Investment strategists are overwhelmingly bullish on emerging
markets, especially China, for 2013. Several analysts make their
case for investing in the People's Republic and other developing
countries in the New Year and which ETF they're most bullish on
for the New Year.
Wojtek Zarzycki, chief investment officer at Optimal
Investing, based in Toronto and New York, with $150 million in
assets under management:
The coming year just might bring back the roar of the red
dragon of Chinese equities. The Chinese Shanghai index has
bottomed out at around the 2000 level and is breaking above its
long-term downward trend line, which started during the financial
crisis. This is good news for investors who want to be part of
China's focus on domestic growth and consumption. The Chinese
leaders are focusing inwards as they see headwinds in the
American and European economies in 2013.
Market Vectors China ETF (
) provides a solid correlation to the Shanghai index. Similarly
to the broader index, it is breaking out above a long-term trend
line. Technically speaking, this is a powerful, long-term move by
the ETF, which should propel the investment higher in 2013.
However, for a better confirmation of the technical move, the
ETF needs to close 2012 above the 34 level and 35 would be ideal.
The ETF has risen quickly in December and could provide a good
entry point for investors as it corrects from overbought
territories in the near future.
The second-largest economy in the world cooled off in 2012 as
it managed to create a soft landing for its real estate sector
and the broader economy. As the once-in-a-decade transition of
power is now finalized, China's new leaders will look toward
providing more opportunities for its citizens and creating more
domestic demand and growth as they focus on creating jobs and
wealth for the Chinese population.
Charles Toole, portfolio manager at Braver Capital
Management in Needham, Mass., with more than $650 million in
assets under management:
After a slump in economic activity, the Chinese economy is
starting to reaccelerate as 2012 comes to an end. Our best ETF
idea for the first quarter of 2013 is
iShares FTSE China 25
Index Fund (
). This ETF is a great way to gain exposure to companies in China
that will benefit from an economy that is showing signs of
Chinese economic growth was lower than expected in 2011 and
early 2012. In response to the slowing growth, the People's Bank
of China took steps to ease monetary conditions in the first half
The central bank cut interest rates in June and July and
lowered reserve requirements by 150 basis points on three
separate instances. It is estimated that for every 50 basis
points the reserve requirement is lowered 400 billion Yuan ($63.4
billion) is added to the economy.
These actions helped to increase year-over-year loan growth in
Chinese banks by over 16% at the end of September. The iShares
ETF has over 58% of its holdings in the financial services
sector. These companies will benefit from the continued increase
in banking activity.
The monetary changes are also starting to show results in the
latest manufacturing data. The latest manufacturing Purchasing
Managers Index reading from November was 50.6 which was an
increase over October's reading of 50.2. The reading above 50
indicates growth and the November reading is at a seven-month
The increase in manufacturing activity, which we expect to
continue in the first quarter of 2013, will help companies in the
energy and basic materials sectors. These sectors have a 14.9%
and 10.6%, respective, weighting in this ETF.
An investment in this ETF is not without risk. China's export
economy is tied to the economic activity in developed nations. If
a recession starts in the U.S., or the current recession in the
EU worsens, the performance of China's economy will be
The Chinese economy would also be affected if inflation
expectations rise. Central banks in developed nations are
increasing liquidity and this may cause inflation to rise in
developing nations like China. Higher-than-expected inflation
would put pressure on the People's Bank of China to tighten
monetary policy, which would slow the Chinese economy.
Simon Maierhofer, founder of iSPYETF.com in San Diego,
The most hated markets often deliver the best profit, and
everyone hated China. Barron's July 2, 2011, front cover called
China the "Falling Star" and warned that "the Chinese economy is
slowing. Get ready for a hard landing."
IShares FTSE China 25 Index Fund is the most liquid China ETF
and it broke out of a five-year triangle (chart pattern) on Oct.
11, 2012. FXI is up 10% since then and has led the entire
emerging markets recovery.
