Many of the top-performing ETFs of 2012 are focused on emerging markets all around the world in a possible sign the global economy is slowly and steadily normalizing and setting up for a period of sustained expansion.
Gone from this year's Top-10 list are the U.S. Treasury funds that dominated the selection a year ago, a reflection of continuing concern about the on-again/off-again economic recovery that has sent investors into the safety of government debt time and time again since the market crashed in 2008.
Investors appear to be starting to loosen their grip on dollar-denominated assets such as Treasurys and U.S. equities, and are instead again moving into riskier assets. Indeed, returns on top-performing countries such as Turkey, India, the Philippines and even China had foreign-exchange winds at their back, as their currencies strengthened against the dollar, pumping up gains.
The value of the Chinese yuan against the dollar looms largely as a harbinger of the macro environment. Every time the global economy has shown stability and improved growth prospects, the yuan appreciates. Investors should take note that, firstly, the Guggenheim China Real Estate ETF (NYSEArca:TAO) returned 53 percent in 2012 and, secondly, 50 basis points of that is due to a firmer yuan.
The iShares MSCI Turkey Index Fund (NYSEArca:TUR) was the top-returning country fund of 2012, though it's been clear that the Middle Eastern nation that has been called "an island of order in a sea of chaos" by geopolitical consultant George Friedman has been on a roll for quite some time. Its economy is rapidly developing, and it led the pack of single-country ETFs at the end of the first half.
If Turkey is heralded as an ongoing success story with vibrant manufacturing and service sectors, then Egypt has to be the comeback story of 2012.
The Market Vectors Egypt ETF (NYSEArca:EGPT) lost half its value in 2011, as the "Arab spring" and the fall of strongman Hosni Mubarak reverberated through the region, causing huge uncertainties including a spike in oil prices that slowed the global economy even before the eurozone debt crisis and unsettling U.S. budget negotiations nearly brought on renewed recession around the planet.
But this year, EGPT has retraced a healthy chunk of is year-earlier losses, climbing about 45 percent.
It's hard to say what happens next in the Middle East's most-populous country, but for now it does seem to be exhibiting all the excitement of a "deep value" play in global investment markets.
One country that has benefited from the Chinese economic story is the Philippines, which has absorbed some of the outsourcing from China as businesses domiciled in the world's second-largest economy look to keep a lid on production costs.
The iShares MSCI Philippines Investable Market Index Fund (NYSEArca:EPHE) has shot up more than 45 percent this year, with almost 9 percentage points of that performance in the currency cross.
Funds focused on other satellite Asian countries such as Malaysia and Vietnam have done similarly well too. For example, the iShares MSCI Malaysia Index Fund (NYSEArca:EWM) is up 11 percent this year and the Market Vectors Vietnam ETF (NYSEArca:VNM) has jumped about 14.5 percent.
Even developed countries in Asia-such as Japan, Australia, Hong Kong and Singapore-are getting in on the action, as the nearly 44 percent jump in value of the iShares FTSE EPRA/NAREIT Developed Asia Index Fund (NYSEArca:IFAS) clearly shows.
Is India The Next Big Thing?
The Indian growth story came into focus too in 2012, as the EGShares India Consumer ETF's (NYSEArca:INCO) nearly 54 percent jump demonstrated. The Market Vectors India Small Cap Index ETF (NYSEArca:SCIF) was another India-focused fund that showed that country's prospective story. The fund is up 26 percent this year.
Even though India has struggled with the slowest growth rate in a decade, slower exports and high inflation relative to other BRIC nations, the country has managed to bring inflation into control-it's projected to drop to 7.25 percent this year from as high as 12 percent in 2010-and continue to implement reforms and infrastructure improvements, Van Eck's marketing director Rafael Cordero said.
"Why that's so key is that now that inflation has started to come in, it's going to be easier for the RBI to lower interest rates in India," Cordero said, noting that lower rates would encourage sidelined companies to start spending some of the money they have on their balance sheets.
"Domestic consumption could be huge for this country," Cordero added, arguing that a booming middle class should drive India's economic growth ahead.
Indeed, the boom of India's middle class started off as a "trickle" and amounted to little more than 50 million people in 2008, but many analysts project that as many as 500 million people will constitute the country's middle class eight years from now.
"That'll be a huge engine for GDP growth in India," Cordero said.
However, few investors seem tuned into the local-consumption story in the emerging markets. INCO, for instance, has just over $7 million in assets even if its performance is among the year's best.
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