Aktierna i tillväxtekonomierna och därmed också de börshandlade fonder som replikerar utvecklingen av dessa börser var en besvikelse under 2015. Ingenstans var besvikelsen mer märkbar än i Latinamerika där de börshandlade fonderna genomled ännu ett år av fallande priser som en effekt av priserna rasat på råvarumarknaderna. Får vi en uppstuds i Colombia 2016?
Av helt fel orsaker var Global X FTSE Colombia 20 ETF (NYSEArca: GXG), den landsspecifika börshandlade fond som replikerar utvecklingen av aktiemarknaden i Colombia, mycket märkbar under 2015. Utvecklingen för den colombianska börsen var minst sagt usel under 2015.
Colombia, Sydamerikas näst största ekonomi, är en stor producent av silver, koppar och, i mindre utsträckning, guld. Priserna på samtliga dessa råvaror har rasat, och till råga på allt straffades Colombia av det fallande oljepriset. Dessa är några av orsakerna till att GXG varit en av de sämsta börshandlade fonderna i sitt slag under 2015.
En av de ljusaste stjärnorna på marknaden
För bara några år sedan var Colombia en av de ljusaste stjärnorna på tillväxtmarknaden, men de fallande råvarurpriserna har fått skenet att blekna. Under förra året var Colombias centralbank tvungen att höja räntan för att kyla inflationen. För två år sedan uppgraderade kreditratinginstitutet Fitch sitt betyg för Sydamerikas näst största ekonomi, till BBB från tidigare BBB-.
Stora katalysatorer till den ekonomiska kampen i den latinamerikanska regionen inkluderar den nuvarande ekonomiska kampen i Kina och nedgången i råvarupriserna. Kina har strategiskt tillgripit den inhemska konsumtionen i syfte att utlösa den ekonomiska tillväxten. Detta är inte bra nyheter för en region som kraftigt förbrukar kinesiska export.
Minus 42 procent
GXG, den största av de landspecifika börshandlade fonder som replikerar utvecklingen av Colombias aktiemarknad sjönk med nästan 42 procent under förra året och inflationen är på uppgång något som kan leda till att landets centralbank åter måste höja räntorna.
Enligt JPMorgan Asset Management är Colombia och Mexikonu medlemmar av den så kallade ”Fragile Five” gruppen sedan länderna ersatt Brasilien och Indien. De två latinamerikanska länder, tillsammans med Turkiet, Sydafrika och Indonesien, ses som utvecklingsländer med för stort beroende av flyktiga utländska investeringsflöden. De ursprungliga ”Fragile Five” var bland de ekonomier som drabbades hårdast under 2013 när FED pumpade in som mest pengar i USAs ekonomi vilket fick effekten att utländska investerare drog sig ur tillväxtmarknaderna. I händelse av att detta upprepas kommer Colombia och Mexiko vara bland de mest utsatta ekonomierna. Det känns inte som det finns förutsättningar för en uppstuds i Colombia 2016.
Opportunities Exist in Emerging Markets Despite Challenges
Van Eck Unconstrained Emerging Markets Bond Fund
Manager Commentary – Opportunities Exist in Emerging Markets Despite Challenges
By: Eric Fine, Portfolio Manager
November 2015
Executive Summary
Emerging markets (EM) debt still facing many headwinds
Strong idyosincratic drivers in Argentina, Venezuela and Russia
EM real rates remain low by historic standards
Overview
We still see many headwinds for EM debt including, but not limited to, the possible upcoming Federal Reserve (Fed) rate hikes, a looming potential devaluation in China, unstable commodity prices, a still weak EM growth trajectory, inflation risk, implosion in Brazil and potentially approaching troubles in Turkey. Regarding the Fed, just as the market was consistently mispricing the timing of their first hike relative to “dots” implied timing, the same seems to be occurring for the timing and magnitude of the anticipated subsequent rate hikes…fasten your duration seatbelts, in our opinion. Despite China telling the world that its currency devaluation will happen someday, it did not trigger capital flight. Shouldn’t the usual rule of thumb on devaluations apply, namely, you do them big and early in conjunction with some real or pretend reforms? How does it not get worse the longer China waits? It is maintaining a currency peg while cutting rates, making it cheaper for investors to short the currency. Furthermore, the rapidly approaching Fed hike means a tighter policy in China, via the exchange rate peg, in a time of declining growth rates for an exporting economy. The risks of unstable or weak commodity prices seem high. Brazil remains in the grips of a vicious political and economic adverse feedback loop of worse outcomes (e.g., recession) creating divisive politics and policy paralysis. Turkey does not seem to be a market concern, but we think it should be. President Erdogan is about to complete his takeover of state institutions which includes the likely departure of the current central bank head. The policy implication could be a central bank easing policy, risking currency weakness and self-fulfilling inflation expectations. Additionally, they may be tempted to intervene in the currency market, threatening their already-low reserves.
