In an earlier article, I presented my U.S. investment plan, and named the 5 ETFs that I think are the best ones to invest in 2013. However, U.S. ETFs are less than half of my entire portfolio. I live and work in the USA and all my hard assets are in the USA as well. Hence, for investments, I look abroad.
As I did in the other article, I will first provide the list of what I consider to be the best international ETFs for 2013, and then present the case for my choice. So, here goes.
- ProShares Ultra FTSE China 25 ETF (XPP)
- EGShares India Small Cap ETF (SCIN)
- EGShares China Infrastructure ETF (CHXX)
- EGShares India Infrastructure ETF (INXX)
- Guggenheim China Real Estate ETF (TAO)
- Vanguard Global ex-U.S. Real Estate ETF (VNQI)
- Direxion Emerging Markets Bull 3X Shares ETF (EDC)
- WisdomTree Dreyfus Indian Rupee ETF (ICN)
Readers will immediately recognize that there is a common theme to this thesis. It is focused on China and India, and in particular real estate and infrastructure in China and India, with a side dish of a broad based market ETF as well. For income, it is using the high deposit rates of the Indian Rupee.
So how did I arrive at this? I first started with the top 10 economies in the world. According to the United nations, these are (in order) United States, China, Japan, Germany, France, Brazil, United Kingdom, Italy, India, and Russia. Together they constitute about 65% of the world GDP. United States is already taken care of, and China and India are chosen. So why did I reject the remaining 7? It is simple. It all has to do with Central Bank policies.
The ECB just lowered growth targets for the eurozone in 2013 to a range of -0.9% and 0.3%. So, Germany, France, and Italy are out for me. I am not interested in investing in countries that are going to shrink GDP. While the ECB claims that it will adopt a pro-growth monetary policy, and indeed interest rates have headed to negative in the recent months, I believe at heart they are still hawks, and the Bundesbank has too much of an influence on the ECB. So, I do not believe that eurozone will do well in 2013. So that takes care of France, Germany, and Italy.
U.K. has made a fine mess of its austerity policy. They took the German model of cutting spending in the middle of a recovery, and is now facing a triple-dip recession. At the same time, inflation in the UK is going up, putting the Bank of England in a tough situation when it comes to lowering interest rates. So that takes care of U.K.
That leaves Japan, Brazil, and Russia.
I debated a lot about Japan. Japan is on the record to pursue an expansionary policy, and I think they will succeed. The yen has already been successfully pushed down against the dollar, and the Nikkei is roaring. The trouble I have is the exchange rate risk. What if USA makes some comments about ending QEternity? The first thing that will happen is the yen will tank promptly, and with that my investments in Japan will go south. So, I decided to pass on Japan, though I suspect I will regret this in 12 months.
A bet in Russia is a bet on oil prices. The market index there hugs oil prices with a very high consistency. I am not bullish on oil prices in 2013 because of the excess supply coming from the USA. So that takes Russia out as well.
Finally, comes Brazil. to put it bluntly, I think Brazil is cooked. The growth forecasts keep getting cut over and over again, and the Central bank is simply not doing enough to cut interest rates fast enough to support economic growth. Of course, Brazil has had bad bouts of inflation in the past, so it is hard to blame the Central Bank for being cautious. After all, the Germans are still seeing ghosts from the 1930s. But right reason or not, Brazil is simply not attractive to me for 2013.
So that leaves China and India. I had earlier made the case for investing in China in 2013 in an article. Interested readers should look it up. the basic thesis is simple: China growth is trending up as the new regime is taking pro-growth policies, while China indices represent value with historically low P/E.
What about India? To me, India is not a fundamental play. It is a liquidity play, as I had written in an earlier article. Indian Parliament just opened up India's retail sector to multi-brand Foreign Direct Investment (FDI). This in turn has sharply increased foreign investment flow into India. In the past, whenever this kind of a mania happened, the Indian stock market did really well.
So that, hopefully, explains the rationale behind my country selection. Now comes the ETFs to choose. I first chose the two broad based indices in China, using leveraged ETFs whenever I can. That explains XPP and SCIN. Other alternatives are the iShares S&P India Nifty Fifty Index ETF (INDY), the iShares FTSE China 25 Index Fund (FXI), or the iShares MSCI China Index (MCHI). Since both these countries are openly declaring infrastructure investments, I chose the infrastructure ETFs CHXX and INXX. Finally, when the market goes high, speculation goes high with it. The most common place for speculation in China and India, two countries with the world's two biggest populations which are fast urbanizing, is real estate. Hence my punt on the real estate in China though TAO. Since I couldn't find an India real estate ETF, I decided to use the world real estate ETF VNQI in its place. Not ideal, but have to do in the pinch.
But what about all the emerging economies outside of the top-10? There are too many of these, too many to research. I do want exposure to the emerging economies, so I decided to take a little punt with a shotgun approach. That's where EDC comes in - it's a broad bet across a whole bunch of emerging economies.
Finally, no investment strategy is complete without some income. I decided to use the ICN, which yields about 7%. I also expect the Indian Rupee to appreciate this year with all the FII rushing in, so I believe that I do not have a foreign exchange risk. Also, VNQI has a nice yield of about 4%.
So, there you have it. 8 ex-US ETFs that I am betting on in 2013. If the Chinese or Indian economies falls apart for some reason in 2013, I will not be very happy, as these are all growth bets. But, that's the risk we all take as investors.
Disclaimer: This is not meant as investment advice. I do not have a crystal ball. I only have opinions, free at that. Before investing in any of the above-mentioned securities, investors should do their own research, consult their financial advisors, and make their own choice.