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, iShares MSCI Emerging Markets Index ( EEM ) returned 18%.IShares MSCI EAFE Index ( EFA ), 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 ETFs 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 under management.
IShares MSCI Austria ( EWO ) is a relatively cheap market with forecasted 2013 price-to-earnings ratio of 10 and a price-to-book ratio of less than 1.
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 last year.
David Allen, portfolio manager at Accuvest Global Advisors in Walnut Creek, Calif., with $465 million in assets under management:
IShares MSCI Austria ( EWO ) 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 decreasing risk.
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 under management:
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 basis.
3. European earnings are at long-term lows, and continuing improvement in the region could unlock a rerating in earnings.
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 iShares MSCI EMU Index ( EZU ), 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 Italy.
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 Denver:
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 house.
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 shareholders.
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 iShares MSCI Japan Index ( EWJ ).
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 Singapore.
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 the large-cap iShares MSCI Singapore Index (EWS). Some 51.8% of the EWSS basket is property companies and only 13.8% for EWS.
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.