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
inMarket Vectors Russia ETF (
) were down 21% year to date, whileMarket Vectors Russia
) plunged 28%. By comparison,
SPDR S&P 500
) was up 0.8%.IShares MSCI EAFE Index (
), tracking developed foreign markets, was off 0.35%, while
MSCI Emerging Markets Index (
) 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
"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
"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?"