Asian stocks have sold off sharply this year. While the U.S. indexes have broke even with Wednesday’s close, Shanghai, Nikkei and Hang Seng are still down 20%, 18% and 25%, respectively.
The sell-off has created a unique opportunity for investors to get into the Asian growth story at a very reasonable price. For example, one third of stocks traded on the Shanghai stock exchange are trading below their price-to-book values in 2008. Unlike Mexican and Brazilian equities, Asian currencies are facing strong appreciation pressures and the long-term growth story of Asia is still intact, even if investors take into account a hard landing in China. China’s income per capita is half of that of Mexico and Brazil. A hard landing in China might derail Chinese GDP for a year or two, but for investors with medium to long-term time horizons, the growth potential is still tremendous.
One challenge to investing in any foreign market is not knowing what stock to invest or how to do research. This is where ETFs come into play. ETFs are sufficiently diversified and they eliminate all firm-specific risks and expose you only to market risks. At price-to-book values below that of 2008, downside risks are limited. In addition, many of these Asian focused ETFs are paying a healthy 1%-3% dividend. Here are a few popular ETFs that target Hong Kong, mainland China and Japan markets.
MSCI Hong Kong Index (EWH)
EWH is a capitalization-weighted index that aims to replicate the performance of Hang Seng index. Its heavy emphasis on the financial sector makes it a very volatile ETF. With the global deleveraging environment still in full swing, bank profits worldwide are bound to come down. I wouldn’t be surprised to see further downside in this ETF before things turn around.
Expense Ratio: 0.53%
Portfolio Allocation: 61% Financial, 13% Utilities, 13% Consumer, 11% Industrial
Price to Book: 3.45
SPDR S&P China ETF (GXC)
While other Chinese ETFs get China exposure by investing in the Hong Kong equity market, GXC tracks stocks that are directly traded on the Chinese exchanges. This is very unique since Chinese exchanges are largely closed to foreign investors. The weight of Chinese financial companies is quite high and this is a cause for concern, as we have no idea the extent of bad debts that will surface in Chinese banks in the next few years.
Expense Ratio: 0.58%
Portfolio Allocation: 28% Financial, 16% Oil and Gas, 13% Telecommunication, 13% IT
Price to Book: 1.49
FTSE China 25 Index (FXI)
FXI tracks China indexes by buying some of the biggest Hong Kong listed Chinese companies such as China Mobile (CHL), China Construction Bank (OTCPK:CICHY) and PetroChina (PTR). What makes these companies unique is that they are all state-owned firms with near monopoly or oligopoly powers in their respective industries. While they might not have the most efficient work force, their unique competitive advantages make them extremely profitable, especially at 11.9x earning and 1.57x book.
Expense Ratio: 0.72%
Portfolio Allocation: 48% Financial, 18% Oil and Gas, 18% Telecommunication, 11% Basic Material
Price to Book: 1.57
MSCI Japan Index Fund (EWJ)
EWJ seeks to imitate the performance of the Japanese equity market by taking at most 5% in any one company. Unlike the Hong Kong ETF (EWH), it is significantly less focused on the financials and more focused on Japan’s strength, the industrials and the consumers. With a strong focus on export-leading sectors, EWJ is likely to benefit from any devaluation of the yen if a sovereign bond crisis were to break out in Japan.
Expense Ratio: 0.54%
Portfolio Allocation: 20% Industrial, 20% Consumer, 17% Financials, 15% IT
Price to Book: 1.36
MSCI Japan Small Cap Index Fund (SCJ)
SCJ targets 40% of eligible small-cap stocks ($200-$1500 million market cap) within each industry listed on the Tokyo Stock Exchange. Small cap stocks are high-risk and high-reward investments. But by holding a wide variety of small-cap stocks, the ETF eliminates a firm's specific risks and exposes investors only to market risks.
Expense Ratio: 0.53%
Portfolio Allocation: 22% Industrial, 21% Consumer, 18% Financial, 13% Basic Material
Price to Book: 1.22
If you are as bullish on the Chinese currency as the U.S. Congress, here is an ETF to profit from China’s Yuan appreciation:
Wisdom Tree Dreyfus Chinese Yuan Fund (CYB)
CYB uses forward contracts and swap agreements to imitate the movement of Chinese currencies. CYB has 75% of its assets in U.S. Treasury Bills and 25% in repurchase agreements. Investors need to be careful when investing in ETFs with contract agreements. The performances might not replicate spot rates 100% especially longer term.
Expense Ratio: 0.45%