The U.S economy has been faltering. Politicians have been blaming one another. And confidence is about as bad as it gets.
However, what you read or hear in the media about recessions and economic progress will not explain the success or failure of stock assets. For example, Australia boasts a mere 5.3% unemployment, the highest interest rates among the G-10 developed nations and GDP growth acceleration. (Note: The Economist Intelligence Unit forecasts 3.8% growth for Australia in 2012.)
Yet, iShares MSCI Australia (EWA) registered -20% in the first three quarters of 2011. That’s two times the loss that the S&P 500 experienced.
China tells a similar tale. While nobody has accurate employment data for the mainland, we do know that the country grows at a torrid 9%-plus. That hasn’t mattered much to investors, as most U.S.-based ETFs for China have logged losses of at least -25% (1/1 – 9/30).
Granted, some of EWA’s decline is due to the unwinding of a currency carry trade and the appreciation in value of the U.S. dollar. But not all of it. In truth, a country’s GDP growth is not highly correlated with the country’s stock market performance.
On the other hand, directionality of a country’s prospects do matter to stock markets. Investors have been wary of China’s fiscal and monetary tightening. Would the government kill its growth machine before taming inflation (a.k.a. “a hard landing”)? If so, how would Australia be able to export its wide range of natural resources with its strong Australian dollar and weak global demand?
The fears are overblown. In fact, investors may want to begin nibbling at country ETFs that export significant goods and services to China, but only if the respective ETF climbs above a 50-day trendline. I’d keep a watchful eye on Australia (EWA), South Africa (EZA) and Malaysia (EWM).
Here are three reasons to maintain guarded optimism:
1. Europe. Greece is relatively small in the European Union (EU). It’s not too big to fail, but Spain and Italy are. More importantly, large banks across Europe and the world are also “too big to fail.” Horrible tastes in mouths notwithstanding, European leaders understand the stakes. They are extremely likely to prevail in finding a near-term resolution.
2. China. China has been raising interest rates and limiting bank lending to cool off its white hot economy. They’ve largely succeeded. It follows that China will eventually ease up on monetary and fiscal policy, enabling the rest of the world to profitably export resources and products.
3. Bargain Hunters. Some of these country ETFs have been beaten down to where the dividend yields are significantly higher than the 10-year U.S. Treasury. What’s more, trailing P/Es, forward P/Es and earnings yields should begin attracting bargain hunters with the right bit of stimulus. An accord in Europe accompanied by a pause in tightening by China would do the trick.
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.