Why is the MSCI Emerging Market Index up 6.8% this year while the
iShares MSCI Philippines Index ETF (NYSE: EPHE) has surged 32.3%?
As you know, I've been deeply skeptical on China while bullish on a Pacific Rim-focused strategy over the past two years.
While so far in 2012 China's Shanghai Composite is down 18% and the FXI is down 3.6%, you might be surprised with the nice performance of some other Pacific Rim markets. Singapore is up 21.7%, Hong Kong is up 14.3% and Indonesia is up 15.1% - through the
iShares MSCI Singapore Index Fund (NYSE: EWS), the
iShares MSCI Hong Kong Index Fund (NYSE: EWH) and the
Aberdeen Indonesia Fund (AMEX: IF), respectively.
Have you heard speakers like me talk about the rising consumer class in the region?
EGShares Emerging Markets Consumer ETF (NYSE: ECON) is up 22.6% in 2012, outperforming the Emerging Markets Index by more than 300%. Singapore real estate trusts (REITs) are up on average 39% so far this year.
And even China's big rival, India, is up 15.23% - through the
WisdomTree India Earnings Fund (NYSE: EPI).
Why could all these markets be doing so well as China struggles? It's simple:
They're competitors to China. So for example, as China's manufacturing index is down eight months in a row, this production is going to other markets in the region. Trade and investment within Southeast Asian countries are also booming. During the last decade, foreign direct investment between these countries has more than tripled and is four times larger than Chinese investment in the region.
And here's a shocker. Even within a specific country there can be a huge difference in sector performance. Just look at how much better Chinese property markets, via the
Claymore/AlphaShares China Real Estate ETF (NYSE: TAO), have done in 2012 relative to the most widely held China ETF, the
iShares FTSE/Xinhua China 25 Index (NYSE: FXI).
I could go on with other examples, but you get the point. What markets and, in turn, what stocks you choose makes a tremendous difference in performance.
Look for Value and Momentum Some of these markets have gotten a bit expensive for my tastes, but overall the wall of capital flowing through this region is likely to continue for some time. Feel free to sprinkle some of these ETFs in your global portfolio but always use a trailing stop loss as these markets can be volatile.
If you have the time, you can of course do much better with more risk by rifling in on specific stocks. But whether you're picking stocks or country ETFs, the best strategy is to look for a combination of value and momentum.
As I mentioned a few weeks ago, despite all the corruption and political meddling in the Russian economy, its stock market, and the
Market Vectors Russia ETF (NYSE: RSX), is dirt cheap, trading at only 5.7 times earnings. And over the last three months, it's up 19.8%, a performance double that of the
iShares MSCI Emerging Markets Index (NYSE: EEM).
Russia finally joined the World Trade Organization (WTO) last month. The World Bank optimistically estimates that this could boost its growth rate by up to 3% per year. In addition, maybe now protected industries will get moving through a dose of badly needed international competition.
Second, Russia, as a Pacific Rim nation, is stepping up its trade and investment outreach to countries such as China, South Korea and Japan. In fact, over the past five years, bilateral trade with Japan has already doubled and trade with South Korea has tripled. Russia's trade with China is now 60% higher than with Germany. These trends will accelerate as what I call "The Pacific Century" unfolds.
In addition to ample supply of energy resources, Russia has geography in its corner. It takes only two to four days to get raw materials from Russia's Asian frontier to China, compared to weeks for many of its competitors. Finally, despite the bad headlines, the Russian economy is chugging along pretty well with about a 4% growth rate.
So don't be lulled to sleep by the myth that all markets move in tandem. Be alert for the combination of value and momentum.
Next week I'll address what you should do about China.
Good Investing,
Carl
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