The Politics of Asian ETFs

Unlike most global investment advisers and strategists using exchange-traded funds, I pay a lot of attention to politics, both here in America and in overseas markets. The politics of a country tells me a lot about the probability of long-term economic growth and stability – vital ingredients for successful investing. It also reveals a country’s culture, business climate and durability in the wake of shocks like the real estate downturn. Countries with free and open political systems can take sledgehammer blows and come back fighting. The politics of countries and the ETFs that track them are important.

The relatively civil conduct of our campaigns and the fair, smooth transfer of executive power is a major reason why our markets are so attractive to global investors. Sure politics everywhere is a contact sport but we look pretty good compared to the fisticuffs this week in South Korea, the messy situation in Pakistan, and the ham-handed turnover of power in Russia (RSX) from Mr. Putin to Mr. Putin.

The current presidential campaign really has my blood pumping. The race between Senator Clinton and Senator Obama is tightening with John Edwards jockeying for an opening. The Republican race is even more fluid and open with the sudden rise of former Governor Huckabee posing a threat to former Governor Romney, former New York Mayor Rudy Giuliani losing steam in national polls and re-directing his efforts to big states like California and Florida. All this movement is creating an opening for the old lion Senator John McCain, whose campaign was left for dead only a few months ago, is staging a comeback in Iowa and New Hampshire.

Political risk is likely to play an increasingly dominant role in Asian markets in the coming year. Elections are due to take place in Taiwan with important ramifications for China while the result of the US presidential elections will have significant implications for relations with Asia, and in particular China. Korea (EWY) faces parliamentary elections in April, the results of which will be crucial to shoring up support for President-elect Lee Myung-bak.

Pakistan, with the death of Benazir Bhutto is the clearest example of why regional risk aversion is rising, but the last weeks of 2007 have produced others. In Thailand (TF), the People’s Power party, allies of deposed prime minister Thaksin Shinawatra, emerged as the largest party after Christmas Eve elections, but fell short of a majority. The shape of any new government, as well as the future of Mr Thaksin himself, remains unclear. Japan’s premier, meanwhile, not even three months into the job, is suffering from the same lack of confidence and popularity that led to the fall of Mr. Abe. Sure makes you pine for the strong agenda of former PM Koizumi when Japan's market (EWJ) was booming.