Emerging ETFs Sink; World Bank Sees Slower Growth

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ETF investors dumped emerging-market ETFs after the World Bank lowered its economic growth forecasts for developing East Asia and the Pacific. Noting that countries dependent on commodities exports are vulnerable to a global contraction, it said China's slowdown could worsen and last longer than analysts expect. Asset managers agree that domestic demand fails to offset the weakness in exports to Europe and the U.S.

IShares MSCI Emerging Markets Index ( EEM ) -- the flagship fund of its kind -- dropped 0.93% to 41.56.IShares FTSE China 25 Index Fund ( FXI ) -- the largest ETF with exposure to the People's Republic -- fell 1.07% to 34.99.

"Emerging-market stocks have had such a nice rally over the past couple of months that traders will use any excuse to take profits," said Matthew Tuttle, CEO of Tuttle Wealth Management in Stamford, Conn.


The World Bank projects that developing East Asia's economy will grow 7.2% in 2012, down from an estimated 7.6% in May. It sees the region expanding 7.6% in 2013, slower than the 8.0% originally seen. The region includes Cambodia, China, East Timor, Indonesia, Laos, Malaysia, Mongolia, Papua New Guinea, the Philippines, Thailand, Vietnam and the Pacific islands. The World Bank expects China, the world's second-largest economy, to expand 7.7% in 2012 and 8.1% in the 2013 because of declining property values and poor demand for exports.

Alan E. Rosenfield, managing director of Harmony Asset Management in Scottsdale, Ariz., estimates China's growth rate could be half that. "They own currencies that are printing money as fast as they can, making the currencies China holds worth less every day," he said.

Chinese citizens will have to pay higher taxes to finance the country's debts and will have less money to spend on consumer goods, Rosenfield explains. "Also, individuals are laden with overvalued real estate and that has not been factored into the equation," he added.

The bad news rippled to developed Asian countries.IShares MSCI Taiwan Index ( EWT ),IShares MSCI Singapore Index ( EWS ),IShares MSCI South Korea Index ( EWY ) all gapped down 1% to 1.4%.

EEM is holding above key price support at its 200-day moving average, so its uptrend remains intact. In the past month, EEM returned 7.95%, outpacing developed markets by nearly 2 percentage points. It's returned 11.94% year to date and 20.06% in the past year on par with the MSCI EAFE index for developed markets.

Valuations Still Attractive

"Valuations in emerging markets look attractive in the long term as the price-to-earnings ratio stands at less than 11.4 times earnings for 2012; the S&P 500 is at about 14 times," said Kenneth Heck, chief financial officer at Heck Capital Advisors in Rhinelander, Wis. "This should help emerging-market prices hold up well relative to the U.S. markets in the event of a sell-off."

FXI appears to have hit price resistance at its 200-day line, which is bearish. It's climbed 9.95% in the past month, 3.98% year to date and 17.23% in the past year.

"Markets if anything may be anticipating stimulus to come, perhaps in the first quarter, causing China's stocks to begin outperforming the U.S.," said Michael Gayed, chief investment strategist at Pension Partners in New York.



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



This article appears in: Investing , ETFs

Referenced Stocks: EEM , EWS , EWT , EWY , FXI

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