination with their explanations were especially useful in helping me understand the subject a little bit more. I still would not be able to use the information for my own benefit because I would need a lot more studying and information on the subject. It would also be helpful to see real life examples of how these ideas are applied in a way that can be related to anyone.
I like the article that was presented here because it helps understand what the best option for the nation is in terms of investing its money in welfare and how much they should do. I also agree with the issue that it presents, which is that the national market right now is overvalued and that this is going to have serious consequences in the end, just because I feel that this is going to bring problems in the future, if it has not already started to bring problems as it is. I was surprised to find out that the author thinks that Europe is going to have an economic crisis in the future, as this was something that I had not even thought about, but I am curious to look better at the graphics that were presented and see what the main differences between the current American economy and the current European economy are to see where these challenges could arise from.
I had a very little knowledge about the economy, but this article is very detailed in explaining how it works. Many countries have different provide their own resource which increases their economy in some type of way. China was is known for their zinc which is a very important resource.This company also explains how company earrings S&P500 are beginning to increase faster than its usual rate
This article is very interesting and informative. It describes how the S&P500 might experience losses in the near future and how we as investors should be prepared for it. Also european markets might not be the best option to switch over to since they seem to be positively correlated with the US as well. It talks about looking into emerging markets as a safety if a crash occurs in the U.S Market and the S&P. Then it talks about how even though many countries are interesting to invest in the best countries should be the ones that offer diversified resources and have the best risk/reward ratio. ETFs hold assets such as stocks, commodities or bonds in different industries. The author focuses on Countries ETFs and lists countries like China or Chile to invest in. I learned that the chilean economy has very good potential and I will be looking more into their ETF and their growing economy.
This article brings up any interesting points about investing in indexes such as the S&P500 and other related markets. The interesting thing that I saw was how the S&P 500 is currently over valued and how that can cause many issues for investors especially if there is in fact a market correction. It is interesting to me to see that the investors that where invested in the S&P and markets alike are likely to invest in the European markets when there is a possibility in a correction in the United States. Also the fact that the market index can cause issues for even the most responsibly managed companies. Another interesting thing that really stuck out to me was the discussion of ETF’s and how the countries producing them can be greatly affected if the countries are to dependent on the resources and aren’t diversified in other ways. Another interesting thing was the issue of the unknowing of what will happen in these over seas economies due to them currently electing new officials. This was really interesting to me because you are seeing a lot more the countries that make a decision to elect a new leader and they put new taxes n production or other things and it causes a spiral of issues for their economy.
The best way to find value in emerging markets is tons of research on specific assets that without a doubt have usability for the near future or even present day. It seems ETFs were a very helpful and reliable source of information concerning emerging markets which unfortunately has went downhill due to people not willing to pay for such information. Without ETFs economists also use a risk-to-reward basis which could contain high volatility in market but the returns would be very great if all goes in favor. The example of china being the largest producer and consumer of zinc in the world and Chile being the biggest copper exporter. This is a very good example because it states how Chile has room to grow due to diversification because copper is only 20% of its GPD while China doesn’t have much room at in dealing with industrial metals. It uses systemic risk because there is not much diversity in China and diversity is key in investing, you never want all your money in one asset. If you diversify one asset could go down as another goes up rather than risking major money loss.
After reading this article a few times what I understood is how emerging markets can be beneficial and profitable and also how it can be risky for investors. This article also points out the importance of emerging markets and helps to understand the risks associated with it. After reading this article I became more familiar with equity trade funds (ETFs) which are the best way to invest in emerging markets.If we look back a few years we can see that the emerging market EFTs are under performing which is caused by low commodity prices. If a country is over dependent by a commodity then the emerging market economy suffers. In cases like that it is much better for investors to invest in single commodities. There are a lot of factors that go hand in hand with investing in emerging markets. That is why a new investors need to take precaution and build experience as they go.
