Here's a harsh byproduct regarding the behavior of global
equity markets since April: Emerging markets stocks and ETFs have
been badly bruised as concerns about the future of the Euro Zone
have escalated. While traders and investors may be adjusting the
fact that it's only a matter of months before Greece departs the
Euro Zone and that Spain may not be far behind, that adjustment
in attitude has not meant shelter from the storm for emerging
markets fare.
Of course, major emerging markets such as the BRICS quintet -
Brazil, Russia, India, China and South Africa - have their own
specific problems that serve as the cherry atop a toxic sundae
facing investors that are considering international
positions.
Using the five major BRICS ETFs as our benchmarks, those being
the iShares MSCI Brazil Index Fund (NYSE:
EWZ
), the Market Vectors Russia ETF (NYSE:
RSX
), the WisdomTree India Earnings ETF (NYSE:
EPI
), the iShares FTSE China 25 Index Fund (NYSE:
FXI
) and the iShares MSCI South Africa Index Fund (NYSE:
EZA
), we find nothing but brutal performances in the past month.
For those keeping score at home, EZA is the best performer of
the major BRICS ETFs since April 23 and that's saying nothing
because the fund is down almost 8%. EWZ and RSX are down more
than twice that amount. With a loss of nearly 14% over that time,
EPI is no peach either and FXI isn't exactly inviting with a drop
of 11.5%.
With the halfway point of 2012 rapidly approaching, let's have
a look at what the second half of 2012 might have in store for
these ETFs and in what order investors should prefer BRICs
ETFs.
iShares FTSE China 25 Index Fund
Putting China atop this list wasn't the toughest of calls for a
couple of reasons. First, Chinese policymakers have shown a
willingness to act in an effort to skirt a hard landing. The
recent lowering of bank reserve requirements says as much.
Second, China appears intent on at least trying to steer its
massive economy toward more domestic consumption.
Then there valuation. FXI's P/E ratio is less than 13. That
compares to over 16 for the iShares MSCI Emerging Markets Index
Fund (NYSE:
EEM
) and over 15 for EWZ. Admittedly, the risk here is that Chinese
equities have appeared cheap for some time and few investors
appear to be taking the bait.
Market Vectors Russia ETF
The further down the list we go, the trickier the calls become
and that's the case right here with Russia and RSX. There are two
catalysts that have the potential to drive RSX higher in the
near-term. Again, valuation enters the equation as Russian stocks
are trading at a steep discount to the broader emeging markets
universe. They're even cheaper on a P/E basis than Chinese
equities.
Second, oil prices cannot be ignored and they explain the
recent drubbing RSX and other Russia funds have endured. The time
to buy RSX might be right now as Russia's benchmark Micex Index
could jump 10% this week if Brent crude flirts with $119 per
barrel,
Bloomberg reported, citing an HSBC research
note
.
iShares MSCI Brazil Index Fund
This is a tepid endorsement here in the third spot because it's
going to take a lot of moving parts to get EWZ headed in the
right direction again. Clearly, Petrobras (NYSE:
PBR
) needs to trade well above $20 to have a meaningful impact on
EWZ. Even that doesn't account for
a less than desirable political environment in
South America's largest economy
.
Inflation is still an issue and there are growing concerns
about domestic growth this year. As a one-day anecdotal example,
most emerging markets ETFs are higher on Monday, but the Market
Vectors Brazil Small-Cap ETF (NYSE:
BRF
) is lower once again, perhaps a sign investors still aren't
convinced Brazilian equities are poised to rally.
iShares MSCI South Africa Index Fund (NYSE:
EZA
)
Last week was the worst in six months for South African equities.
Given that EZA hasn't fallen as much as the other funds mentioned
yet has a P/E of 17.6, it can be argued that it's only a matter
of time before the ETF falls victim to elevated selling
pressure.
The chart is a mess as EZA is trading below its 50- and
200-day moving averages, and another 8%-10% could easily be shave
off this fund before it finds material support. The country is
arguably politically volatile and unemployment is almost 24%, two
factors that cannot be ignored.
WisdomTree India Earnings ETF
A host of catalysts indicate EPI and its India ETF brethren could
be in for more declines. Today, Morgan Stanley slashed its 2012
India GDP growth forecast to 6.3% from 6.9% and its forecast for
next year to 6.8% from 7.5%. The bank cited a high national
deficits and slowing private investment, among other factors.
As we
reported last month, chances are decent India
could lose its already tenuous investment grade status
. With that, the country could face expulsion from BRICS and
weakening rupee is raising the cost of imports. A couple more bad
trading days could take EPI down to its 52-week low. Simply put,
India was an easy choice for the last spot on this list.
For more on emerging markets ETFs, please click
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.
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