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Asia ETFs May be Able to Endure Tapering After All


Plenty of exchange traded funds offering exposure to emerging Asian economies have faltered this year with speculation that the Federal Reserve would taper its quantitative easing program causing much of the downdraft. While the tapering issue has not entirely been put to rest, there are signs that even some of the ETFs previously believed most vulnerable to tapering could weather further Fed-induced shocks.

The Asian Development Bank said Wednesday that even India and Indonesia hold enough foreign currency reserves to handle near-term rough spots. ETFs such as the WisdomTree India Earnings ETF (EPI) and the Market Vectors Indonesia ETF (IDX) were slammed in the second and third quarters as the rupee and rupiah vied for the dubious distinction of the worst-performing emerging markets currency. [Indonesia, India Among Hardest Hit EM ETFs]

Weakness in Indian and Indonesian equities, among other developing Asian markets, has sparked renewed interest in countries that do not have current account deficits. ADB “said developing Asia’s current account surplus is expected to narrow to 1.6 percent of GDP in both 2013 and 2014 from 1.8 percent last year,” Reuters reported.

ETFs offering exposure to Asian emerging markets with current account surpluses include the iShares MSCI Philippines ETF (EPHE) . The Philippines’ strong external balance sheet and robust forex reserves catapulted the country to two investment-grade sovereign debt ratings earlier this year, vaulting EPHE higher in the process. [Philippines ETF Gains on Credit Upgrade]

ADB said fears of a sequel to the Asian financial crisis of the late 1990s are overblown. “Fears of a repeat of the 1997 Asian financial crisis are unwarranted,” ADB said in a statement. “The region is now in a stronger position to weather the storm, with many economies running current account surpluses and holding large foreign reserve stockpiles.”

Despite Wednesday’s comments from ADB, it cannot be ignored that the lending agency recently offered up a cautious assessment of bond markets in some Asian countries. Last week, in reference to the region it calls Emerging East Asia, ADB said “Yet, risks to the region’s bond markets are intensifying. Specifically, (i) the region’s interest rates could rise further when the Federal Reserve starts to tighten policy; (ii) weakening growth momentum in the region could accelerate the pace of capital outflows; and (iii) continued outflows could result in vulnerable economies raising interest rates to prop up their currencies, thereby further dampening growth.” [This Region Could be Problematic for EM Bond ETFs]

ADB classifies the following countries as Emerging East Asia: China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Thailand and Vietnam. Hong Kong and Singapore are AAA-rated developed markets.

Market Vectors Indonesia ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.