Vy Thuy Le Pham
In the concern of losing value on their investment due to the S&P500, many investors shift their investment to European markets. However, compared to the high risk of another European crisis, emerging markets have been more profitable and solid investment opportunities. The investors could predict the effects that cause the changes in price, the market value, government policies and so on, to create perfectly reasonable investment plans, but faulty assumptions can turn out to be spectacular losses. This article mentions China being the largest producer and consumer of zinc in the world, as well as the richest natural resource of copper of Chile, which make these countries become extremely valuable markets. It would be true if the promise of the President Trump of a one-trillion-dollar infrastructure bill has not still been an abstract goal with the amount of $21 billion so far, which could not increase the price of copper to get an influential impact on the Chilean economy. Similarly, Chinese relations with the U.S. are not so smooth recently, including their trade war and East Sea dispute. Therefore, the future political changes in these emerging markets should be taken into account by investors in order to avoid the losses.
The systemic risk is a possibility of an event a company could trigger server instability or collapse their entire industry or economy through buying an opportunity losing investors. Those who manage money can prevent this from happening from shifting the investments to European markets. Merging markets is one asset that has potential to outperform over a couple of years. This is a great way to improve any investors but the factor are needed to be viewed more than once and is risky business. Although, there is always an alternative to the market.
This article speaks about how the S&P 500 is currently overvalued since it is growing faster relative to company earnings. I found it interesting that the market is being so heavily overbought. I also found it interesting that investors like to move to European markets to minimize risk, but this might not be the time to do that since economists are expecting a crisis in European markets. After reading the article, I see a lot of opportunity in investing in emerging markets. The article speaks about various potential investing opportunities to offset the potential correction the S&P 500. A lot of the potential opportunities for investing in markets such as Chile is dependent on political actions, but it does seem like a good hedge against the potential dip in the S&P 500. I do see the potential for gain in these markets, but it is still risky because there are a lot of factors that go into each ETF going up. I did understand the argument for ECH. The background of the leading candidate gives a sense of confidence that he will be able to help that economy, which could result in an investing opoortunity.
This article gives a very interesting and resourceful points on the over earning of the United States. They talk about what S&P500 is how they could handle the situation in the future. If the fluctuation in the s&p500 continue then it can lead to people losing money, due to the stock that put into a company. Also known as a systemic risk, or the collapse of an economic industry. To avoid the down fall of the economy or industries lots of consumers are moving to Europe to join their market. To be able to merge the two markets it is best to fit the idea of the equity traded fund or the ETF. The ETF has mutual funds, low expenses and single assets. However, the ETF has not been working lately due to the low increase of prices of products. Many companies are joining the market and keeping the same price for the items. They would like the ETF to overall help the S&P500.
The article talks about interesting points such as investing in indexes like the S&P 500 and other related markets. The S&P 500 is at this moment overvalued because it is growing much faster than company is getting in income. That of course causes issues with investors. Such as that is why most investors in the S&P and similar markets are looking into move to European markets. In doing so risk is minimized significantly. Many though still do have their doubts in doing so. Many economist see a possible meltdown happening in time for the European market. Another possibility is looking into emerging markets. An emerging market such as Chile is a good example. The biggest issue though Chile’s market is heavily dependent politically wise. Risk is quiet high but return as well could be high. Markets are very familiar with ETF’s and though used highly, must not be significantly depended upon as nations can see high damage otherwise.
The article speaks about various potential investment opportunities to offset the potential correction the S&P 500. If the fluctuation in the s&p500 continues then it can lead to people losing money, due to the stock that put into a company. The S&P 500 is at this moment overvalued because it is growing much faster than a company is getting in income. It is still risky because there are a lot of factors that go into each ETF going up causing issues that most investors in the S&P and similar markets are looking to move into European markets. “The investors could predict the effects that cause the changes in price, the market value, government policies and so on, to create perfectly reasonable investment plans, but faulty assumptions can turn out to be spectacular losses.” (Pham) I agree with this statement completely and couldnt have said it better myself.
In order for investors to get a bigger gain on their profits they decided to invest in foreign markets where the value would be ever increasing. Even if these markets would yield more profits, the investors are also at risk of losing their investment value since these emerging markets might not be as stable and could fail at anytime unlike the markets that have been there longer. This is a risky investment since not only would you be gambling on your profits you might lose it in another market instead of putting your investment into your country’s market, even if you lose profits it would have gone back into your own market instead of another. ETFs have also been under performing so that should be another really why investors should stay away from emerging markets just because of how unpredictable they can be. In the end, investors should play it safe and stick with their own market so as not to lose anymore than they could of.
