Emerging market assets are under pressure as China, the world’s second-largest economy, slows and shifts away from an export-oriented economy. But neighboring countries in Southeast Asia are benefiting from China’s shift to a more consumption-oriented economy.
So while China’s growth engine is shifting gears, and its dominance of low-end manufacturing is fading, countries including Indonesia, the Philippines, Vietnam and Thailand stand to emerge from China’s shadow and lead the next wave of low-cost global manufacturing growth. Stratfor, the geopolitical consultancy, singled out 16 countries it reckons will collectively take China’s place in the coming years.
“Right now, each emerging country is dealing with its own issues and is getting over the hangover of the Federal Reserve’s economic stimulus,” said ETF.com ETF specialist Dennis Hudachek. “You’re going to see more of a divergence in returns from these emerging countries as opposed to the last decade where emerging and broader markets just moved in unison.”
The four countries noted above—Thailand, the Philippines, Vietnam and Indonesia—are each accessible to investors via single-country ETFs. Here are those funds; their returns and the broader characteristics of each of those investment destinations:
4. Thailand, iShares MSCI Thailand Capped ETF (THD | B-96)
Thailand is currently embroiled in ongoing civil unrest, with protestors calling for the removal of Prime Minister Yingluck Shinawatra to resign from office, thus ending the influence of her brother, the billionaire and former Thai leader Thaksin Shinawatra. Thaksin was ousted in a bloodless military coup in 2006.
As a result, Thailand’s central bank cut its benchmark interest rate to 2.00 percent from 2.25 percent, the lowest level in more than three years, to prop up the country’s economy, which has been hit by the political crisis.
Nevertheless, the iShares MSCI Thailand Capped Fund (THD | B-96), the market’s only pure-play Thai-focused ETF, has been humming along, seemingly impervious to the storm clouds gathering in Bangkok. The fund is up 3.6 percent year-to-date, thanks to its portfolio, which steers away from industrial exporters listed on the stock exchange of Thailand and focuses more on foreign multinational companies.
Jim Rogers, the legendary commodity investor, thinks now is the time to buy Thailand. “Thailand has had dozens of coups in the last few decades, but they always start up again,” Rogers told ETF.com in an interview. “Buying during the coups and during civil unrest has usually been profitable.”
3. Philippines, iShares MSCI Philippines ETF (EPHE | B-98)
Despite the devastation brought about by the series of natural disasters that hit the country in the last quarter of 2013, specifically Super Typhoon Haiyan, the Philippine Statistics Authority reported that the country’s gross domestic product grew by 6.5 percent in the fourth quarter of 2013 and by 7.2 percent for 2013, thanks to the robust services and manufacturing sectors.
The International Monetary Fund (IMF) in January raised its 2014 economic growth projection for the Philippines to 6.3 percent this year, up from 6 percent last September, and the IMF also sees further expansion to a range of 6.5 to 7 percent in 2015.
The iShares MSCI Philippines ETF (EPHE | B-98) has appreciated 6.3 percent so far this year, thanks in part to the region’s good market fundamentals, according to Nouriel Roubini, NYU professor and chairman of Roubini Global Economics.
“There are plenty of emerging market economies that have good market fundamentals and international policies,” said Roubini in a recent interview with ETF.com. “In Asia, we particularly like South Korea, but even countries like Malaysia, the Philippines, Hong Kong or Singapore are solid.”
2. Indonesia, iShares MSCI Indonesia Investable Market (EIDO | B-99)
Last year, the Indonesian rupiah got clobbered, losing 21 percent of its value versus the dollar, as taper talk coursed through emerging markets. The rupiah’s move has actually helped the country’s exports in recent months.
In fact, the country’ trade surplus in December was driven by an unexpected surge in exports—up 10.33 percent from a year earlier, versus analysts’ expectations for a 1.80 percent rise.
“Indonesia has had a significant turnaround that is surprising a lot of people,” ETF.com’s Hudachek said.
In turn, the iShares MSCI Indonesia Investable Market (EIDO | B-99) has gained 15.9 percent this year, outpacing broader EM funds such as the Vanguard FTSE Emerging Markets fund (VWO | C-90), which is down 6.6 percent year-to-date.
1. Vietnam, Market Vectors Vietnam ETF (VNM | C-37)
The frontier market of Vietnam is benefiting from loosening foreign investment rules as well as a wave of planned initial public offerings that should translate into strong returns for the only pure-play ETF focused on the region, the Market Vectors Vietnam ETF (VNM | C-37).
VNM, which has risen 16.8 percent year-to-date, got a boost from an increase of foreign ownership in its banks and financial institutions to 20 percent from 15 percent, effective Feb. 20. VNM’s current major holdings include financial services firms, which make up 37 percent of the portfolio.
There are also plans to lift the limit on foreigners’ holdings of voting shares in some industries to 60 percent from 49 percent. Vietnam also continues to benefit as a labor outsourcing center for neighboring China, which is looking to shift its focus from exporting to domestic consumption.
“One of the most appealing factors about frontier markets is that they’re highly uncorrelated to developed and emerging markets and a lot of that has to do with the fact that access to them has been fairly restrictive,” said Hudachek.
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