Emerging markets, an interesting term devised in 1981, first appeared when mutual fund investments were being promoted in the developing countries. Ever since, it's used in different connotations for various economies. Whatever the context, emerging markets are a true indicator of the socio-political and economic landscape of a country.
Most of the economic development is achieved on the wings of trained manpower, abundant natural resources and sound financial systems. Emerging markets look ahead and create fresh space for investments as well as lay the foundation stone of sustained future growth. With the opening up of such economies, comes a marked spurt in GDP levels and a distinct ‘trickle-down’ effect, which percolates to people at the grassroots levels. Thus is created a new middle class and fresh markets for future investments.
The Morgan Stanley Capital International (MSCI) Emerging Market Index is one of the best captures of emerging markets. It constitutes 23 emerging markets from different regions. To understand these markets better we track them region-wise, starting with Asia.
According to the MSCI, “the Emerging Markets (EM) Asia Index captures large and mid cap representation across eight emerging markets countries, with 542 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.” The country-wise weights in the index show that China makes up about one-third of the index with its 33.78% allocation, followed by South Korea at 22.37%. Taiwan, India and Malaysia have an 18.06%, 12.83% and 4.51% allocation each while the remaining three countries – Indonesia, Philippines and Thailand together have an 8.45% weightage in the index.
Although the index is a great representation of these Asian emerging markets, it is not an equal representation at the same time. Let’s look at these eight countries closely, understanding their economic status, stock market trends and investment opportunities.
Seoul, South Korea. Shutterstock photo
South Korea’s journey from a war-devastated state to a ‘trillion dollar-club’ economy has been spectacular. Although, the country is often perceived as developed, it has not quite reached that level. During the period 1980-1997, South Korea’s economy demonstrated an incredible average annual growth of 8.2%; however, longstanding weaknesses in its economy (like high levels of short-term foreign borrowing) were exposed during the Asian financial crisis.
Despite numerous measures put in place after the 1997 mayhem, South Korea’s export-oriented economy was hit yet again in 2008, though it was quick to recover. The US-Korea free trade agreement came into effect in early 2012, but hasn’t been able to spur South Korea’s economy. The country is the home to some of the best known companies like Samsung Electronics Co. Ltd., Hyundai Motors Company Limited, Kia Motors Corporation, Hyundai Heavy Industries Company Limited and POSCO. The country has great potential to grow but needs to tackle some of the challenges, the heavy dependence of its GDP on exports being one of them.
South Korea’s markets represented by Korea Composite Stock Price Index, KOSPI SK Hynix, posted returns of 21.9%, 11.0%, 9.4%, 0.7% and (4.8%) in the years 2010, 2011, 2012, 2013 and 2014, respectively. KOSPI is up by 5.43% in 2015 year-to-date. Some of the popular ETFs tacking South Korea are the iShares MSCI South Korea Capped ETF (EWY), Deutsche X-trackers MSCI South Korea Hedged Equity ETF (DBKO), WisdomTree Korea Hedged Equity Fund (DXKW), Horizons Korea KOSPI 200 ETF (HKOR), First Trust South Korea AlphaDEX Fund (FKO), SPDR MSCI South Korea Quality Mix ETF (QKOR) and iShares Currency Hedged MSCI South Korea ETF (HEWY).
Petronas Twin Towers in Kuala Lumpur, Malaysia. Shutterstock photo
According to the World Bank, “Malaysia is a highly open, upper-middle income economy. Malaysia was one of 13 countries identified by the Commission on Growth and Development in its 2008 Growth Report to have recorded average growth of more than 7% per year for 25 years or more.” Malaysia is among leading exporters of electrical appliances, electronic parts and components, palm oil, and natural gas. The country was impacted by the Asian financial crisis as well the 2008-09 global financial crises but was quick to recover. Malaysia’s GDP growth rate has averaged at 5.7% since 2010.