In my opinion, stocks, investments, and money markets are very risky business in the first places all comes with a higher risk than I am willing to pay for. Knowing that the S&P500 is increasing which lead to the money market in the U.S. being so desperately overbought and that this is a severe problem to all of those who invested their money (investors). To lower the risk of losing ones’ money, most investors move their money to downplay their risk by going to places like Europe.The suggestion from the article was for investors to put their money into a more broad and comprehensive market that does not depend on specific people, groups , business or place. Which I perceive to be a good suggestion considering that all investment is a risk to take and you don’t want to give it to someone who is just going to lose all of your money in the end or a business that will shut down.
The article speaks volumes about the overvaluation of the S&P 500, which is not much surprise to me regarding the current tax rates in the United States giving those companies that comprise of the S&P 500 to keep growing at a rate exceeding that of the companies profits. Not only do I believe that this will lead to a correction sooner than later, but that it could cause a significant recession we have not seen in decades. I also found it interesting that due to the overvaluation that many investors are moving to Europe, but as well as emerging markets such as Nigeria. Furthermore, this article makes the point to be aware and wary of investing in markets where the country controls a majority of the world’s supply, meaning they control the amount, therefore allowing inflation in price overnight. With ETF’s in emerging markets making profound statements around the world, it would be ideal of investors, as stated in the article, to invest now to get a better return later in said country’s economic boom.
The article posted by ejtimana informs and explains how company earrings (S&P500) are beginning to increase even faster than the usual rate, but that is not always the best thing. Using visualizations to display the S&P500’s Price-Earnings Ratio, ejtimana points out the fact that if market corrections stay increasing, investors would lose value in their investments. One tactic used is managers shifting their investment over to the European Markets, but one big risk being made is that if another European crisis occurs, companies will take a loss affecting many of their investors causing a loss of net worth. Equity Traded Funds (ETF) tracks stocks, bonds, and assets. ETFs are different to mutual funds because their value changes throughout the day, keeping money in and out. Ejtimana explains that ETFs give opportunities for investors to rely on one group of assets. The advantages to this are buying a single financial product can help reflect economic growth in a country and can offer low-expense ratios. However, recently ETFs performance has been decreasing causing companies to stress due to them depending on the emerging market. An example would be Nigeria, depending on oil for its economic success. Shown in graph three, Nigeria’s ETF price works strongly with the Brent Crude Oil SPot prices. Due to this situation, the goal to outperform the markets would be on a risk-to-reward basis, meaning that a single country depending on ETF would not be the best choice. In order for it to be affected positively, emerging markets would need to have a big impact on future events. This article gives a great understanding of emerging markets and how it affects not only one country but many others as well.
To begin with, it is interesting to see how an opportunity for certain individuals (buying opportunity) can also lead to a loss for other investors. One may predict a positive or negative correlation in the US/European markets, yet anything can happen at any given moment. As the article states, ETF’s are an excellent way to invest in the emerging market economy. However, ETF’s can consist of low trading volumes, international limitations, and tax implications. Furthermore, the article proves that tt can be difficult to profit from certain resources, especially when a certain country is the main producer and consumer; this will lead towards a critical amount of systemic risk. In the upcoming years, very few commodities will be directly affected by economic and political variables. Overall, the opinions represented in this blog are very interesting and many examples are given to further your knowledge in emerging markets. Investors will continue to “invest” their money into emerging markets for many years to come.
I enjoyed reading the article and helped stimulate my thoughts on the article. I first think that a bill that would improve the infrastructure in the United States would benefit the economy in the short run and long run. Reason why is because the constant jobs needed in all aspects of construction would improve the unemployment rate, which would improve job growth, second by increasing the job growth, investors would invest more into the economy and the market. All the construction would build structures, and buildings that would be needed or used by companies which would as well improve the job growth. I would have to read more in detail about the proposed one trillion-dollar infrastructure bill being introduced to congress, but it would be a good idea. I feel the market would expand in increased improvement if the United States improved their infrastructure. The Chile market would improve drastically if the copper usage would increase for years to come in trade with the United States.
