Tuesday, December 19, 2006

Investing in 2007 - foreign stocks

In the last article of this series, we looked at midcap stocks and their returns and P/E ratios. In this section, we will look at some foreign ETFs and their current P/Es and valuations. As noted in the second article in this series, the foreign ETFs of interest are the iShares EFV, EFG, EFA. We also have the vanguard funds VGK and VPL. In addition, we have the emerging market funds EEM and VWO. We will look at each of these in detail in this section.

First, let us look at the top holdings in EFV, EFG and EFA respectively. We will start with EFV.

EFV - the top holdings for EFV are:

HBC - HSBC Holdings PLC. The analysts seem to say there is some upside to this stock still.
TM - Toyota Motor Corp has a P/E of 15 and a market cap of 203 billion
Nestle SA - no data is available.
VOD - Vodafone Group PLC has a market cap of 162 billion
RDS-A - Royal Dutch Shell PLC-Class A is selling for a P/E of about 10
Royal Bank of Scotland Group PLC - no good data available
STD, Banco Santander Central Hispano SA has a P/E of 12 and market cap of 116.5 billion
RDS-B - Royal Dutch Shell PLC-Class B is also selling for a P/E of about 10 and market cap of 230 billion
BNP Paribas - no good data available
BCS, Barclays PLC has a P/E of 13 and a market cap of 92 billion.

Overall, this ETF has done better than the ING International Value Fund - NIIVX since inception and carries a lower expense ratio. The stocks in this portfolio are similar to that in VTV except that a declining dollar would make this ETF do better. EFV has returned about 25% so far this year. This ETF has exposure to Europe, Japan and Australia. Exposure to Europe is about 70% ( Great Britain at 25% ) followed by Japan ( 22% ) and Australia ( 6% ).

EFA is the blend that has the growth and value stocks in the mix. EFA has the following companies in its top 10 holdings.

HSBC Holdings PLC
Toyota Motor Corp.
Total SA
GlaxoSmithKline PLC
Vodafone Group PLC
Nestle SA
Royal Dutch Shell PLC-Class A
Novartis AG
Roche Holding AG

This portfolio includes oil, banking, technology companies and drug majors. This is overall a good mix. EFA has returned 24% thus far this year. This stock has exposure to Europe, Japan and Australia. Exposure to Europe is about 70% ( Great Britain at 24% ) followed by Japan ( 22% ) and Australia ( 5% ).

EFG is the growth counterpart of the above family. The top holdings of this segments include:

Roche Holding
Mitsubishi UFJ Financial Grp
Total SA

This ETF has returned 18.5% thus far this year. The geographic exposure of this fund is Europe, Australia and Japan. In Europe, it has exposure to Great Britain is the highest around 23%.

The Vanguard European ETF, VGK has returned 32% YTD. VGK has heavy exposure (~30%) to Great Britain market. The Vanguard Pacific ETF VPL has returned about 10% thus far this year. VPL has heavy (~70%) exposure to Japan.

Summary: The main thing to note here is that the above ETFs reflect developed country markets with focus on large stable companies. Some of these companies have significant operations in the U.S. The markets in the developed countries are not overvalued but cant be said to be undervalued either. It is prudent to wait for a market downturn before adding further capital to these ETFs.

Let us look at the emerging markets - the main ETFs here are VWO and EEM.

The country wise distribution of holdings is - Korea (18.5%), Taiwan (15.8%), Hongkong (10.64%), South Africa (10.4%), Brazil (8.3%), India (7%) and Mexico ( 6.69%). This ETF has 771 holdings altogether. The top holdings in this ETF are:

Samsung Electronics
Taiwan Semiconductor Mfg.
China Mobile
Petroleo Brasileiro Sa Petrobras
America Movil S.A. de C.V
Kookmin Bank
Sasol Ltd
Petroleo Brasileiro Sa Petrobras
Teva Pharmaceutical Industries Ltd


The geographic distribution of the holdings are South Korea (15.64%), Taiwan (10.99%), Brazil (10.43%), Hongkong (9.95%), South Africa (9.73%), Mexico (7%), India (6%) and Russia (5%).

Gazprom OAO (ADR)
Samsung Electnc GDR 144A
Taiwan Semiconductor Manufacturing ADR
Posco ADR
Kookmin Bank ADR
Lukoil ADR
United Microelectronics Corporation ADR
Siliconware Precision Industries Co, Ltd. ADR
Chunghwa Telecom Company, Ltd. ADR
Korea Electric Power ADR

Summary: EEM has outperformed VWO of late inspite of the higher expense ratio. The emerging markets in India, China, Brazil and Mexico have all done extremely well in the past two years and may be ready for a correction. The correction can be significant - in the range of 10-20%. It may be time to pick up more of either of these ETFs decline significantly.

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