For quite some time, China has been a leader in global growth. The country has gone from an economically unimportant nation to one of the leading powers in business over the course of about 30 years. Now, China is the world’s second largest economy, the largest exporter, and a key participant in a number of economic meetings and groups.
While China certainly has a long way to go in terms of becoming a developed nation, it is undeniable that its incredible rate of growth and massive economic footprint has made the country a key driver of global economic performance. This is especially true given the underwhelming performance in the U.S. economy and the near recession conditions that are currently plaguing broader European region as well.
Thanks to this situation, fears of a slowdown in China or the bursting of a property bubble have certainly spooked market participants as of late. Several data points regarding manufacturing figures have fallen back to near contraction levels in recent readings while retail sales and non-manufacturing PMI levels have also come in below expectations as of late (read Forget FXI: Try These Three China ETFs Instead).
Meanwhile, property prices in nine major Chinese cities were down close to 5% in a recent year-over-year reading, while unsold housing inventory is beginning to build up to over 20 months in some smaller cities. Given these factors, some are forecasting huge cuts in real estate prices in the near term, a near death sentence for a country that as recently as 2010 was obtaining 13% of its GDP from construction-related activities.
While there is some hope for more Chinese government stimulus to stem the tide, concerns are beginning to build that even a prolonged injection of capital into the nation will not be enough to keep China from a hard landing in which inflation eats up any growth in the massive country (see What Bubble? China ETFs Soaring To Start 2012).
Clearly if this happens, it won’t be great news for Chinese ETFs or stocks, and especially those that are heavily dependent on financials and real estate in the region. Yet beyond these directly impacted investments, investors could also see a number of country specific ETFs heavily impacted by a China slowdown as well.
That is because thanks to the China boom, the People’s Republic has become a major destination and jumping off point for trade and investment in a number of nations not only in Asia but around the world as well. China’s insatiable demand for commodities and finished goods has made the country a top trading partner for many countries that specialize in a variety of goods and services.
In order to determine which countries have become the most vulnerable to a China slowdown, Maplecroft has developed a ‘China Integration Index’. This benchmark looks to be a barometer of FDI and trade to see which nations are the most sensitive to economic conditions in China, and thus those that are most likely to be hit by a slowdown in the country.
By using this index, we looked for the three top ranked—most sensitive—nations that currently have U.S. listed ETFs. Below, we highlight these three nations and their respective funds as ones to watch if China slows down in the near future. If Maplecroft’s research is correct, these three ETFs could be among the most negatively impacted by a hard landing in the massive emerging market:
Hong Kong- iShares MSCI Hong Kong Index Fund (EWH)
According to Maplecroft, Hong Kong is the area that is most sensitive to a slowdown in greater China. This isn’t that surprising as the city is now a part of the mainland operating under the ‘two systems one country’ model, keeping its capitalist system but becoming more integrated with the People’s Republic.
Thanks to this cooperation with the mainland, Hong Kong does a great deal of trade with the rest of the PROC to the point that it makes up nearly half of both the region’s exports and imports. Clearly, a slowdown in China will not only impact this trade but could curtail the large amount of financial activities which take place in Hong Kong and are focused on the mainland.
Given this scenario, investors should definitely watch out for EWH, a fund tracking the broad MSCI Hong Kong index. This results in a fund that has about 40 securities in its basket while charging investors 52 basis points a year in fees (read Hong Kong ETF Investing 101).
Top sectors include real estate and financials which combine to make up more than 50% of assets while utilities, consumer cyclical stocks, and industrials each account for double-digit allocations as well. The product started out the year on a strong note but has since fallen back and is now up just 0.7% on the year although it still pays a robust dividend of about 2.3% in 30 Day SEC Yield terms.
Singapore- iShares MSCI Singapore Index Fund (EWS)
Singapore, the city-state at the tip of Southeast Asia, is another economy which looks to be extremely sensitive to economic events in China. Much like Hong Kong, Singapore is a trade hub that also has a heavy financial presence in a number of sectors.
It appears as though this financial presence is how Singapore is focused in on the mainland Chinese economy as the country really isn’t that dependent on China from a trade perspective. However, the nation is a big source of trade via its port so goods on their way to or from China, or those that need greater technical expertise or industrial know-how, could have a stop in Singapore, making the country exposed to China via that route as well (see Time to Buy the Singapore ETFs).
Lastly, Singapore has strong cultural ties to China, as close to three-fourths of the population are ethnically Chinese. Thanks to this, bilateral investment between the two nations is somewhat high when compared to other Southeast Asia nations—although the investor protections and rule of law in Singapore is a factor as well—and could be a big aspect in Singapore’s performance if China hits a rough patch.
To play Singapore, investors should probably focus in on EWS, a fund that follows a broad large cap-focused benchmark of Singaporean firms. Currently, the product consists of 33 securities while it charges investors 52 basis points a year in fees.
Nearly half of the fund’s assets are tied up in financials, while industrials (25%), and telecoms (11.9%), round out the rest of the top three and pretty much the entire fund as well. Much like EWH, EWS surged to start the year but has had great trouble over the past five weeks.
As a result, EWS is now up about 5.9% from a year-to-date look, while it does pay a solid 3.1% yield in 30-Day SEC terms.
Chile iShares MSCI Chile Investable Market Index Fund (ECH)
The only country in the top seven that is outside of the broad Asia/Oceania region according to Maplecroft is the South American nation of Chile. The country is, like China, an emerging nation that has been experiencing rapid growth over the past few decades, however, its growth has been largely thanks to its commodities.
In particular, copper plays a huge role in the economy as the country produces nearly one-third of the world’s total output. This is important as China is a major consumer of the metal and is in fact the world’s biggest user and importer of the product. As a result, the country is the destination for nearly one-fourth of all Chilean exports and is thus systemically important to Chile’s economy at this time.
Given this trend, investors should definitely keep an eye on ECH, the fund following the MSCI Chile Investable Market Index. This product holds 40 securities in total and charges investors 59 basis points a year in fees (see more in the Zacks ETF Center).
Top sectors go to utilities and industrials as these account for nearly 45% of the total, although financials, basic materials, and consumer staples all make up double-digit allocations as well. Like the other funds on this list, the product started off the year strong but has since slumped back and is now up just 3.6% in year-to-date terms.
Unfortunately, the yield isn’t that great either as the fund pays out just 0.1% in 30 Day SEC yield terms, although the 12-month yield does come in at 1.7%.
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