Malaysia’s headline index known as FTSE Bursa Malaysia KLCI reported gains of 19.34% in 2010, followed by flattish returns of 0.78% in 2011. In 2012 and 2013, the markets were up by 10.34% and 10.54%, respectively. The Malaysian markets dipped by 5.66% in 2014 and are down by 3.11% year-to-date in 2015. The iShares MSCI Malaysia ETF (EWM) is a single country view exchange targeting the mid and large-cap companies on the Malaysian stock exchange.
Taj Mahal, India. iStock photo
The 2014 elections and the sweeping victory by the Modi-led Bharatiya Janta Party (BJP) have revived optimism among investors about the nation’s economy and rightly so! The new government is working towards creating an environment that is more business-friendly and efficient for foreign investors. The positive factors backing India’s economic growth are its favorable demographics, rising consumerism, low oil prices, a pro-active government with campaigns like ‘Make in India’ among many other initiatives. India has grown at an average annual rate of 7% during the 15-year period since 2000 to 2014. The outlook for the country remains positive, but the government needs to fulfill its promises to keep the momentum going.
The annual returns by India’s benchmark stock market index, S&P BSE Sensex during the years 2010, 2011, 2012, 2013 and 2014 were 17.43%, (24.64%), 25.70%, 8.98%, and 29.89%, respectively. The markets are down by 1.53% year-to-date in 2015. Some of the ETFs tracking Indian stock markets are MSCI India Index Fund (INDA), WisdomTree India Earnings fund (EPI), iShares S&P India Nifty 50 Index Fund (INDY), PowerShares India Portfolio (PIN), Market Vectors India Small-Cap Fund (SCIF), EGShares India Small Cap fund (SCIN), EGShares India Consumer ETF (INCO) and EGShares India Infrastructure Index Fund (INXX).
Palawan Island, Philippines. Shutterstock photo
The Philippines was stuck in a mediocre growth bracket for years, but that is fast changing. Often branded as the ‘sick man of Asia,’ the Philippines is now counted among the ‘tiger cub’ as well as the ‘next eleven’ economies. Filipino gross domestic product grew at an average annual rate of 6.3% in the past five years (2010-14). The economy’s strength lies in its young English-speaking workforce, low household debt, contained interest rates and inflation, remittances from abroad and growing services sector. However, for the nation to truly progress, issues like poverty and unemployment as well as inequality in income need to be looked into.
The Philippine Stock Exchange Composite Index (PSEi) delivered impressive returns of 37.62% in 2010 followed by 4.07% in 2011. The markets looked good again with 32.95% growth in 2012; however, it trailed by 1.33% in 2013. PSEi bounced back with 22.76% returns in 2014 and is currently down by 1.27% year-to-date. There is only one exchange traded funds providing pure exposure to the Philippine stocks, which is the iShares MSCI Philippines Investable Market Index Fund (EPHE).
Taipei, Taiwan. Shutterstock photo
The status of Taiwan is complex and so is its relationship with China. Mainland China considers Taiwan as its inalienable part and thus Taiwan does not enjoy international recognition as a separate state. Nor does it have diplomatic relationships with many countries. Despite political and diplomatic issues between mainland China and Taiwan, the two share strong economic ties; an opportunity as well as a challenge for Taiwan. Taiwan may not have grown diplomatically, but has received great recognition for its economic progress. Taiwan is one of the four countries that are part of the acronym TICK and also one of the Four Asian Tigers.
Taiwan Stock Exchange Capitalization Weighted Stock Index returns for the years 2010, 2011, 2012, 2013 and 2014 were 9.58%, (21.18%), 8.87%, 11.85% and 8.08%, respectively. In the current year, the index is down by 9.25% year-to-date. Few ETFs that provide access to Taiwanese stock market are iShares MSCI Taiwan ETF (EWT), First Trust Taiwan AlphaDEX Fund (FTW) and SPDR MSCI Taiwan Quality Mix ETF (QTWN).
