Biggest ETF Losers In Q1: Time To Buy The Fear?


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With the stock market just a day away from completing the first quarter, ETFs tracking Russia, Japan and China can pretty much assure their place on the podium as the biggest losers. Investing strategists say they're worth watching because low valuations will eventually attract bargain hunters and contrarians.

Russia: The New Pariah State

Investors inMarket Vectors Russia ETF ( RSX ) were down 21% year to date, whileMarket Vectors Russia Small-Cap ( RSXJ ) plunged 28%. By comparison, SPDR S&P 500 ( SPY ) was up 0.8%.IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, was off 0.35%, while iShares MSCI Emerging Markets Index ( EEM ) lost 3%.

RSX is trading at rock-bottom valuations of six times earnings and 0.7 times book value while foreign markets are trading with a price-to-earnings ratio of 13 and price-to-book value of 1.6, according to Morningstar.

Russia, the world's largest oil and gas producer, has sold off on expectations that it will lose its biggest natgas customer, Europe, because of the U.S. natural gas boom coming next year, says Herb W. Morgan, CEO and chief investment adviser at Efficient Market Advisors, with $43 million in assets under management, in San Diego.

"Historically when Russia gets to 4.0 times earnings the one-year returns going forward are awesome," Morgan said in an email. "The problem is they need growth and earnings from more than natural gas."

He expects Russia to correct further because of sanctions and believes it will be a buying opportunity when Russia trades at four times earnings or less.

Sanctions following Russia's takeover of the Crimea are expected to slow foreign investor inflow and will hurt Russian companies' ability to borrow money to expand operations.

"While the sanctions so far do not impose any direct restrictions on the Russian energy sector, they undermine investor confidence, impeding Moscow's efforts to generate economic growth through expanded investment," Julia Nanay, a Russia and Caspian energy expert with IHS Global Insight, wrote in a note Wednesday. "The sanctions on Russian officials, as well as ratings downgrades on investment, may negatively impact various big-ticket upstream and midstream projects perceived as vital for the Russian state -- including gas pipelines, LNG (liquefied natural gas) projects and offshore exploration."

The ruble has depreciated 7% against the dollar year to date, further wounding Russia's economic growth potential. In an effort to stabilize the ruble, Russia's central bank raised its policy interest rate by 150 basis points and spent $11 billion, or 2% of the country's reserves, to support the currency.

Skyfall In Japan

WisdomTree Japan Hedged Equity (DXJ) dropped 8% year to date after outperforming most global markets last year with a 41% return. Japan's stock market could drop another 10% if investor confidence doesn't return soon, says CJ Brott, chairman of Capital Ideas, a registered investment advisory in Dallas.

"Markets fear upcoming higher domestic taxes, a lack of corporate expansion and a stronger yen," Brott said in an email. "Doubt about future growth is so strong that it has spilled over into currency markets and destabilized the yen."

DXJ trades with a P/E of 13 and P/B of 1, which is slightly cheaper than foreign stocks as a whole.IShares MSCI Japan (EWJ) also fell 10% year to date. Morgan recommends buying Japan on the dips.

"Japan sold off because the market is concerned about Japan not implementing structural reforms alongside the massive monetary expansion," Morgan wrote. "Monetary expansion only gives cover and time to implement things. Also there is an imminent increase in the value-added tax in Japan. This is thought to 'pull forward' some GDP (gross domestic product) as people buy in advance to avoid the tax increase."

China's Great Wall Of Debt

IShares China Large-Cap (FXI) popped the last week of March, paring its year-to-date loss to 7%.Db X-trackers Harvest China ETF (ASHR), targeting A shares reserved to mainland citizens, was down 11%. The market sold off on fears of China's slowing economic growth. Some economists estimate the People's Republic expanded 5% in January and February, marking the slowest economic growth rate since the 2008 financial crisis.

China's stock market rebounded the past week on optimism that the government will enact more fiscal and monetary stimulus to achieve its GDP growth targets. But that will be short-lived and the market will continue to be very volatile, says Robbert van Batenburg, director of market strategy at Newedge, a global brokerage firm.

"The economic slowdown could exacerbate the stress in China's credit markets," van Batenburg wrote in a note. "Even in the best of times, many smaller companies were barely profitable and they may now be faced with rising liquidity and solvency risks, with obvious consequences for their creditors."

And if property values decline further, it could trigger a flood of loan defaults as most loans are backed by property and most investing trust products are invested in real estate, van Batenburg added. Most Chinese invest in real estate rather than bonds or the stock market. Households have about two-thirds of their wealth in real estate in China, while U.S. households have 41% of their wealth in real estate, according to "Survive & Prosper," a newsletter published by Dent Research in Delray Beach, Fla. In Beijing, households have 84% of their wealth tied up in real estate.

"The government wants to curb lending so that a growing credit bubble doesn't collapse on itself," Rodney Johnson, senior editor of "Survive & Prosper," wrote March 25. "This will mean fewer funds will be available for the next round of homeowners, which could cause a fall in home prices."

"In this area, they're caught between a rock and a hard place," Strong added. "Will they keep the bubble going and risk a bigger crash, or will they constrict credit and cause some short-term pain that could lead to social unrest?"

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
More Headlines for: RSX , RSXJ , SPY , EFA , EEM

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