By: The ETF Professor
As measured by the relevant ETFs, 2012 was a good year for the CIVETS nations - the combination of Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. At the ETF level, only Indonesia can be considered a true 2012 laggard, but some of the other CIVETS constituents offered pleasant surprises throughout the just completed year.
For example, South Africa delivered impressive returns to investors despite some late-year labor strife at its palladium mines. Egypt fought off domestic and regional geopolitical headwinds for much of last year to treat investors to astounding ETF returns. Making the returns offered by the ETFs tracking Egypt and South Africa all the more impressive is stunningly high unemployment rates in both countries.
Black South Africans saw an unemployment rate of 41 percent last year. Unemployment among Egypt's young people is roughly double the 12 percent national average.
Those are two examples of the fact that each CIVETS nation faces its own issues in the year ahead. Obviously, investors need to evaluate those issues before falling in love with one of many catching emerging markets acronyms. Some of those issues will be addressed here along with the boldness of predicting how the CIVETS will perform this year by putting them in order of preference.
Market Vectors Vietnam ETF (VNM) Picking which ETF should be in the top spot among the CIVETS group is made difficult because a strong case can be made that the fund that follows VNM on this list could prove to be the best performer this year. Additionally, last year's laggard, Indonesia, could come roaring back and take on a CIVETS ETF leadership role.
At the moment, VNM is a credible contender for being the best CIVETS ETF performer in 2013. The fund has shaken off the effects of a sharp pullback last Friday and is already one of the top-performing emerging markets ETFs in the new year.
The cautionary tale is that VNM started 2012 with a bang only to wilt for much of the second and third quarters. However, VNM could be in store for a stellar year. Yes, the country is coming off its slowest economic growth year in 13 years, but investors know that. Inflation is muted by Vietnam's standards and investors know that as well.
VNM can take a big leap this year if Vietnamese policymakers move forward with plans such as increasing trading bands at local stock exchanges, cracking down on corruption and boosting foreign ownership limits in Vietnamese banks. The bank issue is pivotal because Vietnamese banks are suffering through a significant bad loan problem and it could take increased foreign investment to prop up some bad Vietnamese banks.
That would be a boon for VNM because financial services names account for about 45 percent of the ETF's weight.
iShares MSCI Turkey Investable Market Index Fund (TUR) The iShares MSCI Turkey Investable Market Index Fund could easily be in the top spot on this list. That is where the ETF finished among the CIVETS in 2012 with a gain of about 60 percent. Banking on another year of that type of performance could lead to some disappointment, but the pieces are in place for TUR to have another strong year and perhaps reign as the CIVETS ETF king once again.
Despite a flap with Standard & Poor's, Turkey is pushing for an investment-grade rating, something it was able to land from Fitch Ratings last November. Turkish banks are healthy, and that is important to TUR's fate because financials account for 51.5 percent of the ETF's weight.
Favorable demographics and the potential for a job-creating energy boom also bolster the case for TUR. Perhaps the worst thing that can be said of the ETF right now is that the ETF has the look of an overbought momentum stock. Then again, the ETF's P/E ratio of around 14 is below that of the iShares MSCI Emerging Markets Index Fund (EEM), implying Turkey trades at a bit of discount to the broader emerging markets universe.
In the case of TUR, it pays to remember that what goes up does not have to come down exactly when naysayers want it to and being on the wrong side of momentum can lead to some savage beatings. Just ask anyone that shorted Amazon (AMZN) in the $180-$200 area.
Market Vectors Indonesia ETF (IDX) A faltering rupiah and a widening account deficit were among the issues that contributed to the woes of IDX last year. Thus far in 2013, the ETF has not been awful, but it has not done much worth writing home about, either.
On a technical basis, IDX could rejuvenate investors' confidence in the ETF by notching several consecutive closes above $29 and turning that resistance into support.
There is a strong fundamental story here as well. GDP growth is expected to be 6.4 percent this year. Said another way, Southeast Asia's largest economy is likely to have the best growth rate among the ASEAN nations this year. Additionally, investors should not overlook Indonesia's strong domestic consumption that drives over 60 percent of GDP.
Global X FTSE Colombia 20 ETF (GXG) Appearing in the bottom half of the CIVETS list does not mean the Global X FTSE Colombia 20 ETF is in for a rough 2013. It merely means the funds ahead of it have the potential to deliver superior returns this year. Last month, the central bank had to lower its full-year 2012 GDP estimate to 4 percent to 4.5 percent from 4.8 percent due to slack third-quarter growth.
The upshot is with inflation and benign and the central bank looking to weaken the peso, another rate cut could be on the horizon. Already tied with Peru for Latin America's (among major economies) lowest interest rates at 4.25 percent, analysts see more rate cuts on the horizon.
The government balance sheet is strong as the country finished 2012 with a record $37.46 billion in foreign currency reserves, according to Colombia reports.
Risks to GXG's upside in 2013 include weakness in the commodities markets as materials and energy names combine for 35 percent of the ETF's weight. Additionally, the government deciding to engage in further dilutive share sales of Ecopetrol (EC), the state-run oil company, could weigh on GXG because that stock is the fund's top holding with a weight of over 14 percent.
iShares MSCI South Africa Index Fund (EZA) The thing about all the labor unrest South Africa has dealt with in recent months is that it usually boosts prices of the affected metals. For example, the ETFS Physical Palladium Shares (PALL) is trading near a new 52-week high today. The ETFS Physical Platinum Shares (PPLT) has gained over five percent in the past week.
The other thing is that EZA often displays an inverse relationship to PALL and PPLT amid labor strife, meaning the ETF falters. Last week, Fitch Ratings downgraded South Africa's long term foreign currency credit rating to BBB from BBB+, the long term local currency credit rating to BBB+ from A and the short term credit rating to F3 from F2.
Not surprisingly, the ratings agency cited rising political and social tensions as catalysts for the downgrade.
All of this is not to say that EZA cannot have a good year, but there are preferred options among CIVETS ETFs. EZA sports a beta of 1.42 against the S&P 500, according to iShares data. TUR's beta is 1.89, but Turkey is clearly the safer bet right now.
Market Vectors Egypt ETF (EGPT) After tumbling from above $14 in October to below $12 in December, EGPT has bounced and is up almost seven percent in the past month. A better than 44 percent gain for EGPT and a gain of more than 49 percent for Cairo-listed stocks shows EGPT and Egyptian can, at times, be impervious to geopolitical headlines.
How much longer that theme remains in tact is anyone's guess and that is all it is: A guess. Egypt is running out of foreign currency reserves. That is plaguing the Egyptian pound and recently lead to a surge in credit default swaps used to ensure Egyptian debt against default. In December, S&P lowered Egypt's credit rating to B-, six levels below investment grade.
Translation: Egypt must now contend with a weak currency, higher borrowing costs and high unemployment. The World Bank is forecasting Egyptian GDP growth of just 2.6 percent this year, meaning investors can capture superior growth rates with less risk throughout the emerging world.
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