But, we think there are still investments that can outperform in the face of these risks. Our portfolio could be thought of as consisting of two halves: idiosyncratic and defensive. The idiosyncratic portion is primarily composed of Argentina and Venezuela dollar-denominated bonds, and both Russia rouble- and dollar-denominated bonds. As the term idiosyncratic implies, we see asset price performance almost entirely based on country-specific factors rather than systematic factors such as U.S. interest rates, etc. In Argentina, the idiosyncratic driver is the new government’s likely settlement with its holdout creditors, while in Venezuela, government bonds are trading near recovery value. In Russia, the idiosyncratic driver for local-currency bonds is declining inflation. The defensive half of the portfolio is made up of some high-spread dollar-denominated short-dated bonds with cheap spreads relative to fundamentals. The spread duration is such that if one is correct, the reward would be the constant carry. One of the largest allocations is to low duration dollar-denominated bonds in South Korea, which is experiencing ongoing balance of payments surpluses and can perform defensively in risk-off scenarios.
Why focus on Argentina and Venezuela as key idiosyncratic diversifiers? We have long maintained that the November presidential elections in Argentina would result in a more market-friendly government than the one established under former President Cristina Kirchner. The election victory of the opposition candidate Mauricio Macri – which was not an obvious outcome even a couple of months ago – might be a real game-changer. The new government’s line-up is very impressive, and so far, Macri has been sticking to his pre-election promises of dealing with the existing imbalances, such as multiple exchange rates, in a timely fashion. The Macri administration is also likely to bring in the resolution of the holdouts situation, paving the way for Argentina’s eventual rating upgrade to single-‘B’. We consider it a good sign that in late November Moody’s changed Argentina’s outlook to positive. The bottom line is that the country is solvent, but it currently has no market access, which should change when the holdouts issue is resolved. This is now a more likely outcome, in our opinion. Venezuela’s macro outlook remains very challenging but markets continue to price in an extremely high chance of default under our recovery value assumptions. Our position is that 100% probabilities of default, in general, are to be viewed skeptically. It remains to be seen whether the National Assembly elections on December 6 will bring in meaningful policy changes or closer relations with the U.S. – but there are several very low-hanging policy “fruits” (such as higher gasoline prices, streamlining the exchange rate system) that can reduce imbalances if there is enough political will.
Why a less negative perspective on Russia? First, Russia is emerging in a new light following the Paris tragedy and the shooting down of its military plane by Turkey. We think that appetite for an escalation of sanctions against Russia in this new environment is low. The rating agencies have already noted that the improving relations between Russia and the U.S. may boost Russia’s rating. Second, the authorities’ response to a considerable deterioration in the external conditions following the introduction of sanctions was surprisingly orthodox and helped avoid a major drain on reserves. Russia seems to be emerging from this episode with a stronger credit profile (e.g., stable reserves, lower external debt, a larger current account surplus). Third, the rouble was used mainly as a shock-absorber in the past months and is now significantly undervalued both on a short-term basis and also when looking at fundamental metrics. Additionally, a major disinflation move is expected in the next 3-6 months allowing the central bank to ease further. All this makes us more comfortable owning non-sanctioned Russia securities (sovereigns [OFZs] and hard-currency quasi-sovereign debt). Fourth, duration makes the trade attractive, in our opinion. Inflation could decline to 6% by the end of 2016 with the policy rate (and yield curve) around 10%. So, with carry and duration, we are looking at rates that are possibly 100bp-200bp lower, which may provide a cushion for potential currency weakness.
