Investing in emerging markets comes with risks in a taper-trodden 2014. These markets enjoyed heavy investment when interest rates were ultra low in the developed world, but things are fated to take a sharp turn thanks to the beginning of the end of a cheap-dollar era (read: 3 ETFs Tumble Most on Emerging Market Sell-Off).
The fear of less hot money inflows, tumbling currency, current account deficit and slowing internal growth are common problems for most of the nations. As a result, investors have begun to flee the space to start this year.
While many region-specific ETFs plunged severely in the year-to-date frame (thanks to their own internal crisis), the slump in the biggest and broader emerging market ETF – Vanguard FTSE Emerging Markets ETF (VWO) – was relatively low, and quite shockingly that too was as deep as 6.61%.
Amid such a turbulent situation, a handful of emerging market ETFs kicked off 2014 on stronger footing and have held up pretty well so far. First of all, some smaller emerging markets/frontier markets are giving outstanding performances this year.
These are Market Vectors’ Egypt ETF (EGPT) and Vietnam ETF (VNM). EGPT retuned about 28%, which is the best in the overall emerging market space, while VNM is up close to 17.7% this year.
Basically, improvement in both the political and the economic backdrop is propelling this undervalued Egypt ETF. On the other hand, Vietnam continues to be the main beneficiary of the migration of low-end manufacturing out of China as the wage level of the former is half of the latter.
Also, the shift in China’s strategy to enhance domestic consumption is going to give a big-time boost to Vietnam’s outsourcing industry (read: How Frontier Market ETFs Surged as EMs Plunged).
However, let’s not consider these frontier markets and look for some top performing ‘traditional’ emerging markets, and briefly highlight some reasons behind their surge (read: iShares Plans New Type of Emerging Market ETFs):
Leaving many investors in utter shock, the Indonesian ETF was off to a stunning run this year despite inflation, current account and currency issues. The rupiah has been emerging as Asia's best performing currency in 2014, as per Reuters.
Inflation and current deficits are also falling. Though the bank of Indonesia slashed its 2014 growth target from 5.8–6.2% to 5.5–5.9% in the wake of relatively weak consumption and investment, it still is way higher than the projected growth rate offered by several developed nations.
Indonesian shares saw the biggest rally in Asia following Vietnam as net inflows by foreign investors rose to about $907 million, the maximum in regional markets, as per Bloomberg. Moreover, government has offered tax incentives for building factories and attracting foreign investments in ports and airports.
The country’s current-account deficit is expected to fall to 2.5% this year, from about 3.3% last year, according to Bank of Indonesia. Also, Indonesia is due for its parliamentary election in April and presidential election in July.
Thus, the possibility of an influx of campaign spending is more in the companies having more domestic exposure especially which are engaged in food, consumer staples and media businesses, as per Bloomberg.
As a result, Market Vectors Indonesia Small-Cap ETF (IDXJ) was the second best emerging market ETF this year adding about 27.23% while iShares MSCI Indonesia Investable Market Index Fund (EIDO) and Market Vectors Indonesia Index ETF (IDX) also returned 24.78% and 20.0%, respectively, securing places in the top-five emerging ETF performers list.
The Philippines economy has also shown promise, having expanded at the fastest clip since the 1950s over the last two years. Than nation logged GDP growth of 7.2% in 2013 on top of 6.8% in 2012 despite the multi-billion peso wreckage from Super Typhoon Haiyan (which hit the island nation in early November). Philippine growth rate came a little short of the Chinese growth rate of 7.7% in 2013.
This year, iShares MSCI Philippines Investable Market Index (EPHE), the only pure-play ETF focused on the Philippines market, has gained about 8.32%. The country has reiterated its growth projection of 6.5% to 7.5% for this year, though some predict that the country may see growth less than 6.0% this year.
As per Barclays, growth will be helped by reconstruction activity in Philippines (read: Solid Growth Puts Philippines ETF in Focus). Also, positive January data on remittances from Filipinos abroad and the World Bank's optimistic view on the nation this year are other factors behind the ETF’s nice run.
Thailand has been seeing quite a bit of turmoil in recent times thanks to a prolonged political mayhem which in turn cast a shadow on its near-term growth outlook. The state planning agency last month reduced its GDP growth forecast for this year to 3% to 4% from 4% to 5% range which seems still respectable after so much political gridlock (read: Where Does the Thailand ETF Go From Here?).
However, in order to restore some confidence in the nation’s financial market and boost the politically troubled growth rate, Thailand slashed its one-day bond repurchase rate by 25 bps to 2%. Prior to this, the nation went for a rate cut last November as political unrest crippled the demand for its all-important tourism sector and the central bank is striving hard to boost other sectors in the economy, especially consumption and business investment. The rate has now touched its lowest point since late 2010.
A decent inflation rate (presently at 1.96%) helped the Bank of Thailand to take such a step. Also, a likely lift in emergency rule imposed in January 2014 for a timeframe of 60 days gave the much-needed boost to the Thai stock market. The reduced interest rate spread cheers among investors. The core Thailand ETF, iShares MSCI Thailand Investable Market Index Fund (THD), has advanced 6.74% this year.
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