This article was very enjoyable and I liked learning about the different markets that the world possesses. The Chilean economy seems in prime position to flourish with better leadership and this could definitely help the world. I enjoyed reading about all of the emerging markets. I believe that shifting investments from the American markets to the European markets is not the answer for investors because as professor Timana mentioned, the risk for an impending European crisis is not worth the reward. I do not think that it is fair for investors to be taken down with the market corrections specially since they invested in a more stable company. If it were up to me, I would stick with the American market or invest in Nigeria since it is the smarter move to invest in a single comodity. I also believe that President Trump’s tax plan will attract investors in the copper field, as the price of copper is set to increase after the tax plan.
This article tries to explore the high reward to risk ratio from commodity investments in the emerging markets such as China and Chile with high reservations due to the instability of their institutional systems. But the balance tilts heavily toward the lost for inexperienced investors like for those sucked up in the IPO stocks (initial public offering) hype in the Y2K era.
The S&P 500 index increases so fast and above the company earnings. This overprice market creates a systemic risk of money loosing for investors after a market correction. As a result, the investors change to European market even though its crisis risk is high.
In the article, I am interested in the metal big producers are China and Chile. China consume large amount of metals such as copper and zinc to build their infrastructure. I have learned that China is the biggest producer of zinc in the world and China steel is one of the good that President Trump apply the tariff on.
The article offers many formulas that I guess they are very helpful for people who work or study on stock market.
This article was very expressive and presented helpful formulas which helped stay focused while trying to read and understand it. The first thing I took notice of is that you said we are trending toward a market correction, which I agree with. It seems that we will have been trending toward another big recession for awhile due to top companies running the market. With Europe kind of following our footsteps it seems essential for stockholders to watch their investments closely. ETFs seem to be a light of hope the way they are presented, if they can get around their difficulties. Hopefully President Trump’s plan can support the emerging market economy. I have faith, especially with all the new jobs he has created and how the stock market as a whole has looked since his term began. It’s also interesting to think that we’re living in the middle of a world where the global economy can be watched so closely, even from our phones.
Investing in emerging markets is believed to produce a a significant return above inflation especially in the coming decade. The recommended method of investing into these stocks recently is through equity traded funds, which these funds will provide major opportunities for investors to invest and any assets. Recently retirees have been tempted to invest in emerging markets because that sector is at an all time low since 2007. This makes it hard for those retirees to invest into emerging markets, especially since equity trading funds have been “blowing away the competition”. Investing in emerging markets has a risky side to it too because theres relatively little amounts of history about that economy’s stock, from which to draw conclusions. Its also risky to invest in because assuming the future is only a part of the vicious cycle, with greater 20% chance that the EPS will fall by 20% and any given time or year.
Gabriel Cedeno
In the article, the writer explains the systemic risk in which investor lose value in their values with the company due to the market correction. The graph illustrated the increase in equity index leading to an overvalued market of America. To solve the problem investors of U.S started shifting their investment to Europe but there also crisis ratio is very high. An investor should invest through ETFs, and it allows to invest in single asset group and reduce the risk of losing investment. But many ETFs also performing not that good the reason behind this underperformance is dependence on one or more than one commodities, for example, Nigeria whose economic growth is highly dependent on the oil prices. Against systematic error, there is a need to use ETF as a hedge.
In China metal like copper & zinc is showing recovery. This recovery is driven by infrastructure. Change in the leadership and government leaders to the hope for an investor that there will be an increase in the spending on infrastructure. China is both the biggest producer and consumer of zinc which makes it difficult to increase profit without systematic risk. Therefore investing in zinc can overexpose to the investors. On the other hand, Chile is the producer of copper where 63.4 percent economy is from private sector 32.4 percent is from industry and only 4 percent from agriculture. This is the significant point for Chile because the economy with the large private sector has a more elastic labor force.
