Five Most Promising Emerging Market ETFs for 2009

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 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.

Original post

Comments

[turnkeusa:]

I own an apt in a Bulgarian ski resort and found Bulgaria to be more cosmopolitan, open and globalized than the American south or provincial northern Italy, where I used to live. Bulgaria has many problems, but xenophobia is not one of them.
I have owned real estate in Latvia since 1998 and find your idea that the Baltic states are "fairly uncorrupt" absolutely laughable, except for Estonia, which is less corrupt than Italy, where I lived for 15 years. Even former president Freiberga used govt funds to redecorate her personal library; and that's the least of the corruption. Go and see the illegal construction along the beach in Jurmala, which resembles the degree of illegally built real estate in Sicily or Calabria, but never bulldozed by the authorities, as in Italy. The lack of accountability and the impunity of the powerful in Latvia is what led to the recent riots in Riga on January 13, appropriately the anniversary of the 1905 revolution in Tsarist Russia.
Before you generalize about countries in eastern Europe, buy a couple of plane tickets and come visit this summer and swim in the Baltic under the near midnight sun.

Jan 30 01:38 PM

[vivek bhauka:]

i feel that the gold prices are all set to become stronger and stronger..may be double from these levels.
the reason is that world over governments are printing money.however they can print money only when its backed by gold reserves for better risk management and public/country confidence.to overcome the present financial crises they believe in printing more money..hence more gold reserve requirement for them.
but gold is a scarce commodity.hence only way to print more money is to increase the price of gold in international markets.this helps everyone especially the governments as they are biggest holders and then can print more money as value of gold reserves lying with them increases.

hence this will go on till there are breakes on printing money like madness.till then gold prices will zoom.however when its over gold will come back crashing down.

Jan 31 02:44 AM

[Did U Think...:]

You want us to buy emerging markets? Gary Shilling totally disagrees with you. Cash is still king in 2009, the year when global deflation really picks up steam.

Jan 31 09:56 PM

[donzelion:]

"Our emerging markets investments must be concentrated...where domestic savers have piggybanks that are large enough to fund expansion locally."

Think about Samsung in S. Korea in '07 (insider trading to preserve the dynasty) and Satyam in India - both of which could fool the likes of accountants and auditors with full access to their books. And South Korea and China have much stronger accounting regimes than does China (after all, an insider trading scheme is far less harmful than, say, poisonous food additives added in multiple different factories under multiple different parties nominal control).

Hence, I'd hesitate to suggest that (mainland) China will do fine. You will never have the power to discern an Enron from an Exxon in China (and you will always know that if the Chinese Exxon's prosper enough, the government can take them back at any time).

The economies of Taiwan and Singapore are wholly dependent upon abiding by capitalist principles openly and honestly - China, on the other hand, is merely experimenting. They like certain features of capitalism (growth, new jobs, new technology, new investment flows) - but no one knows what they'll do in response to other features - (loss of employment, enforcement of debts and liquidation, etc.).

Feb 01 05:14 AM

[donzelion:]

Er, I meant South Korea and India have much stronger enforcement capacity than China does. Mis-stated that above.

India has literally hundreds of thousands of competent accountants roaming about - preparing books, drafting books, setting books in order. India also has hundreds of thousands of lawyers roaming about - enforcing the bookkeeping and monitoring transgressions. And India has hundreds of thousands of journalists commenting when the others fail.

If you believe democracy works, then you must believe China has some pretty glaring defects. If the thought of U.S. government nationalizing banks would ever give you a moment's pause for concern, steer clear of China and don't delude yourself.

