5 Foreign ETF Investing Picks For 4th Quarter 2013


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Where are the global stock markets headed in fourth quarter and where should investors venture?

Several investment strategists share their outlook and best ETF investing ideas for the final stretch of 2013.

1.iShares MSCI Italy ( EWI ).

Bill Witherell, chief global economist at Cumberland Advisors in Sarasota, Fla., with $2.2 billion in assets under management:

The moderate recovery in the eurozone economy remains on track. The latest indication is the flash reading for September of the Markit Purchasing Managers' Index. The composite index covering both manufacturing and services rose from 51.5 to 52.1, the highest level in 27 months.

Gross domestic product growth for the eurozone as a whole became positive in the second quarter and is projected to remain positive but slow going forward. GDP growth for 2014 may be only slightly above 1%.

Eurozone stock markets have responded strongly to the return of modest growth in the economy. According to the MSCI comprehensive indexes for national equity markets, the eurozone equity market in aggregate has increased by 16% over the past three months, which is better than the 6% for the U.S., the 12% for the advanced markets outside North America and 8% for emerging markets.

The explanation for this outperformance, despite subdued prospects for economic growth, appears to be valuation. Equity valuations suffered from the past crisis and from doubts about the future of Europe. Comparing the Stoxx Europe 600 with the S&P 500, we see that the price-earnings ratio for the Stoxx Europe 600 is still only 13.1, compared with 14.9 for the S&P 500. The corresponding price-to-book value ratios are 1.7 vs. 2.5.

Of the eurozone's larger equity markets and economies, Spain's and Italy's are the two that have gone through much more difficult times during the past two years. Spain's Prime Minister Mariano Rajoy announced that Spain has emerged in late summer from two painful years of recession.

It looks likely that Italy has as well. Rajoy noted that Spain still faces years of fiscal austerity and difficult adjustments. He concluded that "Spain is out of the recession but not out of crisis."

The same could be said for Italy. In large part because their valuations have been driven so low (the price-to-book values are 1.0 and 0.9), these markets have outperformed during the recovery over the past three months: Spain, 23.3%; and Italy, 21.8%.

2.Vanguard FTSE All-World ex-U.S. ( VEU )

Chris Costanzo, investment officer at Tanglewood Wealth Management in Houston with $750 million in client assets.

We own VEU across all client portfolios. It is time for investors to consider tilting their portfolio exposure away from outperforming domestic equities toward underperforming international equities. Valuations in international markets look attractive.

While most people talk about Shiller price-earnings ratios in the U.S. as being expensive, not many mention that Europe and Asia are selling at large discounts to their historical median Shiller P/Es.

The 12-month forward P/E of the MSCI Europe index is statistically correlated to average returns over the next 10 years. At 10 times forward (earnings), we have historically seen 15%-plus returns over the following 10 years. The 1999 multiple of 25 times led to 4% returns over the following 10 years.

Currently, at 13.1 times we are at levels that historically have seen 10%-15% returns. Not extremely undervalued, but attractive.

VEU yields 3%, has a low expense ratio of 0.15% and has exposure to emerging markets, which are also undervalued. The regional allocation is 18% emerging markets, 46% Europe, 29% Pacific and 7% Americas.

PMI surveys across the world are improving with increases in the U.K., eurozone and Japan, which tend to foretell earnings growth.

3.Short iShares MSCI Australia ( EWA ) .

Srinivas Thiruvadanthai, research director at the Jerome Levy Forecasting Center in Mount Kisco, N.Y.: Australia has multiple vulnerabilities: heavy reliance on key commodity exports to China, an unsustainable boom in mining investment, hugely overvalued home prices and a banking sector that is dependent on wholesale funding from international markets.

A hard landing in China will not only strike Australia's exports and current account hard, but also exacerbate any weakness in mining investment. In fact, the unprecedented investment in mining structures and equipment that has been supporting the Australian economy is already peaking.

Meanwhile, rate cuts helped the housing bubble in Australia defy gravity, but the household debt-to-income ratio is at record levels and the labor market is weakening. The housing market is vulnerable.

Lastly, Australia's banks are exposed to the real estate sector and also to international funding. Any adverse international financial developments would create problems for Australia's banks.

The imbalances in the Australian economy are reflected well in EWA, which has a 17% weighting in basic materials stocks and a whopping 43% weighting in financial services.

A short EWA position will also benefit from weakening in the Australian dollar, which even after recent declines is in real terms roughly 30% above its long-term average.

For those who are long in China, Australia's domestic problems combined with its heavy Chinese exposure make a short Australia position a well-suited hedge to long Chinese positions.

4.iShares MSCI Brazil Index ETF ( EWZ ).

Brett Owens, editor of Contrarian Advantage : According to research by investing guru Mebane Faber, we can average triple-digit returns when we buy "clobbered countries" -- those that shed 50% or more of their stock market value.

Brazilian shares fit the bill. A grinding three-year bear market has the market selling at "half off" its 2010 price. When Brazil is motoring as it was in 2007 and during the 2009-10 "reflation rally," it's an emerging market "blue chipper."

Since topping in late 2010, the mainstream investing community has left Brazil for dead at exactly the wrong time. A reasonable Chinese economy could really get Brazilian stocks rocking and rolling. And we have a chance to make triple-digit returns, while risking only a small portion of our capital.

5.db X-trackers MSCI Germany Hedged Equity ( DBGR ).

Martin Kremenstein, Americas head of passive asset management at Deutsche Asset & Wealth Management in New York with $60 billion in assets under management: Germany's recent re-election of Chancellor Angela Merkel has provided strength to the country, producing a ripple effect throughout the eurozone.

While German equities stand to benefit, questions still remain as to whether neighboring countries will impact the price of the euro. For the past three years, investors' fears of the eurozone's instability have left many on the sidelines, but now that the political situation in Germany has been decided, many economists believe Germany will continue its upward growth trend.

With this in mind, U.S. investors should consider direct investments in German equities, while remaining cautious on the euro. Those who seek to invest in German companies without exposure to the currency risks involved should consider the db X-trackers MSCI Germany Hedged Equity Fund, which mitigates the impact of fluctuations between the U.S. dollar and the euro.

Many investors are still not aware of the currency risks they inherit when they invest in international equities. The biggest misconception is the belief that because you purchase an ETF in U.S. dollars, you do not have currency exposure.

The prices of unhedged ETFs are determined by both the stock and currency values. This means that the underlying stocks can rise in value, but your investment can fall due to moves in the currency.

Hedged equity ETFs, such as those on Deutsche Asset & Wealth Management's db X-trackers platform, offer a solution to this problem. Currency hedging can reduce volatility in portfolios and allow investors to position themselves for changing head winds in the market.

Follow Trang Ho on Twitter @IBD_THo .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: DBGR , EWA , EWI , EWZ , VEU

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