ETF Insights: Hong Kong, Megacaps

Hong Kong ETF Surges as Democrats Hold Ground

Hong Kong ETFs such as the iShares MSCI Hong Kong (EWH) surged 2.5% in morning trading as pro-democracy candidates overcame low voter turnout to do better than expected in Sunday’s Legislative Council elections, thereby retaining a critical veto power.

The pro-Beijing forces were able to maintain a majority in the legislature, in part by basking in the nationalistic glow from last months’ Olympic games.

Hong Kong went to the polls yesterday to select the legislature’s 60 members, half of whom are directly elected by popular vote, and half chosen by a complicated formula of ”functional constituencies” representing professional interest groups, such as bankers and industry.

Only 45% of registered voters took part in this year’s ballot, compared with more than 55% in the last election, which took place in 2004 amid deep dissatisfaction with the Beijing-backed government

While low turnout is normally deadly for the pro-democracy camp, it managed to hold on to 23 seats in the elections, down from 25 four years ago. Although it is far from the majority needed to reject government legislation, it gives the democrats power to veto changes to Hong Kong’s mini-constitution, the Basic Law.

Megacap ETFs Clobbered by Global Slowdown

Last week was a particularly rough week for global markets and the mega cap stocks that make ETFs such as the iShares S&P Global 100 Index ETF (IOO), which is comprised of 100 large cap (average $10 billion) multinational companies that are selected based on the firm’s percentage of foreign assets, revenues, and employees. IOO is split about evenly between US and international companies and represents a simple, low-cost vehicle to gain global exposure with a click of your mouse.

We may not technically be in a global recession but GDP growth projections are coming down pretty much across the board on a daily basis. European companies and Japan are suffering just as much if not more than the US as growth and profit numbers mirror the weakness in global consumer demand.

While the S&P 500 and the Dow lost about 3% last week, European ETFs lost about 6.8%; Asia fell about 6.5% and Latin America gave up 9.2%. Having a fair amount in cash, trading more actively and allocating limited assets to inverse ETFs has led to the Chartwell World Country ETF Rotation being down about 4.9% year-to-to date.

Bill Luby writing in Seeking Alpha points out that the weekly chart of IOO highlights the deterioration in the global equity picture which accelerated dramatically this week, with stocks falling through technical support and bringing the IOO back to levels not seen since July 2006. If IOO cannot hold the 2006 support level of 61.00, then another even uglier leg down is certainly a distinct possibility.

On the other hand, this sharp pullback may provide tough investors with a great opportunity to build positions in some great companies.