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 ( PEK ) 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 ( FXI ). This ETF is a great way to gain exposure to companies in China that will benefit from an economy that is showing signs of renewed strength.
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 of 2012.
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 high.
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 affected.
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, Calif.:
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 2008.
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 ETFs 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 GDP.
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 ( EWZ ) 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 Index ( ILF ), 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 investment.
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, Calif.:
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 overseas.
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 ( DEM ) 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.
Follow Trang Ho on Twitter @TrangHoETFs .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.