With 2013 finally here, reflecting back on the year that was for
exchange-traded products can provide investors with some clues
regarding what themes and trends will be hot this year. This is not
a bold prediction, but it is reasonable to expect one of 2012's
hottest asset classes to stand tall again in 2013.
The asset class being referred to is emerging markets
, both bonds and equity-based funds. While the final tally for 2012
ETF inflows has not yet been published, it is worth noting that
emerging markets bond ETFs
had hauled in $5.4 billion through the end of
In November alone, diversified equity-based emerging markets
ETFs such as the iShares MSCI Emerging Markets Index Fund (NYSE:
) raked in $1.8 billion in new capital, according to Morningstar
With the outlook, a bullish one at that, for emerging markets
debt ETFs in 2013
having been previously highlighted
, it is time to focus on which equity-based ETFs could present the
best opportunities for investors looking to gain exposure to the
developing world in 2013.
There are few things about this list to keep in mind. First, no
fixed income funds are featured here. Second, only 10
country-specific ETFs will be featured here, in no particular
order, but the universe of emerging markets funds is obviously many
times larger. Third, given the sheer size of the emerging markets
ETF universe, these are not the only funds that will be worth
trading or investing in this year.
iShares MSCI Brazil Index Fund (NYSE:
) A quick recap of EWZ's 2012 performance would go like this: The
largest ETF tracking Latin America's largest economy was, quite
one of the year's biggest emerging markets
Coming off a year in which the fund tumbled 6.3 percent and was
sharply outpaced by its small-cap equivalents
, EWZ showed some signs of life in the last month of 2012, gaining
Just as EWZ's 2012 misfortunes are easy to explain, so is the
2013 outlook for this fund. Brazil's GDP has been shocking paltry
in recent quarters. For the third quarter it was just 0.6 percent.
That is not what investors are accustomed to emerging markets A
smart investor is apt to wonder why it is worth taking the risk on
ETF with a beta of almost 1.8 against the S&P
when the U.S. is offering far superior GDP growth.
Bottom line: EWZ can offer investors a positive reversal of
fortune in 2013, but the stars need to align properly for that to
happen. Economic growth must improve, the Rousseff Administration
must show foreign investors that Brazil is not as politically risky
as it appeared in 2012 and Petrobras (NYSE:
), EWZ's largest holding, must cease being the laggard among global
integrated oil stocks.
Market Vectors Indonesia ETF (NYSE:
) From one 2012 disappointment in EWZ to another in IDX. The oldest
Indonesia ETF lost just 1.6 percent last year, but that performance
is woeful compared to the returns offered by other ETFs tracking
Southeast Asian nations such as the country-specific funds for the
Philippines and Thailand.
With 2012 in the books, investors will be looking to see if IDX
offers potential for a significant rebound in 2013. In fact, it
does. Indonesia is Southeast Asia's largest economy and the
fourth-largest country in the world by population. Those factoids
do not mean IDX should rise (or fall), but it is worth noting
profits are increasing at large-cap Indonesian firms
J.P. Morgan is sounding a bullish tone on the
What is crucial to the Indonesian investment thesis is that
foreign investors take a proper view of the country. Meaning they
must recognize that the country is not as export-dependent as many
outsiders think it is. Indeed, exports account for 20 percent of
GDP, but Indonesia is arguably the envy of much of the developing
world because its consumers driver 60 percent of GDP.
The government expects 2012 GDP growth of 6.5 percent while the
World Bank is forecasting 6.3 percent growth in 2013. A look at
, which includes a 12.8 percent weight to staples names, shows the
ETF is intimately levered to the Indonesian consumer story.
iShares MSCI Philippines Investable Market Index Fund (NYSE:
) From a Southeast Asian disappointment in IDX to one of 2012's
shining starts in the iShares MSCI Philippines Investable Market
Index Fund. EPHE was not only one of the region's best-performing
ETFs last year, it was one of the best among all emerging markets
funds with a gain of almost 44 percent. A 44 percent surge in one
year obviously begs the question can it happen again the following
Obviously, asking for a repeat of a 44 percent gain is asking a
lot, so investors might do well to temper their expectations with
EPHE in 2013. However, that does not mean the ETF will not impress
again. Actually, the
catalysts are in place for another strong year for
Those catalysts include soaring GDP growth (7.1 percent in the
third quarter, topping estimates of 5.4 percent) and a push for the
Philippine government is far from shy about. Should the country's
economy continue on its current pace, it is unlikely that even
slow-moving ratings agencies will let the country's sovereign
rating languish in junk territory much beyond the second
Another important factor to remember about EPHE and the
Philippines is that, as , the country is not intimately dependent
on exports to China to drive its economic growth. As the top
business process outsourcing destination and the call center
capital of the world, the Philippine economy is far less
export-dependent than many think it is.