A tax plan by the government of Donald Trump can increase the value of the copper than the zinc. Another graph shows the negative relation between Copper and zinc. The different calculation has been made in the article to shows the economic condition of the US and comparison to Europe which conclude that the ETF is currently driven from the China infrastructure where Chile will attract more capital, but it doesn’t indicate that the investor should invest in Chile.
Before reading this article, I didn’t know a lot about how our country and emerging markets affect each other. Today, our market is so directly connected internationally to other markets that the relationships are either beneficial or not. I believe there is more risk in these investments but diversification in investments on different commodities with better outlooks could be of help with systematic risk. ETF’s are interesting in allowing investors to invest in emerging markets. The connection between the U.S., China, and Chile were interesting as well as I read this article. Politics do have an impact on the market and, with this information, chances for the commodity copper to be the next thing in the market are high and positive, but that depends on what happens next on the market and in politics. ECH’s chances of outperforming the S&P500 I think would help boost investors involved in emerging markets and probably encourage much more; however, things don’t always turn out as planned concerning the market. Thus, when investing in emerging markets, I think it would be best to research, watch, and diversify with multiple potential investments before investing.
Before I started this class, I didn’t know much about the economy. This article really explains a lot because of how detailed it is. For example, the different resources each country provides. I didn’t know China was known for their zinc or Chile for their cooper. Also, this article helped me understand how politics also influence trade and the market. it really shows how much loss will occur, I agree with the author.
On the whole, the analysis makes sense to me. The market is clearly undervaluing ECH, and as such it should be profitable whenever the market corrects. However, there was an incongruity in the future analysis of the country that I found confusing. The article mentions that single commodity countries are a bad investment because their ETF’s are so closely tied to the value of that commodity that directly investing into the commodity is safer. The article goes on to focus on Chilean copper production as it makes up for 20% of their GDP. This seems a little contradictory to me. The article claims that the price of copper will go up soon, so why not invest directly to copper? Perhaps it is to reduce risk, as there are so many industries within Chile. But if that was the case, I wish the article would go into more detail about the other industries.
This article describes how the S&P500 might experience losses soon and how investors should be prepared for it and find alternative solutions. It mentions if a single commodity country dependent ETFs fails to offer diversification among various industries, it may not be the best choice if the ETF. For example, China is the largest producer and consumer of zinc in the world. This makes it much harder to profit from this metal without a significant amount of systemic risk. But due a tax plan, it could also drive up the price of copper since it would include infrastructure spending in the U.S and eventually influence other countries. Nigeria is highly dependent on the price of oil for its economic growth, so if they were to decrease their sales, their economy will suffer. It is not always that way. In Chile, 60% of export is copper, but it only drives 20% of its GDP.
In this article I found it interesting how investor in a way protect themselves from a risk known as systemic risk by investing in EME through ETFs. It also caught my attention how everything is connected, what happens in one country can affect what happens in the market like for instance the example with zinc and copper with the three countries China, Chile, and United States of America. Since China is the biggest consumer of industrial metals I would imagine it would have an impact what investors investigate when discussing the price of these industrial metals. It is insane how China is one of the largest producers and consumers of zinc in the world. With Chile being the largest exporter of copper, it helps with the market to increase the price. Sebastian Piñera seems like he knows what he is talking about and with Chiles economy being impacted by high taxes and regulations I truly think he can fix that problem.
The S&P 500 is on a bullish trend which is a double edged sword at the moment; it’s good as people are making a lot of money and American companies are performing well. However the average investor is skeptical as bullish trend can be turned into a bearish very quickly and they can lose a lot of their profits and equity. Investors are looking to pull out and diversify their portfolio either to emerging markets, European markets or in the commodities and industrial metals such as copper, zinc, oil and gold etc. Nigeria, China and Chile are the prime destinations of these investors. An investor needs the collateral guarantee that his capital will be safe and secure plus making profits for him. As these countries do provide some economic or political stability. Nigeria’s economy is struggling due to the decline in global oil prices. Chile is politically stable at the moment and that can be a good option for the investors as its newly elected president has pro-business policies. China’s massive infrastructure projects such as OBOR (One Belt One Road) will definitely take the prices of Zinc and Copper to new heights and this will be a great news for investors. Donald Trump has promised to pass a one trillion dollar bill for infrastructure which will further strengthen the confidence of the investors in precious metals in the near future.