Common sense says that a beaten down sector (or country) has
more upside potential and less downside risk than the latest
high-flying Wall Street darling. Parallel to FXI's breakout, the
Shanghai Composite Index traded near its lowest level since
Some U.S. indexes are closing in on QE (quantitative easing)
inflated all-time highs, while Chinese stocks are just inching
off multi-year lows. Sentiment suggests that the Chinese recovery
has more to go and even if it doesn't, the downside risk seems
limited compared to U.S. stocks.
The most beautiful thing about FXI is that it is climbing up a
rising trend line connected by the Sept. 9 and Nov. 16 lows. A
drop below this support line (currently around 37.50) would be a
warning sign and can be used as a stop-loss. A test of this
support line can be used to pick up FXI.
Ronald Lang, principal at Atlas Wealth Management, in the
Philadelphia area with $20 million in assets under management:
Brazil's economy has been strong over the last five to 10 years
despite a pullback over the last two years in conjunction with
the global slowdown. We expect a good run in key Brazilian
over the next 3-1/2 years, while the continued buildout for the
2014 World Cup Soccer and 2016 Olympics takes place.
The economic impact of both events is expected to be around
$120 billion on the high-end, which is 5% of Brazil's overall
There are some analysts that believe the impact will be minor
to Brazil's overall economy because of lower investment levels
(due to global slowdown), lower skilled labor and the global
slowdown depressing their growth potential.
The country has slowed down since 2009, along with most of the
developing and emerging countries, but Brazil will keep investing
over the next few years in their infrastructure at a higher
growth rate, which the other developing and emerging countries
will not be expected to match.
You could consider building a position in
iSharesMSCI Brazil Index
) within 3% of current price levels. The P-E ratio is 14.43 and
book value is 1.26, compared to
iShares S&P Latin America 40
), which has a P-E ratio of 14 and book value of 1.76.
EWZ would be considered undervalued. If the global economy
rebounds in late 2013, developing countries will look for global
investments. Why not emerging countries again, especially Brazil,
which will continue to be in the eye of two major events by 2016?
The larger Brazilian companies will benefit from the future
Over the next three or more years, you may see at least a
10%-15% or more growth rate in the broad-based EWZ by the World
Cup and Olympics.
From a wealth management perspective and your risk tolerance,
this could be up to 5% of your medium-term portfolio. You may
want to consider lightening your position or selling it by late
2015, early 2016.
Tom Lydon, editor of ETFtrends.com in Irvine,
Over 2012, investors emphasized safety first, pressuring
yields and sticking to quality U.S. equities. This has only
fueled the fire that U.S. investors are underallocated
As we head into 2013, investors will find greater investment
opportunities in emerging markets as dividend yields are
competitive and corporate balance sheets are looking better than
ever in these regions.
For instance,WisdomTree Emerging Markets Equity Income Fund (
) provides diversified exposure to emerging market companies with
a focus on income generation.
DEM comes with a 5.7% distribution yield and follows a
modified weight methodology that leans toward annual cash
dividends paid out, instead of total dividend yield.
Consequently, the underlying index will have a heavier allocation
toward large-cap value companies, which are also safer or
healthier than most emerging market companies.
Like U.S. equities, paying emerging market companies have also
historically outperformed stocks with little or no dividends.
Over the past five years, DEM has gained almost 6% compared to
the MSCI Emerging Markets Index's return of about -15%.
Looking at overall growth, the emerging markets also look more
attractive, compared to the U.S., where spending cuts and tax
hikes will have a negative effect on the economy, and a recession
in Europe after their prolonged debt crisis.
Meanwhile, emerging markets are looking inward, relying less
on export demand and more on domestic spending and consumption,
as a way to provide sustainable economic growth.
Moreover, DEM could also enjoy a small boost from a weaker
U.S. dollar over the longer term. Emerging market countries have
a positive growth outlook, healthy balance sheets and large
foreign reserves, which will help the countries attract greater
foreign investments and strengthen their domestic currencies.
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