Why Emerging Market ETFs Sank First Session Of 2014

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After severely lagging the U.S. and developed markets last year, emerging markets are adding insult to injury in the new year. Their stock markets kicked off the first trading day of 2014 with their biggest one-day sell-off in six months.

Investors were troubled by anti-government protestors roiling Thailand, weak economic reports from China and a sudden surge in the U.S. dollar.

"Lack of liquidity in the markets due to holidays exacerbated the sell-off," Neena Mishra, director of ETF research at Zacks Investment Research in Chicago, said in an email.

Vanguard FTSE Emerging Markets ETF ( VWO ), the largest ETF in category by assets, plunged nearly 3.5%. By contrast, iShares MSCI EAFE ( EFA ), tracking foreign developed markets, slid 1.9% and SPDR S&P 500 ( SPY ) fell 0.9%.

"Today's tape action should not be surprising, nor should it be alarming," Anthony Danaher, president of Guild Investment Management in Los Angeles with $170 million in assets under management, said in an email. "A lot of portfolio decisions -- especially sales -- may have been pushed into 2014 for tax reasons."

Thailand's Political Turmoil

IShares MSCI Thailand ( THD ) sold off hardest among all equity ETFs, plunging 9% to its lowest level in nearly two years. It tumbled 15% in 2013. It has been trending lower since May and now trades deeply below both its 50-day and 200-day moving averages, indicative of severe weakness. But it's also very oversold, making it ripe for a sudden snap-back rally from bottom fishers and short-covering. Traders betting on falling prices have to buy back shares to close their positions, thereby creating demand.

Antigovernment protestors threatened to shut down Bangkok by Jan. 13 in hopes of ousting Prime Minister Yingluck Shinawatra and derailing national elections set for Feb. 2. Yingluck threatened to declare a national emergency, which would impose curfews and allow information censorship. Thailand's economy and tourism industry may take a huge hit ahead of Chinese New Year on Jan. 31. The baht currency fell for an 11th straight day -- it's longest losing streak on record, Phuket Wan Tourism News reported .

China Manufacturing Weakens

IShares China Large-Cap ( FXI ), the flagship ETF for the world's second-largest economy, tumbled 3%. It broke below key price support at the short-term 50-day moving average but it still trades above its 200-day line, indicating a weak uptrend. It ended 2013 down 2% after forming a bottom in July.

The HSBC/Markit Purchasing Managers' Index (PMI) for China fell to a three-month low of 50.5 in December, although it remains above 50, the minimum reading for expansion, Reuters reported .

China should enjoy economic growth of at least 7% this year, but interest rates are rising. Guild Investment Advisory doesn't recommend investing there. "The government is being forced to do repeated short-term squeezes on the nonofficial lending sector -- unofficial banks and illegal lenders who are overlevered," Guild wrote in a client note released Thursday. "Further, the government is trying to tighten the reins on provincial governments who have engaged in and encouraged too much real estate speculation."

Greenback Rebound

The dollar kicked off the New Year with a bang, thereby amplifying losses in foreign investments. Gains made in foreign currencies convert to fewer dollars as the dollar strengthens.

PowerShares DB U.S. Dollar Index Bullish (UUP), measuring the dollar against a basket of foreign currencies, gapped up 0.6%. Although it broke above the 50-day line, it remains deeply below the 200-day line, indicating a strong downtrend. It dipped 1.3% last year.

The dollar rallied on positive economic data. Unemployment claims dropped by 2,000 to 339,000 the last week of 2013, the Labor Department reported Thursday. The Institute for Supply Management's index of U.S. manufacturing beat Wall Street expectations and showed expansion for a seventh month straight in December. New orders rose to their highest level since April 2010. The Employment Index rose to the highest level since 2011.

IHS Global projects the unemployment rate will dip from 7.4% in 2013 to 6.5% in 2014, while gross domestic product grows 2.7% in 2014 after expanding 1.9% last year.

"While we look forward to a much better 2014, it should be remembered that 2.7% growth still remains below the economy's average annual growth of 3.0% between 1990 and 2007," Doug Handler, chief U.S. economist at IHS, wrote in a note. "The threats to this growth are all the usual suspects: policy missteps from Washington, including a deadlocked debt-ceiling debate; weaker-than-expected growth in many key U.S. trading partners, hurting export growth; and interest rates rising especially sharply in reaction to either additional tapering or renewed fears of inflation. These risks are all viewed as unlikely."

Follow Trang Ho on Twitter @IBD_THo .



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: EFA , FXI , SPY , THD , VWO

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