This article really shows not only how our economy is affected by the economies of other countries, but also how important international commerce is to develop and maintaining countries. What happens in a smaller less developed country can greatly affect what happens in a bigger more developed country like America. For example, if a natural disaster were to hit Chile and halt the production and exportation of copper for a significant amount of time, China would greatly suffer due to it being the world’s largest consumer of copper.
I think that if done correctly, countries have the opportunity to utilize ETF’s to their advantage to speed up their development. But only if they can find ways to lower the percentage of systemic risk attributed to their country. By doing so would better the risk to reward ratio giving investors more of an incentive to invest in the ETF’s of a country. My better monitoring the activity of the global economy, less developed countries could set up specific niche ETF’s to help the development of certain markets in their economies.
-Before anything else, this article was very detailed and ideas are backed up well with fact.
-Regarding the article, it was impressive how by looking at data and graphs could let you know so much about a country. The article was helpful in mentioning that the Europe market is not as stable as we once thought and it is struggling just like the US. I agree with the author since the EU experienced the whole Brexit thing and it sure affected their market. Moreover, I also agreed with the point that the market with soon come to a market correction (or recession) because of interest rates and intense sanctions between major countries. In fact, everything comes to a full loom will bust.
-The article also points out the system of risk and reward, which I think all markets should have. In my opinion, the system of risk and reward does keep the market going because of the end goals that people aim to.
-Last but not least, I feel like all the datas above shows the potential of multiple short-runs benefits but does not really go into the long-term effects they might have.
The article is very attractive me with all logistic information. The introduction states the main idea of the article that is very helpful to help me understand the meaning straightforward. It talked about the prices of the largest and most diversified U.S. equity index known as the S&P500 with all statistic graphs showing detailed numbers is very interesting me. Through the graphs and the article, I understand that the main issue is with the investors. For example, most of the investors in the S&P and similar markets are looking to move to European markets. Also the article pointed out the comparison between many countries and show the formula that help me understand more clearly.
I did not know much about macroeconomics before this class. This article gives me an understanding of emerging markets and how the United States market is connected to international markets.
I fully understand why the S&P500 is overvalued and have downfalls. I feel as an investor we should still invest in the US market and not go elsewhere. When I say “not go elsewhere” I mean each market has downfalls, risks, and they change all the time.
This article really shines light on the delicate nature of investment. The overvalued U.S. market, which moves ever closer to correction, can potentially attract new investors or lead others to ruin. Based on the given information, since both of the markets are closely tied together, it does not seem wise overall to shift investments to European markets, especially with the impending threat of a crisis. Additionally, while the emerging market ETFs pose the potential of reward, it seems like a degree of luck is involved in investing in the right one. Though they clearly present a unique and lucrative opportunity for those looking to slither into foreign markets, chance is heavily at play.
The thing I found most interesting about this article is the minutia involved. The success of an investment can depend on a very small unforeseen occurrence, infrastructure, or something as large as a change in power, as seen with China and Chile.
The article starts by giving an interesting approach towards analyzing the way these investors will value their funds. Does a good job at showing the major influencers due to the market or the influences countries can have on each other. We can see a visual representation of the overvaluing and negatives that may surely come. Gives an understanding of how things that on the outside may not seem so influential, such as politics, can create an impact on the markets for the better or worse. We see the example of the proposed bill from the Republicans that have a very large effect on a country like Chile. Many countries look towards the U.S to establish a foundation of price for the existing market. An article can even serve as a warning to investors. It provides information to help analyze the risk that may be at stake. Loads of information followed with visual examples really help establish the clear message and reveal a true influence on how sensitive markets can be.
