What are developed markets?

Developed markets are well-established economies, strong capital markets and technological infrastructure. The population enjoys a relatively high income levels, high gross domestic GDP and foreign ownership. They should also exhibit minimal capital controls. They include the major Eurozone nations but also Canada and Australia. Many of these are overheated though and inverse and hedged equity ETFs might provide some downside protection for your portfolio.

What is the concern with developed international markets?

Given the classic asset allocation models adhered to by most money managers, There is a good chance you own a developed international fund in your 401k or maybe your IRA. A typical composition might be 60% Europe, 40% Pacific with Canada also in there somewhere. The Unites States notwithstanding, the major developed markets are Germany, the U.K., Australia, Canada, Switzerland, France, Italy and Japan. A problem with most mutual funds, these developed funds have the same general holdings of large multi-nationals such as Royal Dutch Shell, HSBC Holdings, British Petroleum, Roche Holding AG, Nestle SA and Toyota Motor Corp. Many of these countries, Eurozone and Japan certainly, are on the brink of deflation.

Many commodity-centric developed markets like Australia and Canada have major companies that have already succumbed to deflation via commodity prices. In Australia, the companies major mining stock, BHP Billiton, once a darling in the mid-2000’s is struggling to stay relevant in the face of plunging iron and copper prices and a slowdown from China.

Canada

Making matters worse for Canada is the fact that it’s at the beginning of the pricking of their housing bubble which doesn’t get nearly as much media coverage as it should. Canada tops the list of over-valued housing markets in developed countries as compiled by The Economist. The average home price in Canada is a whopping $439,000 as of Q1 2015. Vancouver has seen the average property increase in value by $8,500 per month and house flipping is back en vogue.* By some metrics, (including median home price divided by median household income) its ranks above San Francisco and New York City for Metropolitan areas. History tells us this simply cannot continue.

Japan

Japan has been battling deflation for nearly two decades now and is stuck in a liquidity trap where cash and short term equivalents are being stockpiled. The Bank of Japan’s decision in January 2016 to impose negative interest rates, joining the ECB, is a signal that cash will continue to leave their banking system but may not be loaned out.  its aging economy is struggling. The stock market has not returned to its lofty 1989 levels when its closing high was 38,916.** The Nikkei 225 recently traded at almost 18,000, still less than half of the prior summit. In the 1980’s, Japanese business was all the rage and movies like Gung Ho personified their dominance. This is a lesson that today’s retirees or baby boomers close to retirement that stocks can peak and not return to the prior peak for years or even decades. The bubbles of 2000 and 2007 have lulled people into a false sense of security because they recovered. The next time may not. Don’t forget, a 20% drop in retirement funds requires a subsequent 25% gain just to return to the previous level. We’ve been lucky.

Hedging with Hedged Equity ETFs and Inverse ETFs

There are a number of inverse exchange traded funds and currency hedged ETFs that can help protect your portfolio in a global bear market. If you own these developed, international funds in a retirement account, like a 401k, you may have limited hedging options other than selling and going to cash (presumable a money market fund). Wisdom Tree, iShares and Invesco all have currency hedged equity funds which aim to eliminate fluctuations between the local currency and the U.S. dollar. Here is a list of a few currency hedged developed market ETFs and inverse international ETFs:

Hedged Equity ETFs

  • IHDG    International Hedged Dividend Growth
  • HEDJ    Europe Hedged Equity
  • DXJ       Japan Hedged Equity Fund
  • DBJP    MSCI Japan Hedged Equity
  • HEWJ   Currency Hedged MSCI Japan

 

International Inverse ETFs

  • EFZ      Short MSCI EAFE
  • EFU     UltraShort MSCI EAFE
  • EPV     UltraShort MSCI Europe
  • EWV    UltraShort MSCI Japan
  • DPK     Daily Developed Markets 3x Bear

 

 

 

http://www.huffingtonpost.ca/2015/11/03/canada-housing-market_n_8461888.html

http://www.marketwatch.com/story/japan-marks-25-years-since-nikkei-averages-peak-2014-12-29