Why still unable to find attractive local currency? First, even though real interest rates in emerging markets increased in the past few weeks, they remain low by historic standards and also in comparison to real rates in developed markets (real interest rates in the U.S. have recovered to their long-term average). The Federal Open Market Committee (FOMC) continues to give strong signals that it is ready to hike in December. Such a move might not only pull nominal yields in the U.S. (at least in the near term) but also real rates in emerging markets. Second, with the renminbi in November finally becoming part of the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) basket, an international reserve asset which is based on the values of major currencies, the focus is now shifting to possible currency devaluation in China and its potential impact on the rest of EM FX (both in terms of the initial knee-jerk reaction and the subsequent rounds of “currency wars”). The offshore currency (CNH) is weakening relative to the controlled onshore currency (CNY). Third, even though there were some improvements in the EM macro data flow in the past weeks, we have yet to see any meaningful improvement in the EM growth outlook. Consensus continues to downgrade the 2016 growth forecasts in all EM regions – reflecting debt overhang and low commodity prices among other things. The expected growth differential between EM and the U.S. continues to narrow down, undermining the fundamental support for EM FX. We should note the potential for contagion risk in Brazil and Turkey perhaps, due to the size and importance of their economies.
A key feature of the intial steps of our investment process compares the risk premium of a country to its fundamentals) and we should emphasize that it does uncover pockets of value in local-currency markets. Colombia, Brazil, Zambia, Nigeria and others pay high real interest rates. However, in each of these cases, these investments failed the following step of our process which test specific risk factors. Colombia has been very correlated to oil prices, and we expect it will continue to be, and thus the failed correlation test, Brazil fails the policy/politics test, and Zambia and Nigeria are slowly moving to capital control regimes, in our opinion, and therefore, fail the policy/politics tests.
Exposure Types and Significant Changes The changes to our top positions are summarized below. Our largest positions are currently: South Korea, Argentina, Venezuela, South Africa and Russia.
We added local-currency sovereign and hard-currency quasi-sovereign debt exposure in Russia. We expect to benefit from a combination of a change in the geopolitical narrative that reduces the potential risk of additional sanctions and disinflation that should allow the central bank to further slash interest rates.
We reduced sovereign and quasi-sovereign hard-currency debt exposure in Chile due to concerns about the price of copper in light of the ongoing growth slowdown in China.
We also reduced local-currency sovereign exposure in Romania due to concerns about local politics and policy noise.
We reduced hard-currency sovereign exposure in Israel due to greater vulnerability risks as well as concerns about duration. We also reduced quasi-sovereign hard-currency exposure in Vietnam on greater vulnerability risks.
Fund Performance
The Fund (EMBAX) gained 0.13% in November, compared to a 1.11% loss for a 50% local-50% hard-currency index.
The Fund’s biggest winners were Venezuela (hard-currency sovereign), South Africa (hard currency sovereign and quasi-sovereign) and Ivory Coast (hard-currency sovereign). The Fund’s biggest losers were Argentina (hard-currency sovereign), Romania (local-currency sovereign) and Mongolia (hard-currency sovereign).
Turning to the market’s performance, the GBI-EM’s biggest winners were Nigeria, Brazil and Indonesia. The biggest losers were Colombia, South Africa and Hungary – with Colombia and South Africa affected by low commodity prices and policy rate hikes.
The EMBI’s biggest winners were Venezuela, Kazakhstan and Malaysia, while its biggest losers were Egypt, Chile and Mongolia (with the latter two affected by concerns about the price of copper).
Diversification does not assure a profit or prevent against a loss.
Expenses: Class A: Gross 1.32%; Net 1.25%. Expenses are capped contractually until 05/01/16 at 1.25% for Class A. Caps exclude certain expenses, such as interest. Please note that, generally, unconstrained bond funds may have higher fees than core bond funds due to the specialized nature of their strategies. The tables above present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at Net Asset Value (NAV). Index returns assume that dividends of the index constituents have been reinvested. Investing involves risk, including loss of principal; please see disclaimers on next page. Please call 800.826.2333 or visit vaneck.com for performance current to the most recent month ended.
Data Sources: Van Eck Research, FactSet. All portfolio weightings and statements herein as of November 30, 2015. Unless otherwise indicated.
Duration measures a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. This duration measure is appropriate for bonds with embedded options. Quantitative Easing by a central bank increases the money supply engaging in open market operations in an effort to promote increased lending and liquidity. Monetary Easing is an economic tool employed by a central bank to reduce interest rates and increase money supply in an effort to stimulate economic activity. Correlation is a statistical measure of how two variables move in relation to one other. Liquidity Illusion refers to the effect that an independent variable might have in the liquidity of a security as such variable fluctuates overtime. A Holdouts Issue in the fixed income asset class occurs when a bond issuing country or entity is in default or at the brink of default, and launches an exchange offer in an attempt to restructure its debt held by existing bond holding investors.
