Should You Be Getting MISTy?

| About: iShares MSCI (EWW)

The word BRIC entered the lexicon of global investors and traders in 2001, thanks to Jim O'Neill of Goldman Sachs. Since then, there has been a continuous stream of products, investment theses, strategies and contrary opinions to take advantages of the booms and busts in those economies. An investor who invested in these countries at the beginning of 2002 would have earned 292% by the end of July 2012, for an annualized return of 13.8%. Ex-China, the return would have been 379% and annualized rate 15.9%. That is pretty good, considering that during this time, the S&P 500 returned only 20% for an annualized rate of 1.7%.

However, perhaps now it is time to find a new kid on the block, because it seems that if investors remain hung up on BRIC nations, then their portfolios may fall like bricks. BRICs are no longer performing at the levels they were few years ago. Oh sure, their economies are growing, and they are a big engine behind the global GDP growth, but their equity markets are not producing stellar returns.

So we turn back to Goldman Sachs for another acronym. This time it is MIST -- Mexico, Indonesia, South Korea and Turkey. These counties have been popping into my regular scanning and market analysis for some time, but since I am not as creative as Jim O'Neill, the acronym alluded me. Nevertheless, I still can get MISTy, and perhaps you should too.

Here is the skinny on these emerging economies. Together, these four countries have an economy of $3.9 trillion and nearly 500 million people. In the last decade, their GDP has more than doubled in size.

Mexico is the world's fourteenth largest economy, with a per capita income of $14,000. Manufacturing and industry account for 34% of her economy, and the service sector, 62%. With $336 billion, exports constitute 29% of the GDP, and she has a current account deficit of $11.3 billion. As of 2012, Mexican wages are undercutting Chinese wages. In 2005, China had a $1.22/hour advantage over Mexico in productivity-adjusted manufacturing wages. By 2010, it was narrowed to $0.34. Early this year, Mexico held the advantage, with the gap estimated to grow to $1.75 by 2015. Mexico is also building an advantage over Brazil due to increased trade with the USA, and its economy may top Brazil's by 2022.

Indonesia is the world's sixteenth largest economy, and is aiming to increase her GDP to $4.5 trillion by 2025, which will increase per capita income from $4,700 in 2011 to $15,000 at that time. The government plans to achieve this through economic acceleration programs focusing on infrastructure development in the nation's six regional economic growth corridors.

South Korea is the world's fifeenth largest economy, with a per capita income of $32,100 in 2011. Manufacturing and the industrial sector account for 39% of her economy, and the services sector accounts for 58%. Exports account for 47% of South Korea's GDP.

Turkey's economy is one of the fastest-growing in the world. It rose by 8.5% in 2011 and 9.0% in 2010. As The Economist notes, after the 2001 crisis, Turkey's productivity improved, with 3-3.5% growth in GDP per person. The per capita income also tripled to $10,000. On the other hand, the author of the paper cited by The Economist -- Dani Rodrik of Harvard University -- notes that Turkey still faces some uphill tasks to correct her ship.

So the economic activities and growth prospects of MIST nations are significant. Their stock markets have also performed remarkably over the past few years.

Year-to-date (end of July), the Mexican Stock Exchange Index has returned 9.8%, Indonesia's Jakarta Composite 8.4%, South Korea's Kospi 3.1% and Istanbul Stock Exchange National 100 Index 25%. Together, YTD growth of the MIST nations' stock exchanges is 11.6%, whereas BRIC stock markets returned only 1.4%. Of the four BRIC countries, only India's Sensex has a positive year at 11.5%. China, Russia and Brazil have negative returns.

If you go back further and compare three years' performance, then the BRIC nations returned 2.4% and MIST nations returned 50.2%. The biggest drag on BRIC is the massive underperformance of China. Without China, BRIC returned 16.0% over three years.

The difference in performance since the bottom of the financial crisis in 2008 is even starker. Since October 2008, BRIC has a return of 56.6%, but MIST returned 132.2%.