There are risks, though. The Philippines is home to rampant
poverty and over-population. Those are cautionary tales on their
own, but a reputation for corruption and graft presents an issue
when it comes to attracting foreign direct investment.
WisdomTree India Earnings ETF (NYSE:
) As , 2012 was a wild year for Indian equities and the ETFs that
track them. EPI finished the year with a 18.5 percent gain, which
is arguably somewhat deceiving given a nasty decline that saw the
fund slide from around $21.60 in late February to $15.60 in early
There are reasons to be cautiously optimistic regarding what
2013 has in store for EPI and other India ETFs. The government has
, including reducing diesel subsidies and opening India's retail
sector to more foreign investment. Inflation, perhaps the biggest
stumbling block for the Indian economy over the past several years,
is moderating a bit and that could give the Reserve Bank of India
room to cut interest rates later this month
An interest rate cut should be supportive of India large-cap
ETFs because these funds are typically heavy on bank stocks and
cyclical sectors. EPI, for example, allocates a combined 39 percent
of its weight to financial services and materials names.
Still, Indian policymakers are carrying heavy burdens going into
2013. Inflation must be reduced, the country must keep hold of its
investment-grade credit rating and domestic infrastructure must
finally be improved.
iShares MSCI All Peru Capped Index Fund (NYSE:
) There are multiple ways of interpreting some of Peru's latest
economic data points. The Andean nation showed economic growth of
6.71 percent in October 2012 compared with October 2011, but that
is down 1.2 percent from September 2012. Still, there is no
debating the fact this South America's fastest-growing economy with
expected 2013 GDP growth of seven percent
Given that Peru is one of the world's largest producers of
copper, gold and silver, EPU is often viewed as a materials play.
It is that with a weight of 51.5 percent to that sector, but there
is more to the story. Financials account for almost 27 percent of
EPU's and that is a good thing because Peruvian banks are
flourishing. Bank lending in Peru
could rise by as much as 18 percent this year
Impressively, Peruvian banks increased lending in 2012 with nary
a bump regarding non-peforming loans. As one example, Credicorp
), EPU's largest holding with a weight of almost 21 percent, had a
non-performing loan ratio of just 2.34 percent at the end of the
second quarter of 2012. Generally, an acceptable NPL ratio is in
the area of five percent. At the end of November, the NPL ratio
among private Peruvian banks was a stellar 1.79
On a related note, Peru's central bank lifted reserve
requirements four times last year in an effort to keep inflation
tame. The outlook for 2013 is generally positive, but EPU returned
almost 24 percent last year, leaving investors to wonder if a
sequel is possible. More upside is possible though Peru will need
at least two of the following three factors to work in its favor:
Continued improvement in the Chinese economy, the same thing in the
U.S. and any type of positive economic momentum out of the
iShares MSCI Thailand Investable Market Index Fund (NYSE:
) Like so many of the other ETFs on this list, the iShares MSCI
Thailand Investable Market Index Fund is coming off a 2012 run that
leaves investors to wonder if similar feats can be repeated in
2013. A 2012 gain of 33.5 percent and closing the year at an
all-time high will do that.
The simple answer regarding THD's 2013 fortunes is that a
negative performance would represent a break from what is becoming
a long-term uptrend. Since the March 2009 market bottom, THD has
been one of the best-performing ETFs of any stripe and the fund has
nearly quadrupled. Of course, past performance is no guarantee of
future returns, but the Thai economy is well-positioned to start
the new year.
The country is expected to see GDP growth of 5.2 percent this
year and is sitting on a streak of 56 consecutive quarters of
according to Investor's Business Daily
. Like the Philippines, Thailand has a debt-to-GDP ratio that would
make a developed market blush, in this case under 42 percent.
Inflation is a concern, particularly after the December report
showed an increase to 3.63 from 2.74 percent in
. That leaves the Bank of Thailand without much wiggle room to
lower interest rates.
That leads into the primary issue regarding THD's continued
bullishness this year. The Thai economy is export-driven and any
slowdown in the global economy can weigh on Thailand. If inflation
jumps while exports fall, the Bank of Thailand may not be able to
cut rates. On the other hand, Thai stocks are resting at 16-year
international investors more than tripled their
of Thai equities in December from November.