Emerging Markets Hard Currency Bonds refers to bonds denominated in currencies that are generally widely accepted around the world (such as the U.S.-Dollar, Euro or Yen). Emerging Markets Local Currency Bonds are bonds denominated in the local currency of the issuer. Emerging Markets Sovereign Bonds are bonds issued by national governments of emerging countries in order to finance a country’s growth. Emerging Markets Quasi-Sovereign Bonds are bonds issued by corporations domiciled in emerging countries that are either 100% government owned or whose debts are 100% government guaranteed. Emerging Markets Corporate Bonds are bonds issued by non-government owned corporations that are domiciled in emerging countries. A Supranational is an international organization, or union, whose members transcend national boundaries and share in the decision-making. Examples of supranationals are: World Bank, IMF, World Trade Organization. The European Central Bank (ECB) is the central bank for the euro and administers monetary policy of the Eurozone, which consists of 19 EU member states and is one of the largest currency areas in the world. The Labor Market Conditions Index (LMCI) is a dynamic factor model index that combines 19 labor market indicators to provide an assessment of overall labor market conditions. The Employment Cost Index tracks the changes in the costs of labor for businesses in the United States economy.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. The 50/50 benchmark (the “Index”) is a blended index consisting of 50% J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified and 50% J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM). The J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM) tracks local currency bonds issued by Emerging Markets governments. The index spans over 15 countries. J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified tracks returns for actively traded external debt instruments in emerging markets, and is also J.P. Morgan’s most liquid U.S-dollar emerging markets debt benchmark. The J.P. Morgan Emerging Country Currency Index (EMCI) is a tradable benchmark for emerging markets currencies versus the U.S. Dollar (USD). The Index compromises 10 currencies: BRL, CLP, CNH, HUF, INR, MXN, RUB, SGD, TRY and ZAR. The Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.
Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The index may not be copied, used or distributed without J.P. Morgan’s written approval. Copyright 2014, J.P. Morgan Chase & Co. All rights reserved.
Investing involves risk, including loss of principal. You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks associated with its investments in emerging markets securities. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctua-tions, and economic and political risks, which may be enhanced in emerging markets. As the Fund may invest in securities denominated in foreign currencies and some of the income received by the Fund will be in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s return. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. The Fund may also be subject to credit risk, in¬terest rate risk, sovereign debt risk, tax risk, non-diversification risk and risks associated with non-investment grade securities. Please see the prospectus and summary prospectus for information on these and other risk considerations.
Investors should consider the Fund’s investment objective, risks, and charges and expenses carefully before investing. Bond and bond funds will decrease in value as interest rates rise. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing. Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus.
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iShares MSCI Mexico Capped ETF (NYSEArca: EWW), den börshandlade fonden som replikerar utvecklingen av den mexikanska börsen, har handlats ned marginellt under november 2015. Sett till utvecklingen sedan årets början är emellertid Mexiko, den bästa aktiemarknaden i Latinamerika. Denna ETF har förvisso fallit den med, men den har gått betydligt bättre än mer diversifierade emerging markets och börshandlade fonder som replikerar utvecklingen av andra aktiemarknader i Latinamerika.
Mexiko är i riskzonen, då landets kassatäckningsgrad det vill säga valutareserven dividerat med bristen på finansiering endast är 1,6 år, vilket är betydligt lägre än de sju år som Ryssland, en annan stor oljeexportör har. Dessutom begränsas Mexiko av landets nära-nollrealränta, vilket ger föga utrymme för att sänka räntan om dess ekonomi försvagas. Mexiko har av många investerare, framförallt i USA, sett som en fristad, men landet har nu kommit att bli en emerging market med hög risk. Enligt JPMorgan Asset Management är nu både Colombia och Mexiko medlemmar i den så kallade ”fragile five” sedan de har ersatt Brasilien och Indien.
Det finns emellertid skäl att anta att Mexiko kommer att vara det land i Latinamerika som kommer att vara det stabilaste i fråga om investeringar under 2016. Mexikos närhet till USA kan återigen vara en fördel om FED meddelar en räntehöjning denna månad.
