FAANG Friday

Fri, 2017/10/27 - 1:01pm | Your editor
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In Journal of Portfolio Management's latest issue, three experts found that returns are higher in smaller countries with smaller total listed market capitalization than in foreign investing overall. Stocks from small countries tend to have higher average returns than stock from large ones. The country size effect is largely independent from the return on buying small capitalization firms overall. It also does not depend on other quantitative factors like book to market valuation or momentum. The authors conclude that small country higher returns reflect home bias. A smaller country has fewer home investors so stocks are undervalued, giving an edge to the intrepid foreigners who take the trouble to learn about the equities available.

The authors are Gregg S. Fischer, Ronnie Shah, and Sheridan Titman.of Gerstein Fisher, a New York based investment house. It aims at exploiting market inefficiencies, investor biases and valuation errors, and the human tendency to extrapolate current trends way into the future regardless of facts and information to achieve outsize returns.

 

This is yet another argument against investing in exchange-traded funds tracking a country index. It doesn't work for bonds and there is evidence that it also doesn't work for small caps and small countries which most ETFs ignore because the cost of coverage is high compared to the big markets and their big companies. Maybe I can find a way to short ETFs pretending to be truly global.

 

*With the European Central Bank moving very cautiously in its 3rd attempt to exit quantitative easing, the euro lost altitude. That means the dollar rose which has nothing to do with anything the White House or Congress get up to. It does mean the odds are higher that the Fed will raise interest rates one more time this year, because US growth was high despite natural disasters in Q3. Fear of Fed is hurting Wall Street more than Trumpian tax cuts can add to stock prices. But thanks to Microsoft and the FAANGs, Wall Street is up again.

 

More today from Bermuda, Brazil, Britain, Canada, Colombia, Curacao, Denmark, Finland, Ireland, Israel, Japan, Mexico, South Africa, and Sweden.

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