Feb 01 05:25 AM

[seethrudanoise:]

great retort---thanks for putting this generalist straight

appreciate your making things realistic then fuzzy


On Jan 30 01:38 PM turnkeyusa wrote:

> I own an apt in a Bulgarian ski resort and found Bulgaria to be more
> cosmopolitan, open and globalized than the American south or provincial
> northern Italy, where I used to live. Bulgaria has many problems,
> but xenophobia is not one of them.
> I have owned real estate in Latvia since 1998 and find your idea
> that the Baltic states are "fairly uncorrupt" absolutely laughable,
> except for Estonia, which is less corrupt than Italy, where I lived
> for 15 years. Even former president Freiberga used govt funds to
> redecorate her personal library; and that's the least of the corruption.
> Go and see the illegal construction along the beach in Jurmala, which
> resembles the degree of illegally built real estate in Sicily or
> Calabria, but never bulldozed by the authorities, as in Italy. The
> lack of accountability and the impunity of the powerful in Latvia
> is what led to the recent riots in Riga on January 13, appropriately
> the anniversary of the 1905 revolution in Tsarist Russia.
> Before you generalize about countries in eastern Europe, buy a couple
> of plane tickets and come visit this summer and swim in the Baltic
> under the near midnight sun.

Feb 01 12:53 PM

[Adam Sharp:]

I prefer PGJ over FXI for investing in China. FXI is 40% financial, and more exposed to China's manufacturers/exporter... PGC is only 6% financial stocks. It's more focused on the domestic market: software, services, tech. But a good mix of everything. I posted a more-detailed review here:

www.bearishnews.com/po...

Feb 01 10:30 PM

[Jan Rogozinski:]

In the market, one must consider both reality and investors' fantasies.
(1) Some brain-dead folk think that huge government deficits, 0% interest rates, and vast increases in the amount of paper money AUTOMATICALLY lead to inflation. They don't. Consider the 2000's. Greenspan kept interest rates at 1% year after year. Bush combined $3 or 4 trillion worth of silly aggressive wars with ending taxes for the rich, doubling the deficit every year. Meanwhile the Fed happily monetized Bush's deficits.
SO, DO WE NOW HAVE INFLATION?? OR DO WE HAVE DEFLATION?

(2) However, brain-dead folk still think we will inflation "some beautiful day" and their silliness moves markets. Hence, for example, the run up in gold. So one might well have bought gold, even though one knew it is, as far as reality goes, a dumb investment.

Feb 02 08:49 AM

[k9s-4-k8:]

Uh...do we need to rehash Bulgarian history here? Should we inquire ethnic Turks how they felt represented in Bulgaria before the Iron Curtain fell? Not only were they a hated minority and banished to the worse living conditions, the government even changed their surnames to Bulgarian surnames to make them true Bulgarians. Today, we have the extremist nationalist party "Ataka" pushing an increasingly popular xenophobic vision for the Bulgarian nation. Their platform openly advocates hostility and discrimination against ethnic and religious minorities complete with a large dose of vile hate speech. Interesting enough, now with Bulgaria one of the newest members of the EU they are facing some of the same discrimination in the form of richer nations like Switzerland blocking Bulgarians from working in their countries. The rich nations of Europe have a long history of xenophobia against the poor nations and the poor nations to other poor nations. Its quite a mess, but I can hardly think of very many countries that are 100% free of all that crap.


On Jan 30 01:38 PM turnkeyusa wrote:

> I own an apt in a Bulgarian ski resort and found Bulgaria to be more
> cosmopolitan, open and globalized than the American south or provincial
> northern Italy, where I used to live. Bulgaria has many problems,
> but xenophobia is not one of them.
> I have owned real estate in Latvia since 1998 and find your idea
> that the Baltic states are "fairly uncorrupt" absolutely laughable,
> except for Estonia, which is less corrupt than Italy, where I lived
> for 15 years. Even former president Freiberga used govt funds to
> redecorate her personal library; and that's the least of the corruption.
> Go and see the illegal construction along the beach in Jurmala, which
> resembles the degree of illegally built real estate in Sicily or
> Calabria, but never bulldozed by the authorities, as in Italy. The
> lack of accountability and the impunity of the powerful in Latvia
> is what led to the recent riots in Riga on January 13, appropriately
> the anniversary of the 1905 revolution in Tsarist Russia.
> Before you generalize about countries in eastern Europe, buy a couple
> of plane tickets and come visit this summer and swim in the Baltic
> under the near midnight sun.

Feb 02 02:10 PM