This article points out the fact that some people have been looking towards European markets instead of US markets as nn alternative market to the S&P500. Because of the close relationship between the United States and Europe this presents a problem. An interesting option for an alternative is the Emerging Market Economy. This market has it’s own problems too. Under performance from over dependence, low prices on commodities. On the plus side zinc and copper look promising in this market. Although zinc is tied closly to the chinese economy. Chlie is the number one producer of copper. If countries use ETF’s correctly, they can help development. Giving investors more incentive by lowering their systemic risk would benefit them greatly. I wished the article would look into the markets of other industries. President Trump’s tax plan should encourage investors to invest in the copper field because the price of copper should increase after the tax plan.
– Elijah Boivin
I think Its really cool that you can make money from emerging countries but there is a ton of math behind seeing if its possible for a country to be profitable or not and what if your numbers are wrong and you wasted your money away on a country that is still 50 years away from seeing a economic boom. It just seems pretty risky to me and i dont know if i would trust myself to do it. Also what if youre planning on having a certain person become elected and they dont win or win and keep the same policies. I can defiently seem the money behind it being a lot but i just think its too risky to trust myself with numbers Its a great article though and a very good read!
This article is informative and well-designed because aside from stating the current stating the global economic scenario, it also gives a reasonable alternative for investors. Meaning that because S&P 500 has potential to increase systematic risk, people should look towards emerging markets like Chile. This helps investors see that there are more options than pledging to the S&P 500. The article also does well in that it is upfront with all the situations that have to go right in order for the complete success of an emerging copper market like Chile. This being Chinese investment in its infrastructure and American politics promising economic plans. As well as Chile’s internal happening that have to occur such as having politician Sebastian Pinera winning office and changing Chile’s economic focus to its copper industry. Showing this helps to see what needs to go right helps highlight the true risk-to-reward mentioned in the article, as many times people will just see the consumption of copper in China’s industry and the production of copper in Chile and will choose to invest on these facts alone.
This article is informative and well-designed because aside from stating the current stating the global economic scenario, it also gives a reasonable alternative for investors. Meaning that because S&P 500 has potential to increase systematic risk, people should look towards emerging markets like Chile. Through the graphs and the article, I understand that the main issue is with the investors. For example, most of the investors in the S&P and similar markets are looking to move to European markets. The article also points out the system of risk and reward, which I think all markets should have. In my opinion, the system of risk and reward does keep the market going because of the end goals that people aim to. And lastly, this article helped me understand how politics also influence trade and the market. it really shows how much loss will occur, I am really agree with the author.
This article helped me understand the very high risks and rewards of emerging markets as Brian previously stated. This article has convinced me however that investing is much more tricky than I thought. You really have to pay attention and realize where you are putting your money. I thought the graphs as well as the examples in this article where very useful and easy to understand like the one about Nigeria being dependent on oil to grow their economy therefore single commodity ETF’s are the way to go.
In my opinion, given the information in the article above, I think investing in emerging markets could be a very good decision.The graphs and explanations are helpful in understanding the reasons behind changing investments from the S&P 500 .The S&P 500 may no longer be the most desirable investment; the emerging markets appear to be a viable option, based on the formulas and explanations provided. The fact that you mention that the S&P is indicating a trend toward a market correction is significant and investors will need to change their strategies in order to avoid heavy losses should a correction occur. I think it’s important to observe the trends carefully and shift investment money to protect it when we can. If we can follow the guidelines above and accurately predict which to invest in, we could make a fair amount of money. This article was quite informative; personally I don’t have any experience with emerging markets so this was a wonderful learning experience. I never knew
This article goes over how S&P 500 is overvalued right now because it is growing really fast. This means that when the market corrects itself, investors will lose value on their investments. What investors are doing to avoid this problem is that they are switching over to European markets. The article does go over, however, how the European market may not be the best option for investors either. Turns out, the United States market and the European markets are connected and there is a correlation between the two. This just goes to show how interconnected worldwide markets are. The events of the United States market is directly affecting the European market. The author provides alternative options to investing in the United States and European markets. They suggest that investors should look into other global markets like those in China or Chile. Investors just have to pay attention to the market and politics.