The country based ETFs provide slightly different results, but they still capture a big part of the individual index movement. The ETFs for MIST are (NYSEARCA:EWW) for Mexico, (NYSEARCA:IDX) for Indonesia, (NYSEARCA:EWY) for South Korea and (NYSEARCA:TUR) for Turkey. Their combined five year return is 136.4%. The BRIC ETFs are (NYSEARCA:EWZ) for Brazil, (NYSEARCA:INP) for India, (NYSEARCA:RSX) for Russia and (NYSEARCA:FXI) for China. As a group, their five year return is only 41.7%. The biggest drag is the Chinese ETF, FXI.

To compare their performances on a chart, I constructed few composites. The BRIC composite was constructed using those nations' respective market indices, normalized using their October 2008 closing price. Similarly, the MIST market composite was developed and composites for their respective ETF groups.

Below is the weekly chart of the ratio of MIST composite market indices to that of BRIC composite market indices. The continuously rising trend indicates that MIST has been outperforming BRIC. Other trends are not as obvious, but one stands out. At the beginning of a global rally, BRIC outperforms MIST. Notice the declines in the first quarter of 2012, in late 2010 and early 2011, and in the first and fourth quarter of 2009. The declining ratio indicates that BRIC was performing better than MIST. These were the times when the markets around the world were coming off a global retracement.

(click images to enlarge)

The chart showing the ratio of the composite of ETFs for MIST and BRIC is similar:

So how do you take advantage of this?

The 9-period RSI provides some clues. Every time the 9-period RSI reached oversold levels (see chart for market indices), it was a signal that MIST would start to outperform BRIC. RSI's oversold reading -- below 30 in November 2009 -- started an uptrend that lasted for next 12 months. Similarly, in February 2011, RSI reached a low of 31, which prompted an uptrend lasting 10 months. The oversold reading in February 2012 fueled an upward move until the end of July.

On the other hand, overbought levels for RSI -- especially with divergences -- were signals that BRIC may start to outperform MIST. In August 2009, RSI was in overbought territory and for the next three months, you would have made more money in BRIC nations. The oversold reading in November 2010 was accompanied by bearish divergence and BRIC again outperformed MIST for three months. Similarly, a decline in the first quarter of 2012 was preceded by a bearish divergence in the overbought region. Presently, the RSI is coming down from an overbought reading. The RSI for the ratio of ETF is showing a divergence.

Of course, these charts are just providing guidance and you need to analyze individual investment vehicles to determine your strategy. Individually, the ETFs paint a different picture. The Mexican ETF, EWW, seems to be having a big influence on the performance of MIST. It is also trying to break out to the all-time high, hence, it is facing some technical resistance. This could be a reason that MIST is underperforming BRIC since the beginning of August. EWW is nearing the high made in 2011. Other MIST ETFs are nowhere near that level. Their performance after the market decline in late 2011 is similar to that of BRIC ETFs. None is near the high of 2011. They are also below their 2012 highs, except for TUR.

On the other hand, all BRIC ETFs are trying to mount a recovery after making bottoming patterns recently. It does not mean that there is a reversal of trend between MIST and BRIC, but that there may be a pause in the uptrend.

Additionally, the Chinese stock market had been in a funk for some time, and it reached its lowest level since 2009. However, FXI did not follow it. Unlike the Shanghai Composite, FXI did not make a lower low than November 2011. Chinese authorities are also getting serious about easing and stimulating their economy. The hints given by policy makers are helping FXI to recover.

India is facing some head winds due to policy inaction and stubborn inflation. The recent actions of the Reserve Bank of India and the government raised hopes that India will get serious about her slump. INP is reflecting this optimism, though barely. It is coming off a double bottom. Though the market has to rise a lot to reverse the downtrend started after the Commonwealth Games High of November 2011, there is some room to the upside for INP.

Other BRIC ETFs - EWZ and RSX - are similarly placed.

The long term economic outlook for these countries is somewhat different. According to Goldman Sachs, BRIC nations are expected to grow at an average of about 6.5%, and a bigger group, which includes MIST, is expected to grow at 5.5%. Nevertheless, based upon the immediate past and continuing momentum, it may be time for you get MISTy.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EWW, EWZ, FXI over the next 72 hours.

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