Tillväxtförväntningarna har ökat
Den senaste undersökningen som genomfördes av Bank Of Mexico visar på att tillväxtförväntningarna för 2015 har stigit från 2,29 procent till 2,44 procent, en förändring som kom efter det att landet rapporterade en bruttonationalprodukttillväxt på tre procent för det tredje kvartalet 2015. EWW har ingen exponering mot energisektorn, men trots detta har denna ETF drabbats hårt av oljeprisets fall eftersom Mexiko är en av Latinamerikas största råoljeproducenter.
Den mexikanska peson står på tur för en uppvärdering
Den mexikanska peson står på tur för en uppvärdering, det är i alla fall vad Credit Suisse Group AG och Toronto-Dominion Bank, de två banker som toppade Bloombergs ranking för valuta förutsägelser under andra kvartalet, anser. Efter att ha rasat till en rekordlåg nivå mot den amerikanska dollarn kan hita ett golv sedan landets centralbank säger att den kommer att agera politiska signaler från sin amerikanska granne.
Som en oljeexportör har peson, Mexikos valuta drabbats av de fallande råoljepriserna, men investerare som arbetar med börshandlade fonder bör ha i åtanke att även om Mexiko har en stor oljeindustrin så har ingen av de ETFer som finns på marknaden någon exponering mot denna sektor.
Långt under presidentens prognoser
En sak är emellertid säker, Mexiko har en lång väg att gå. De nya prognoserna för landets ekonomiska tillväxt ligger lågt under de mål som landets president, Enrique Peña Nieto, satt upp. Med en prognos om 2,74 procent är tillväxtprognosen i princip oförändrad. Att Mexikos ekonomi växer beror på en rekordlåg inflation och en ökad sysselsättningsgrad vilket gör att två tredjedelar av de tillfrågade i undersökningen som genomfördes av Bank Of Mexico att landets ekonomi är starkare än vad den var för ett år sedan. Frågan är om det räcker för att Mexiko skall förbli den bästa aktiemarknaden i Latinamerika
2015 närmar sig nu sitt slut och det är enkelt att konstatera att året varit ett tufft sådant för latinamerikanska aktier och de börshandlade fonder som replikerar aktiemarknaderna i dessa länder. iShares Latin American 40 ETF (NYSEArca: ILF) har till exempel fallit med 23,6 procent, mätt i dollar. Frågan är, finns det hopp för Latinamerikas aktiemarknader?
Enligt JPMorgan Asset management är nu både Colombia och Mexiko medlemmar i den så kallade Fragile Five, den grupp av utvecklingsländerna som är alltför beroende av flyktiga utländska investeringsflöden. Colombia och Mexiko ersatte Brasilien och Indien. Övriga länder i denna grupp är Sydafrika, Turkietoch Indonesien. Begreppet Fragile Five myntades under 2013 när de internationella investerarna drog sig ur emerging markets.
Ytterligare dåliga nyheter från Brasilien
Brasilienlevererade under veckan sin senaste dåliga nyhet, landets inflation nådde den högsta nivån på tolv år och ligger nu på tio (10) procent. Andra indikatorer som mäter tillverkning och konsumtion tyder på att lågkonjunkturen i Brasilien har förvärrats under hösten, något som är ett dåligt tecken för den totala tillväxten i Latinamerika. Brasilien är Latinamerikas största ekonomi och ytterligare försämringar av de ekonomiska utsikterna i detta land får negativa konsekvenser i den övriga regionen.
En korruptionsskandal i Petrobras (NYSE: PBR), Brasiliens statliga oljebolag, höga räntor, stigande bytesbalansunderskott och en ekonomisk tillväxt som utvecklas åt fel håll innebär att den brasilianska aktiemarknaden har rasat. Det betyder att även de börshandlade fonder som investerar på brasilianska aktiemarknaden har rasat.
Mexikoär i riskzonen, då landets kassatäckningsgrad det vill säga valutareserven dividerat med bristen på finansiering endast är 1,6 år, vilket är betydligt lägre än de sju år som Ryssland, en annan stor oljeexportör har. Dessutom begränsas Mexiko av landets nära-nollrealränta, vilket ger föga utrymme för att sänka räntan om dess ekonomi försvagas. Mexiko har av många investerare, framförallt i USA, sett som en fristad, men landet har nu kommit att bli en emerging market med hög risk.
