The equity markets began the year 2012 on a strong note but as the Euro-zone situation worsened and emerging markets’ slowdown appeared much worse-than-expected, the investors rushed into “safe haven” assets.
Second quarter of the year was bad for most emerging markets in particular, due to ‘risk-off’ trades; however some of the markets continued their solid performance.
As we are already in the second half of the year, it is time to look at the best performing markets and related single-country ETFs of 2012 so far and analyze whether they will be able to continue their run during the rest of the year. (Read: Q2 ETF Asset Report: Bond Funds Lead the Charge)
Below we highlight the five top performing single-country ETFs year-to-date.
Market Vectors Egypt Index ETF (EGPT) - Up 37.9% YTD
Egypt stock market and the ETF had a disastrous performance last year due to the political turmoil. The fund rebounded this year on hopes of a peaceful election process, but the run has been far from smooth.
The political situation now seems to be stabilizing in Egypt, with the election of Mohamed Morsi of the Muslim Brotherhood, as the first democratically elected leader of the country. However, it would not be easy for him to put in place a stable governance system with the power-seeking judiciary and the military as partners.
Last month S&P put Egypt’s long-term debt on watch for possible downgrade in view of significant uncertainty in the political transition process. (Read: Forget the BRIC ETFs, Focus on the PICKs)
GDP Growth fell from 5.1% in 2010 to 1.8% last year, and is expected to come down further to just 1.5% this year, according to IMF. Foreign exchange reserves have plunged since the turmoil began and the currency has been weak.
The country needs some critical economic reforms to revive growth and bring down high unemployment (above 12% currently), swelling fiscal deficit and rising inflation rate (~9%), which is going to be difficult.
Attracting foreign investments and tourists is also not going to be easy in view of the volatile political situation. Hence the outlook for the Egypt EYF does not look very promising going forward.
EGPT tracks the Market Vectors Egypt Index, which is comprised of companies that are domiciled in Egypt or generate at least 50% of their revenues in Egypt. The fund has $42 million in AUM, invested in 28 securities (mostly mid-cap and small-cap).
Financials enjoy the heaviest weighting in the fund (43%), followed by Telecom (18%) and Materials (12%). Expense ratio is contractually capped at 0.94% through May 2013 and may go up to 1.20% afterwards.
iShares MSCI Turkey Investable Market Index (TUR) - Up 31.3% YTD
Like Egypt, Turkey ETF also had a miserable performance last year (negative 36.3% return) but saw solid investor interest this year, as the economy showed remarkable resilience to the events in the euro-zone.
The economy grew at an impressive 8.5% in 2011 but is expected to slow down to 2.3% in 2012 and then rise slightly to 3.2% in 2013, per IMF.
Despite solid growth potential, the economy faces some serious challenges from its growing current account deficit (~10% of GDP), rising inflation and low savings rate.
The deficit is mainly being financed by short-term capital flows (hot money- which can change direction quickly). Further, energy imports account for about half of its current account deficit, leaving the country vulnerable to increase in oil prices.
Last month S&P revised the outlook on the country to stable from positive due to concern that “less buoyant external demand and worsening terms of trade could inhibit Turkey’s economic rebalancing”. The agency maintained its sovereign rating at BB, which is two notches below investment grade.
Going forward, the country will remain vulnerable to adverse developments in the investor sentiment.
TUR tracks the MSCI Turkey Market Index, which is a capitalization weighted index that aims to capture 99% of the Turkey equity market. The fund was launched in March 2008 and has attracted $421 million in AUM so far.
The fund charges 0.59% annually for expenses. In terms of sector exposure, financials constitute almost half (47%) of the assets, followed by consumer staples (14%) and industrials (11%).
iShares MSCI Philippines Investable Market Index (EPHE) - Up 31.2% YTD
Philippine economy grew at an impressive 6.4% during the recent quarter, much better than expectations.
