The awards for hottest ETF investing destination in 2012 goes
to Turkey, the Philippines and Egypt. They rallied 63%, 46% and
37% this year as of Dec. 26, respectively, while their benchmark,
MSCI Emerging Markets Index (
) returned 18%.IShares MSCI EAFE Index (
), tracking foreign developed markets, added a handsome 20%.
Investment strategists we polled are betting on a new crop of
leaders -- Austria, the European Monetary Union, Japan and
Singapore -- to emerge in 2013. They explain which
they're betting on in the New Year and why.
Leila Heckman, managing director of The Roosevelt
Investment Group in New York City, with $5 billion in assets
IShares MSCI Austria (
) is a relatively cheap market with forecasted 2013
price-to-earnings ratio of 10 and a price-to-book ratio of less
Austria is also considered one of the least risky markets in
terms of possible default on its sovereign bonds. One measure of
country-specific risk that we measure is the level of its
sovereign bond yields over the appropriate "riskless" instrument.
In the case of Austria, we are measuring the difference between
its sovereign bond yields and those of German Bunds. This is
called the sovereign yield spread over Bunds. Austria's sovereign
bond yields are close to those of German Bunds and its sovereign
spreads over German Bunds have been narrowing. In addition, price
momentum of its equity market has been relatively strong over the
David Allen, portfolio manager at Accuvest Global
Advisors in Walnut Creek, Calif., with $465 million in assets
IShares MSCI Austria (
) has risen to the top of our country ranking model and is one of
our most attractive countries heading into 2013, despite Europe's
perceived risk from central bank uncertainty. Similar to the way
that Germany led markets to start 2012, we feel Austria is poised
to follow a similar trajectory. A closer look at Austria reveals
a country with cheap valuations, positive momentum, and
Short and intermediate price momentum has been extremely
strong. For the three-month period ending in November, it was the
best performing country we follow, outpacing the MSCI All Country
World Index by over 10%. Despite that recent run in performance,
both absolute and relative valuations remain attractive. Austria
currently trades at a 10.3 price-to-earnings ratio, which is both
cheap relative to the rest of the world, but also to its average
P/E over the last five years.
The key risks for Austria heading into 2013 are in their
fundamentals and headline volatility. In terms of their
fundamentals, their Organisation for Economic Co-operation and
Development (OECD) leading indicators have been decelerating and
their earnings-per-share growth trend is negative. Additionally,
if the volatility we experienced at a country level in 2012
persists, European names will continue to show exaggerated
movements with headline events. Despite these risks, we believe
that a consistent overweight to Austria will be rewarded over the
three- to six-month timeframe.
Rick Vollaro, chief investment strategist at Pinnacle
Advisory Group in Columbia, Md., with $1 billion in assets
We believe the trend of relative outperformance from U.S.
assets will likely undergo a shift to global over domestic in
2013. European equities are poised to perform very well in 2013
relative to U.S. for several reasons:
1. The European Central Bank (ECB) has shown a credible
backstop for the system in the Outright Monetary Transactions
(OMT) program, and is willing to buy bonds on the periphery in
unlimited amounts. This has eliminated the risk of a banking
crisis, has stabilized the euro currency, and is benefiting the
periphery of the e urozone by allowing for lower bond yields in
Italy, Spain, etc.
2. Growth appears to be stabilizing in the region and
austerity headwinds should ease in 2013. German confidence has
been picking up to support the core, and even the peripheral
economies have an improving growth profile on a rate-of-change
3. European earnings are at long-term lows, and continuing
improvement in the region could unlock a rerating in
4. Parts of the periphery have undergone historic declines (in
excess of 70% for Italy) and are deeply undervalued, particularly
on a price-to-book basis.
One ETF we have purchased is
MSCI EMU Index (
), tracking developed Europe minus the United Kingdom. It invests
countries of the European Monetary Union and strips out the U.K.
The ETF has large weights in France, Germany, Spain, and
EZU is unhedged, which means that the euro vs. dollar
relationship represents a risk for U.S. investors. The euro
currency has enjoyed a nice run since the summer as speculators
have piled out of the "euro-breakup" trade, but it could become a
risk later in 2013 if currency markets refocus on growth and rate
differentials and less on the risk of a breakup.
Other risks include a fiscal cliff-induced U.S. recession that
reverses the stabilization occurring in eurozone area growth via
less exports to the U.S., or a reversal in the political trend
that is slowly creating a more united Europe rather than one that
is more divided.
Carl Delfeld, managing director of Chartwell Partners in
Japan's Liberal Democratic Party leader Shinzo Abe, who was
thrown out with the LDP in 2007, will return as prime minister
after a smashing victory and supermajority in the Diet's lower
Japan's stock market has fallen 40% since Abe left in 2007.
One reason for the many poorly performing Japanese stocks is that
their management doesn't put a high priority on share price.
Management is paid in cash, not stock options, so goals like
market share and top-line growth are a higher priority than stock
price. This also leads to Japanese companies constantly raising
new capital by issuing new shares, thereby diluting existing
Since the election was called about a month ago, Japan's
market has surged 14%. This momentum should continue near term
for a number of reasons. First, Abe is committed to getting the
Bank of Japan to pump liquidity into its economy to try to get
some mojo going. Second, this will help push down the value of
the yen, which has risen about 25% since 2009, boosting exports
and the export-oriented stock market. A weaker yen should benefit
large-cap multinationals that mostly make up
MSCI Japan Index (
The Japanese economy faces staggering demographic and debt
headwinds. The proportion of Japanese ages 65 and above has gone
from 5% in 1950 to 25% in 2012. By 2030, there will be only two
workers for every one retiree. The ongoing dispute with China
over islets in East China Sea recently led to protests and 10
billion yen of damages to Japanese businesses in China. Chinese
visitors to Japan dropped 33% in October. Japan remains the
biggest direct investor in China -- twice that of America. Japan
ranks 24th in the world in ease of doing business surveys,
ranking far below eighth-ranked rival South Korea.
The country faces many economic uncertainties. The LDP's
campaign called for more stimulus and infrastructure spending but
how does this square with a national debt almost 2-1/2 times its
gross domestic product? Will the new government repeal the
proposed increase in the consumption tax in April 2014? And what
about long overdue but tough structural reforms in agriculture,
banking, and trade?
IShares MSCI Singapore Small Cap Fund (EWSS) is a Singapore
property play. So far this year, four of the top-10
best-performing REITs (real estate investment trusts) with assets
of more than $250 million in the Pacific region are from
For example, according to a recent S&P report at the end
of the second quarter, here is how Asia-Pacific property markets
stacked up against U.S. property markets:
1. Offer a higher dividend yield than U.S.
2. Trade at less than book value vs. 2.4 times for U.S.
3. Trade at much lower price-to-earnings ratio than U.S.
4. Earned a return on equity four times that of U.S.
Frasers Commercial Trust (FCOT) has returned 57% this year,
AIMS AMP Capital Industrial REIT 48% andKeppel Land Ltd.'s K-REIT
Asia (KREIT) 46%. You could invest in these REITs through the
Singapore market but there are no ADRs (American depositary
receipts) traded at all on major U.S. exchanges. EWSS is the best
tool for capturing Singapore property markets -- far superior to
MSCI Singapore Index (EWS). Some 51.8% of the EWSS basket is
property companies and only 13.8% for EWS.
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