Brasilien, en symbol för de svåra tiderna
Brasilien har kommi att bli en symbol för Latinamerikas svåra tider, landet har ökat sin export till och sitt beroende av Kina under det senaste decenniet. Även om landets ekonomi är mer varierad än andra i Latinamerika bygger Brasiliens ekonomi fortfarande på ett starkt beroende av råvaror.
Det ser ut som detta är goda nyheter för de investerare som vill ha en exponering mot emerging markets, och nu är både en del av de ledande bankerna och fondförvaltarna är positiva till detta tillgångsslag som länge varit så pass nedtryckt. Vissa fondförvaltare tror emellertid att det kommer ta ett tag innan tillväxtmarknadernas aktiemarknader återhämtar sig på allvar. Investerare drog sig ur riskfyllda tillväxtmarknader när statistiken visade att tillväxten i Kinas ekonomi saktade, råvarupriserna sjönk och Federal Reserve signalerat en räntehöjning i år.
Avmattningen i Kina underblåser de lägre råvarupriserna och lägre utsikter för andra viktiga tillväxtekonomier. Lägg till stigande lånekostnader, en starkare dollar och en ökad skuldsättning bland företagen så finns det anledning att lyssna på när IMF, Internationella valutafonden varnar för företagskonkurser. Detta är emellertid sedvanliga risker när det tillväxtmarknader. Valutarisken är annars den viktigaste av allt för den som köper emerging markets.
Frågan kvarstår, finns det hopp för Latinamerikas aktiemarknader?
Trade Idea – Commodities – Bearish bets on coffee hit record high
26th November 2015
Coffee prices to remain depressed
• Last week the BRL staged a 3% rally as the incumbent Brazilian President, Dilma Rousseff, won a political victory aimed at narrowing the country’s growing budget deficit. The strengthening of the BRL sent the price of Arabica coffee soaring 8% from 23 month lows (see Figure 1, Source: Bloomberg) and partially reversed a downward trend that has plagued the soft commodity since the end of last year. Brazil is the largest global exporter of Arabica coffee and the recent weakening of its currency has, until September, significantly weighed on the coffee price[1]. In coming months, we expect support from favourable currency movements to fade and a strong coffee supply outlook for 2016/17 crop year to weigh on price, benefiting those investors with tactical short exposure to coffee.
Speculative coffee positioning reaches record low
• According to the Commodity Futures Trading Commission (CFTC), short bets on coffee swelled to the highest level on record in the week to Nov 17 (see figure 2), reflecting the bearish sentiment that has dominated coffee trading until last week’s recovery. We believe that bearish sentiment will reassert and help to push coffee prices lower as soon as BRL strength abates. The Brazilian economy is currently under considerable duress as stagflation and political turmoil weigh on the nation’s prospects. Therefore, we believe that the optimism that has fuelled the recent BRL appreciation is fragile and will likely fade as the economy slips further into recession and political uncertainty persists.
Favourable supply outlook
• The Brazilian harvest for 2015/16 is almost complete and despite the 2014 drought prompting forecasts of a large fall in production, output has only fallen 3% YoY (Source: United States Department of Agriculture). Looking ahead to next year, good rain in key producing regions is helping the flowering process of Brazilian coffee trees which should aid coffee cherry development and in turn increase the likelihood of a strong yield from the 2016/17 harvest.
• Elsewhere, Columbia and Honduras have seen production grow 40% and 46% respectively over the past five years as tree renovation programmes, aimed at combatting coffee rust (disease that affects coffee plantations), pay considerable dividends (see Figure 3). Given that both are top five global exporters of coffee (third and fifth respectively) this trend will likely be another source of pressure on coffee prices in the near future.
Investors wishing to express the investment views outlined above may consider using the following ETF Securities ETPs:
Coffee
• ETFS Coffee (COFF)
• ETFS 2x Daily Long Coffee (LCFE)
• ETFS 1x Daily Short Coffee (SCFE)
• ETFS 3x Daily Long Coffee (3CFL)
• ETFS 3x Daily Short Coffee (3CFS)
• ETFS EUR Daily Hedged Coffee (ECOF)
• Swiss Franc Daily Hedged Coffee (CCOF)
The complete ETF Securities product list can be found here.
[1] Brazilian coffee suppliers increase output as a weaker BRL means that their produce become cheaper on international US Dollar denominated markets.
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