Last month, Moody's raised its credit rating on Philippines by one notch to Ba2, which is just two ratings below investment grade. S&P had raised its rating on Philippine credit to BB from BB- in November.
While an improving fiscal situation, low inflation rate, comfortable foreign exchange reserves position and a stable currency have been factors in driving the growth, the country faces some significant obstacles like poor infrastructure and corruption.
Thanks to its large educated young population that can speak English, Philippines has been growing in popularity as a BPO destination and has emerged as a tough competitor to India.
Rising consumer demand due to growing incomes of the middle class continues to boost the domestic economy.
Long-term fundamentals for the economy look good in view of the stable political situation and the popular government that seems committed to accelerate the pace of reforms in the country.
EPHE follows the MSCI Philippines Investable Market Index, which is float-adjusted market capitalization-weighted index designed to measure the performance of the Philippine equity markets. The fund has $148 million in AUM and holds 41 securities.
Expense ratio at 0.59% is among the lowest in the peer group. Financials comprise more than 38% of the fund while Industrials and Utilities comprise 25% and 13% respectively.
The ETF had a slight negative return of 3.28% in 2011. (Read: Forget T-Bonds, Invest in These Top Corporate Bond ETFs)
Market Vectors Vietnam ETF (VNM) - Up 24.5% YTD
Like the top two, Vietnam ETF also had an extremely dismal performance in 2011, when it sank by almost 47%, as the investors were concerned about the future prospects for the economy. However as the economic situation improved, the investors have poured money into the fund.
2011 was a bad year for the economy as the growth slowed, inflation spiked (touched 23% in August last year), and trade deficit worsened. As a result, the government introduced some critical reforms aimed at restraining credit growth, controlling inflation and restructuring state-owned enterprises and the financial sector.
The economy seems to have turned the corner and the inflation now seems to be coming under control as it reached a 21- month low of 8.34% in May. The IMF projects that the economy will slow down to 5.6% in 2012 from 5.9% in 2011 but rebound in 2013 to 6.3%.
VNM tracks the Market Vectors Vietnam Index, which provides exposure to the publicly listed companies that are domiciled and listed in Vietnam or derive at least 50% of their revenues from Vietnam.
The ETF currently holds $299 million in AUM and charges 76 basis points to the investors annually for expenses. The expenses are contractually capped at the current level through May 2013 and may go up to 92 basis points after that date.
In terms of sector allocation, financials occupy the top spot with almost 50% weight. Energy (22%) and industrials (11%) hold the next two.
Market Vectors India Small Cap Index ETF (SCIF) - Up 21.9% YTD
India’s pace of growth is slowest in about a decade mainly due to rising inflation, widening fiscal and current account deficit and a weakening currency. Rating agencies have downgraded the outlook on the country’s credit of late and warned that it may be downgraded to junk status.
Prime Minister Singh, who was the chief architect of major market reforms introduced in early 1990s, has taken over the role of finance minster again. It remains to be seen whether he will be able to end the current state of policy paralysis in India. (Read: Top Three Emerging Market Dividend ETFs For Income And Growth)
Recent manufacturing data ignited some hopes as manufacturing was at its highest levels in four months.
The currency which had plunged to all-time low a couple weeks back has also since recovered after recent measures taken by the government to ease restrictions on foreign investments and some reports that that the government may abolish the withholding tax on foreign institutions’ investment in government bonds.
While India ETFs had started the year on a solid note, the sentiment reversed later. However the ETF focusing on small-cap stocks in the country is still one of the best performers in the first half of the year.
Going forward, the ETF may continue its performance only if the government treats the recent adverse events as a wake-up call.
SCIF tracks the India Small Cap Index which is a free-float market cap weighted benchmark representative of the small cap market in India. The product currently holds 108 securities and charges investors 85 basis points a year in fees (capped through May 2013).
Consumer Discretionary and Financials sector takes the top spot with 21% each of total assets followed by Industrials (18%).
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