Asia ETFs Jump, Latin America ETFs Slump on China Rate Hike

Includes: EWM, EWS, EWT, IDX, JPXN
by: Gary Gordon

The biggest news over the weekend had been China’s surprise Christmas-day decision to hike its interest rates. China is looking to slow down price inflation. And, not surprisingly, some of the worst performing Country ETFs on 12/27/2010 were those with heavy exposure to the materials and energy segments.

For example, Columbia, Chile, Brazil and Mexico were among the biggest losers. (Review my recent commentary, “China Decides How High Reflation Trade ETFs Will Climb.”)

In general, this tells us that when China reins in rates, the market may believe that the 2nd largest economy may require less coal, steel and copper from resource-rich nations. It may be a knee-jerk reaction, but it’s a predictable reaction nonetheless.

On the other hand, China’s proactive response to curb price inflation isn’t necessarily a burden on its middle class. Consider 5 of the best performing Country ETFs on the last Monday in 2010 – Singapore, Malaysia, Taiwan, Japan and Indonesia. China raised its rates, and the neighboring region’s ETFs rocket higher?

China Hikes Rates… Best Country ETFs Are Asian?

Approx. % as of 12/27
iShares MSCI Singapore (NYSEARCA:EWS) 1.44%
iShares MSCI Malaysia (NYSEARCA:EWM) 1.14%
iShares MSCI Taiwan (NYSEARCA:EWT) 0.93%
iShares S&P TOPIX Japan 150 (ITF) 0.60%
Market Vectors Indonesia (NYSEARCA:IDX) 0.45%
S&P 500 SPDR Trust (NYSEARCA:SPY) 0.04%
Vanguard Europe (NYSEARCA:VGK) -0.60%
iShares Latin America (NYSEARCA:ILF) -0.74%
Click to enlarge

In truth, Asian Country ETFs have weakened relative to the broader equity markets over the last 10 weeks. They have dropped from the 90th percentile in relative strength rank to a respectable, through less robust, top 1/3 in the ETF universe.

Nevertheless, China is, at best, halfway into its rate hiking, inflation-fighting campaign. It follows that it’s important to see how that may or may not affect a variety of assets. And at least for one trading session, Asian neighbors seemed to be noteworthy beneficiaries.

One possible reason? Countries like Singapore, Taiwan and Malaysia export a wider variety of non-resource related goods and services to China. As China raises rates and/or chooses a responsible monetary policy, China’s yuan should appreciate. A more competitive yuan (Chinese dollar) in the region lets the other Asian currencies devalue a bit, giving an edge to their exports.

Another reason? Both Singapore (EWS) and Malaysia (EWM) are heavy on the financials and industrials segments, while Taiwan (EWT) is locked in on the tech sector. All of these funds have precious little exposure to energy and basic materials — areas of the market that take the largest hits when the reflation trade is questioned.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.