Regarding THD, from 2009 through today, it can be said that
every significant pullback endured by the ETF has represented a
buying opportunity. With most signs pointing to another strong year
for the Thai economy, THD's pullbacks may be few and far between
Market Vectors Egypt Index ETF (NYSE:
) This is how strong the Market Vectors Egypt Index ETF was in
2012: The ETF posted a gain of 32 percent despite falling 14.5
percent in the last three months of the year. For much of 2012 EGPT
fought of an array of negative headlines out of Egypt ranging from
bloody protests in Cairo to tensions in other Middle East nations
to a new political regime that appears hardly more pleasant than
the one it replaced.
What EGPT's performance over the last few months of 2012 says is
that the ETF was likely bid higher on optimism that Egyptian
President Mohammed Morsi would be usher in a new era for Egyptian
politics and economics. To this point, that has not been the
Morsi has not been a friend of business and nterference by the
Morsi administration could impact foreign direct investment and
plague Egypt's domestically-focused economy, one that is already
suffering from rampant poverty and high unemployment. Speaking of,
Egypt , but that number doubles for the nation's young people.
Investors' patience with Egypt may be wearing thin making EGPT a
sell if it falls below support at $12.
iShares MSCI Malaysia Index Fund (NYSE:
) With a 2012 gain of 12.5 percent, the iShares MSCI Malaysia Index
Fund appears to be somewhat of an emerging markets laggard,
particularly as far as ETFs tracking Southeast Asian nations go.
That does not mean EWM is not worth a look in 2013. Actually, the
opposite is true.
This year is an election year in Malaysia and are facing what is
expected to be one of Malaysia's most hotly contested
So what is a politician to do when he wants to retain office?
Open up the government coffers to stimulate the economy. That is
what Razak is trying to do with the $444 billion Economic
Transformation Program, which is aimed at bolstering domestic
consumption and reducing poverty. However, there may be limits to
the government largess. The government does not want to exceed a
debt-to-GDP level of 55 percent, but with the number currently in
the 53 percent to 54 percent area, the spending to win elections
scenario may be put to the test this year in Malaysia.
Note two interesting factors about EWM. It has a trailing
12-month yield of 3.66 percent and a beta of just 0.57 against the
according to iShares data
iShares MSCI Mexico Investable Market Index Fund (NYSE:
) The iShares MSCI Mexico Investable Market Index Fund was one of
the juggernauts among Latin American ETFs in 2012 with a gain of
27.5 percent. There are reasons why EWW's uptrend can continue,
though the most prominent one is how much the U.S. economy
EWW and the Mexican economy have already been benefiting from an
influx of manufacturing jobs from China. Rising wages in China have
sent some manufacturing jobs to Mexico and due to higher fuel
prices, some U.S. firms have favored production of goods in Mexico
over China due to the former's proximity to the U.S.
Key to EWW's outlook is how much recently passed . Mexico has
had issues with poor job creation and high unemployment in the
past, but efforts to improve the domestic economy could mean a
boost to domestic consumption. That could be a potential catalyst
for EWW, which allocates more than 38 percent of its combined
weight to staples and discretionary names.
SPDR S&P China ETF (NYSE:
) This list probably would not be complete without at least one
China ETF and the inclusion of such a fund is made all the more
necessary by the impressive performances notched by many China
funds over the last few months of 2012.
For much of 2012, China ETFs provided investors with frustration
as market participants debated the ability of policymakers in
Beijing to engineer a soft landing for the world's second-largest
economy. Slowing growth, dividend cuts by Chinese banks (financial
services are often excessively weighted in China ETFs),
geopolitical controversies and negative headlines regarding some
Chinese small-caps were among the issues to confound investors
looking for China exposure.
China's new leader, Xi Jinping, is working to improve confidence
in the Chinese economy and his efforts are being helped by a spate
of positive economic data to close 2012 that shows China is in
The subsequent ebullience helped lift the iShares FTSE China 25
Index Fund (NYSE:
), the largest China ETF by assets, to a 15.8 percent gain over the
last three months of 2012. That might leave some wondering why .
Fair question, but over the past year, two years and five years,
GXC has consistently (and easily) outperformed FXI. GXC has also
been consistently less volatile than FXI over longer time
Not only that, by GXC is home to 220 stocks, nearly 8.5 times as
many as FXI. Like FXI, GXC's top sector weight is financials at
34.7 percent, but that is far lower than the 57.5 percent FXI
allocates to the same sector.
The good news is that on a valuation basis, Chinese ETFs still
look inexpensive relative to the broader emerging markets universe.
FXI has a P/E ratio of 12.89 and a price-to-book ratio 1.61,
according to iShares data
. GXC is slightly cheaper with a P/E ratio of 10.9 and a
price-to-book ratio of 1.55.
For more on ETFs, click .
(c) 2013 Benzinga.com. Benzinga does not provide investment advice.
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