The Five Most Promising Emerging Markets ETFs for 2009
By Martin Hutchinson
Contributing Editor
Money Morning
If you’re an emerging-markets investor, and you happened to peruse the study that the Institute for International Finance released this week, you must’ve experienced alarm – if not panic. The IIF expects the inflow of private funds into these markets to plunge to only $165 billion this year – an amount that’s just 18% of the $929 billion that flowed into these very same markets in 2007.
For investors, the message is clear: We’d better concentrate on those emerging markets whose inhabitants have hefty piggybanks of their own.
The details of the investment slowdown are as alarming as the headline. Bank loans to emerging markets will decline from an inflow of $165 billion to a net outflow of $61 billion. Private non-bank debt investment will decline from $125 billion to $31 billion, and even official flows will decline from $41 billion to $29 billion.
Net portfolio equity investment will remain negative, though the outflow will be only $3 billion compared to 2008’s $89 billion. Only direct foreign investment will increase, rising 12% from 2008 to $195 billion.
In terms of regions, emerging Europe will suffer worst, with inflows plummeting from 13% of regional gross domestic product (GDP) in 2007 to just 1% in 2009. Latin America will also suffer, with inflows dropping from 11% of regional GDP to 3%.
Overall, inflows to emerging markets will drop by 5.8% of emerging market GDP between 2007 and 2009 – almost double the declines of the late 1990s crisis (3.7% of emerging market GDP) and early 1980s (3.2%). Emerging market cash flows will also be affected by the need to repay $223 billion of private market debt this year.
This will cause a reordering of the economic pecking order in the emerging markets.
From 2003 to 2007, the availability of natural resources and/or cheap labor was more important than high foreign reserves or a big domestic savings base, so Argentina (natural resources) and emerging Europe (cheap labor, relative to the EU average) did well. In 2009, access to capital will be more critical than either of those other strengths. Countries without a large domestic savings base, or with substantial balance-of-payments deficits, or with low foreign exchange reserves, are likely to suffer badly.
Many emerging Europe countries have balance of payments deficits exceeding 10% of GDP so will suffer badly. Within that region, the Baltic states – fairly uncorrupt and friendly to foreign investment – will do much better than Romania and Bulgaria, which are both corrupt and xenophobic.
In Latin America, Brazil has an excellent domestic savings base, which it has been nurtured by policies that keep interest rates much higher than the rate of inflation. It is also quite friendly to foreign direct investment. Hence, in spite of its high foreign debt, Brazil should do fine.
Conversely, Mexico has a lower domestic savings base, relies heavily on remittances from Mexicans in the United States (which have declined sharply) and is quite hostile to foreign investment, particularly in the energy sector. Hence it is likely to have a tough year.
In Asia, China – with huge domestic savings, $1.95 trillion in foreign exchange reserves, and low foreign borrowing – will do fine. Conversely, India’s high domestic savings are offset by a profligate government, which runs a wasteful deficit of more than 10% of GDP. Hence India is quite reliant on foreign borrowing, and is likely to have problems.
For investors, the message is clear. Our emerging markets investments must be concentrated in countries that will not be badly affected by the decline in foreign capital inflows, preferably where domestic savers have piggybanks that are large enough to fund expansion locally. In particular, without delving into particular stocks, the following country-specific exchange traded funds (ETFs) are worth looking at:
- The iShares MSCI Brazil Index (EWZ) has net assets of $3.4 billion, a Price/Earnings (P/E) ratio of 7.0, and a dividend yield of 6%. Money Morning Contributing Editor Horacio Marquez recently recommended this Brazilian ETF in this weekly “Buy, Sell or Hold” series.
- The iShares MSCI Chile investable index (ECH) has net assets of only $112 million and a P/E of 13. However, Chile is interesting because it built up a reserve fund of $21 billion (12% of GDP) during the years when copper prices were high – it is thus not dependent on foreign-fund inflows.
- The iShares FTSE/Xinhua China 25 Index (FXI) invests in the 25 largest Chinese companies. Net assets are $5.9 billion, its P/E ratio 10, and its yield 2.7%.
- The iShares MSCI Taiwan Index (EWT) has net assets of $1.3 billion, a P/E of 9 and a yield of 8%. Taiwan is highly liquid, with large reserves, a high savings rate and almost no foreign debt
- The iShares MSCI Singapore Index (EWS) has net assets of $800 million, a P/E of 9 and a yield of 8%. Like Taiwan, Singapore is highly liquid, with large foreign exchange reserves and little debt. Taiwanese and Singapore companies may indeed benefit from the liquidity crunch by finding attractive investment opportunities in regional cash-short emerging markets with high growth potential, such as Vietnam.
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News and Related Story Links:
- Money Morning Buy, Sell or Hold Feature:
Buy, Sell or Hold: iShares MSCI Brazil Index. - Wikipedia:
balance-of-payments. - Chinability:
China’s foreign exchange reserves, 1977-2008.
Pingback by ECONOMICS 101: Why Obama’s Stimulus Will Make the Economy Worse and How We May Lose Our Liberty — But As For Me on 31 January 2009:
[...] The Five Most Promising Emerging Markets ETFs for 2009 [...]
Comment by Abid on 31 January 2009:
Dear your comment on India, may not be that correct. Some sectors of Indian economy have shown good numbers like education, telecom, drug, FMCG, Banking (govt) Sector. The good part of India is high domestic demand and what is being produced can be consumed inhouse. It is price sensitive econmy. With cost cutting and price reduction it can survive and thrive.
The per capita consumption of energr, steel and other paramerts are much less than USA. Indian have high saving rate. Today the demand is driven by govenment spending.
I see avery good future for Indian econmy.
Comment by Ashish on 31 January 2009:
Martin,
your Essay is more or less spot on.With one exception.I would India in the list of ETFs investors should look out for.
Mainly on account of three measures:
1) The More Business Friendly BJP is due to win National Polls in India this year.That will push Markets up dramatically as a feel good factor.
2)India and Overseas Indians(NRIs),hold huge amounts of Savings and Capital that is just waiting to be deployed in India ,on getting a positive signal-This Pool of Capital ,between
USD 50-150 Billion ,can make a massive difference to Indian Equities.
3) All Cash Rich Sovereign Funds who have gotten badly burnt in Western Markets are now actively looking at Indian among other Asian Investments.Even Singapore is actively looking at Indian Investments and they like current valulations.
Do not be surprised if India shoots up dramatically by December 2009.(30% -40% gains)
Regards
Ashish.
Pingback by Looking For the Next Global Profit Play? Take a Look at These Emerging Market ETFs on 20 May 2009:
[...] Money Morning: The Five Most Promising Emerging Markets ETFs for 2009. [...]
Comment by Lester Golden on 10 August 2009:
The idea that the Baltic states are “fairly uncorrupt” is utterly laughable. Live in Riga for awhile, where I have since 2005–and investing since 1998–and learn what a zero-accountability political and legal system looks like. By comparison, Berlusconi’s Italy looks like Sweden or Minnesota. What we have here is modernized feudalism, where the oligarchs make their own rules. That was the real point of the Latvian finance minister’s comment in the Financial Times that the “Yale educated guys at the IMF don’t know what’s going on in Latvia.” What he meant was, I can’t make any of these oligarchs pay taxes. But, as the former finance minister said in his laughably illiterate Bloomberg interview last year, “nothing special.” Those are two of the 3 English words my Latvian grandson knows.