ETF Country Plus Strategy Insights: Global Capital Movement (Part 1)

James Kimball | May 10, 2015

Both ETF Country models pulled back a little this week. All three of our holdings have exposure to Asian equities, which sold-off the majority of the week before rebounding nicely on Friday. The benchmark, MSCI All World Index, managed a small positive gain on the week.

The U.S. markets sold off the first three days of the week and then recovered all of that and a little more on Friday on a strong gap and reasonable follow-thru off the May jobs report.



This Week’s Strategy Lesson: Global Capital Movement (Part 1)

After spending a few weeks focusing on Sector performance, we thought it would be good to shift our focus to the state of global markets. And this couldn’t be timelier as we have seen a real shift in attention away from U.S. markets (which have been basically sideways for the last six months) to Europe, Asia, and some emerging markets.

Money doesn’t stand still. Everyone from individual investors, mutual funds, investment banks, to sovereign wealth funds are constantly searching the world over for return. The opportunities fall on a spectrum of risk and reward—higher risk typically accompanied by higher reward (though they are not always correlated).

Developed markets typically have lower (but more consistent) growth, higher liquidity, and more comprehensive safeguards in the way of stricter financial reporting standards and better corporate and market oversight.

International and emerging markets can offer a whole spectrum of opportunities but often have less transparency, much lower liquidity, and the booms and busts can be much more spectacular. Hence the old cliché, “when the U.S. sneezes the rest of the world catches a cold.”

After the big run-up in U.S. equities over the last few years, the Federal Reserve contemplating its first fed funds rate hike in nine years, and lackluster expected growth in corporate earnings, it’s not surprising that we are starting to see more and more capital start flowing elsewhere into some of the regions that have underperformed or offer lower overall valuations.

In the above chart, we have plotted the TSI values of 35 country fund or index ETFs. The color scales with the lowest or negative TSI rankings in darker red, the middle of the pack in yellow shades, and darker greens for the best performers. The unshaded counties aren’t represented in our ETF list.

Looking at the chart, you can get a quick idea for the state of each international market and where the performance has been this year. The U.S. has basically been sideways with a negligible gain. Meanwhile, Europe and Asia has seen tremendous recent growth. India, after a robust 2014, has recently pulled off considerably in just the last couple months of 2015.


This is the complete list of the Country ETFs and where they stand now. It should be noted that this list includes a number of ETFs that aren’t in our ETF Country Plus model. The primary reason some were left off were either very small market capitalization or some of the ETFs have very low trading volume. Some of them, as they gain capitalization and liquidity could be considered for addition to that model.

Of course, just because money is flowing into these foreign markets does not preclude the possibility of U.S. markets catching some traction and trending towards a positive return this year. However, in the current climate, expectations have come off a little and it is apparent that investors and money managers are putting more of their money to work internationally.

In the next couple of articles, we will look closer at how the liquidity cycle can play out in the international sphere and the role that global capital flows can play on performance.

The Current Condition of the Model

There were no position changes this week. Our three positions are FXI, EWH, and EWJ. Both models are in all three positions.

Stay tuned to daily updates for any position changes.

Here is a summary of the weekly performance of all the ETFs that the strategy monitors.


Best wishes for your trading, 

James Kimball