Bangkok, Thailand. Shutterstock photo
Thailand, the country known for military coups and political chaos, presents one of the most dynamic growth stories – transforming itself from a ‘low-income’ nation to being declared as an ‘upper-middle income’ country by the World Bank in a matter of less than three decades. Other than being a popular tourist destination well-known for its beaches and food, Thailand offers great investment opportunities given its dynamic growth and sound stock market performance.
Thailand’s SET Index reported solid returns of 40.6% in 2010 followed by a flattish 2011 with (0.72%) returns. The markets moved up by 35.76% in 2012, but dipped by 6.7% in 2013 and then rebounded by 15.32% in 2014. SET is down by 5.76% year-to-date in 2015. The popular exchange-traded fund covering Thailand’s stock market is the iShares MSCI Thailand Capped ETF (THD). Launched in 2008, the ETF provides a portfolio of about 130 Thai companies. It has an asset base of $243.4 million and an expense ratio of 0.62%.
Great Wall of China. Shutterstock photo
China has been in news lately and not for the best reasons. The Chinese economy is experiencing a slowdown, but still growing much faster than many other economies around the world. China’s economy is the world’s second largest in terms of nominal GDP after the US but tops the list when GDP is assessed in terms of purchasing power parity (PPP). Lou Jiwei, Minister of Finance, said at a recent meeting, “It is predicted that China will continue to maintain around 7% growth in the coming few years with solid economic foundation, sound growth conditions and sufficient driving power at disposal.”
The Chinese stock markets represented by Shanghai Composite Index posted solid returns of 79.98% in 2009; however, the markets remained in the red during 2010 and 2011, falling 14.315 and 20.30%, respectively. There was some recovery in 2012 at 3.17% with yet another drop of 6.75% in 2013. The markets delivered impressive 52.87% returns in 2014. The index is 1.6% year-to-date in 2015.
There are a host of ETFs available to gain access to the Chinese stock markets, some of them being iShares China Large-Cap ETF (FXI), IShares MSCI China ETF (MCHI), SPDR S&P China ETF (GXC), Deutsche X-Trackers Harvest CSI 300 China A-Shares Fund (ASHR), Global X China Consumer ETF (CHIQ), Market Vectors China AMC A-Share ETF (PEK) and Global X China Financial ETF (CHIX) among others.
Bratan Lake, Bali, Indonesia. Shutterstock photo
Indonesia, the world’s largest archipelago, gained sovereignty from the Dutch rule in the 1940s; however, the pathetic state of its economy continued under the first president Sukarno. Things turned around for Indonesia when General Suharto took over as the second president in 1967 and introduced the ‘New Order.’
During this 30-year period until 1997, the country grew at an average annual rate of 7%. However, the Asian financial crisis of 1997 triggered Suharto’s downfall as the country bore a huge brunt with a 13.1% fall registered in its GDP in 1998. Indonesia was quick to learn and adopted corrective policies, which shielded to its economy during the 2008 meltdown.
The average annual GDP growth rate for the 15 year period (2000-14) has been 5.3%. Indonesia can be a great investment opportunity given its manageable inflation, healthy financial sector, and its new policy initiatives designed to draw foreign investment. However, some of the problems Indonesia faces are corruption, poverty and lack of infrastructure.
During the calendar years 2010, 2011, 2012, 2013 and 2014, The Indonesian stock markets reported returns of 46.13%, 3.20%, 12.94%, and (0.98%) and 22.29%, respectively. In 2015, the markets are down by 12.2% year-to-date. Some of the ETFs tracking the Indonesian markets are iShares MSCI Indonesia ETF (EIDO), Market Vectors Indonesia Index ETF (IDX) and Market Vectors Indonesia Small-Cap ETF (IDXJ).
Notes: Year-to-date returns as of October 11, 2015; GDP figures based on World Bank data.