Alexia Mathew
This article goes over how S&P 500 is overvalued right now because it is growing really fast. This means that when the market corrects itself, investors will lose value on their investments. What investors are doing to avoid this problem is that they are switching over to European markets. The article does go over, however, how the European market may not be the best option for investors either. Turns out, the United States market and the European markets are connected and there is a correlation between the two. This just goes to show how interconnected worldwide markets are. The events of the United States market is directly affecting European market. The author provides alternative options to investing in the United States and European markets. They suggest that investors should look into other global markets like those in China or Chile. Investors just have to pay attention to the market and politics.
In my opinion, the article points out really good facts and data that help me understand what is going on the world economy. According to the article, people tend to lean toward European market although it is just as unstable as the United States market. In other words, it is perhaps better to invest in America rather than somewhere else.
Also, investment is a tricky system of risk and reward that promise to award people with high-risk investment a bigger out come. Overall, what you do with your investment can mostly tell you the results you will get.
This article is very well structure and give good information needed to understand and help people decide on which route they would take given the pros and cons of each route. As an investor, I was thinking that single commodities from emerging markets would be a good choice however, with this article I have learn that single commodities would have risk and rewards too due to only having one export and depending on the one instead of multiple commodities to help boost the economy of a nation. Hopefully with this information, many investors can choose the best choice for them and the economy.
I took this article more a guideline for trading stocks in America or even internationally. I see it as looking in each country and seeing how to benefit off the information retrieved. For example, say Trump decides to set a reform to repair Americas infrastructure, if I’m looking for a nice stock to get in this could potentially be very beneficial by looking at it from emerging markets. This is because I know America would import certain materials for a project this big, so say China has a large steel production and America plans to get steel from them, then I would see it as a sign to shift investments over to China steel in hopes of making a nice profit. Now that is simply a made up scenario, but after reading the information in the blog I feel that looking at emerging markets could potentially be very beneficial to individuals that read it correctly.
While diversification is obviously a wise strategy, concentrating your investments in an economy such as Chile’s would be more a play on the commodities market which could be appropriate at certain times, however in the long term not true diversification. This is due to the fact that Chile’s GDP is 5% of the US GDP and it has a population of 18 million, vs 360 million and I feel that it would be risky to diversify using this investment only. Having said that in certain times ECH might be a way to add to your portfolio and take advantage of the rise in copper and other metals. Diversification is everything when the timing is right. You just have to be careful not to have too many of your eggs in one basket and the S&P 500 even though it can get pricey, typically corrects down to a historical P/E level.
I think we all can understand how America’s investment in copper is more advantageous than zinc. But, we have to study and predict if this is a long-term valuable business. Before we invest something or somewhere, we also need to look at the country’s economic environment such as and how much copper accounts for the country’s GDP. Every investor wants to make a long-term profit. But it’s not that easy. When investing in the emerging market, it takes a high risk because many emerging markets are depending on one more few commodities. Investors could make profits for one commodity, but lower prices will cause unimaginable damage to investors, so they are hesitated to invest emerging market.
After some economic classes I developed interest for the stock market and learned how to follow on markets, perhaps not as an expert but I can follow up. In this new emerging market, my opinion is a bit complex. I do understand they seem to outperform the S&P 500 in the long run is a big risk and they tend to fall after a certain period. Perhaps because I am more a person of a Long term investments the option of buying in Europe o ETF from other countries is more interesting for me and at times more stable, but I understand many factors such as politics can be affected by it. Perhaps another crisis might be coming for Europe, but then I would have to ask, which would be the main cause of it ?
Oil seems safe, but not lately since in keep declining and the metals seem a good option but not while there is a tariff war between China and the US
It’s interesting to see how the S&P500 market has been overvalued due to investments exceeding value relative towards company earnings. With this leading to an overvalued U.S. market; and the potential for a market correction occurring which can cause investors to lose money, investors have apparently looked to investing in European markets. But as shown in the article, this could be problematic due to a positive correlation between U.S. and European markets. Also another issue is the chance of another European crisis being very high. Another alternative for investment is the rise of the emerging market economy. Though the emerging market economy has the potential to outperform the S&P500, it is problematic due to the fact that only a limited number of emerging economies that can be accessed by the average investor. With this knowledge, I’ll choose to stay out of investing until I have a better grasp on how the markets will effect my potential return.