Tiger Cub Economies Part 4: Tourism And Sentiment

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Includes: EIDO, EPHE, EWM, THD, VNM
by: Steve Auger

Summary

This is the final installment of a 4-part series examining the 5 Tiger Cub Economies, and the fundamental factors used to determine the best country ETF to invest in.

Part 4 touched on tourism, political instability, terrorism, sentiment indicators, and identifies the country with the best overall rank, and that is Vietnam.

The share price of VNM, appears to be positioned for take-off, after successfully staying above the long term support level .

VNM has the lowest P/E Ratio and Price/Book Ratio. However, VNM does have a slightly greater Expense Ratio, and holds fewer stocks, primarily because there are fewer stocks available.

VNM has a more even distribution, hence more diversified. EIDO (Indonesia) and EPHE (Philippines) have a large allocation to the financial sector. Conclusion is that VNM is the best buy.

This is the final installment of a 4-part series examining the 5 Tiger Cub Economies, and the fundamental factors used to determine the best country ETF to invest in. Part 1 covered demographics and the middle income trap. Part 2 explored the effect of lower energy prices, financial market disruptions, ongoing slowdown in China and US protectionism. Part 3 examined fiscal and monetary policy, plus manufacturing PMI. Part 4 will touch on tourism and sentiment, and provide a wrap-up for this series.

Background

Tiger Cub Economies

The term "Tiger Cub Economies" refers to the low-to-middle-income Southeast Asia economies of Indonesia, Malaysia, the Philippines, Thailand and Vietnam. Many economists believe that these developing economies are young versions of the Four Asian Tigers: Hong Kong, Singapore, South Korea, and Taiwan.

Country ETFs

The securities listed below are high liquidity country ETFs that are associated with the Tiger Cub Economies. The ETFs will be examined in Part 4 of this series.

  • iShares MSCI Indonesia ETF (NYSEARCA:EIDO)
  • iShares MSCI Malaysia ETF (NYSEARCA:EWM)
  • iShares MSCI Philippines ETF (NYSEARCA:EPHE)
  • iShares MSCI Thailand Capped ETF (NYSEARCA:THD)
  • VanEck Vectors Vietnam ETF (NYSEARCA:VNM)

Investment Selection Methodology

The choice of best ETF will focus on country fundamentals, not the holdings within the ETF. Since there are many factors to consider and many of them are contradictory, a simple ranking system approach will be employed. Each country will be assigned a unique rank for each factor. The assigned rank will be between 1 and 5 for a given factor, with 5 being the best score, 1 being the worst.

Tourism - the Effects of Political Instability and Terrorism

Tourism is a very important part of in the Philippines economy, accounting for 14% of total import expenditures. Compare this to Malaysia, the next highest on the list, at 5.57%. Tourism is great for the economy, but what happens when political stability or terrorism rears its ugly head?

There just so happens to be a political stability index and a terrorism index. The political stability index is produced by the World Bank, while the terrorism index is compiled by the Institute for Economics and Peace (IEP). This data makes my life a lot easier, as I don't have to make subjective calls on which country has the worst situation. Every one of the Tiger Cub economies has political issues.

Vietnam doesn't have a ranking for political stability, perhaps due to the fact that the country is communist. Based on above charts, I have assigned the ranks as follows:

Tourism Disruption

Country

Rank

Malaysia

5

Vietnam

4

Indonesia

3

Thailand

2

Philippines

1

Sentiment

I obtained consumer confidence, business confidence and ease of doing business ratings by country from tradingeconomics.com. These leading indicators are determined by consumer and business surveys.

Vietnam leads the pack with respect to consumer confidence but does not have a rating for business confidence, possible because the communist government has partial ownership of most businesses. Based on above charts, I have assigned the ranks as follows:

Sentiment

Country

Rank

Indonesia

5

Vietnam

4

Philippines

3

Thailand

2

Malaysia

1

And the Winner Is …

After tallying up all 10 factor rankings, it appears that Vietnam comes out ahead, followed by Indonesia and Thailand.

Summary of Country Rankings

Factor

Vietnam

Indonesia

Thailand

Malaysia

Philippines

(1) Demographics

5

2

3

4

1

(2) Middle Income Trap

5

3

1

2

4

(3) Rising Price of Oil

3

5

2

4

1

(4) Exposure to China and the USA

2

5

3

4

1

(5) Financial Market Disruptions

5

3

4

1

2

(6) Fiscal Policy

1

3

4

2

5

(7) Monetary Policy

1

2

4

5

3

(8) Manufacturing PMI

4

2

3

1

5

(9) Tourism Disruption

4

3

2

5

1

(10) Sentiment

4

5

2

1

3

Average Rank

3.25

3.125

3

2.875

2.75

The share price of VNM, the Vietnam country ETF, appears to be positioned for take-off, after successfully holding the long term support level as shown below.

Check Under the Hood

I have collected and summarized some basic characteristics for the 5 ETFs. I was pleasantly surprised to see that VNM has the lowest P/E Ratio and Price/Book Ratio. However, VNM does have a slightly greater Expense Ratio, and holds fewer stocks, primarily because there are fewer stocks available. VNM also only has 75% exposure to Vietnam, while the other 4 ETFs have 99% exposure to their respective countries.

Characteristics

VNM

EIDO

THD

EWM

EPHE

No. of Holdings

34

85

121

45

44

Price/Earnings Ratio

12.11

19.23

15.80

16.61

20.02

Price/Book Ratio

1.46

2.81

N/A

1.7

2.48

Expense Ratio

0.67%

0.63%

0.63%

0.48%

0.64%

The sector allocations for the 5 ETFs is provided below. VNM has a more even distribution, hence more diversified. EIDO (Indonesia) and EPHE (Philippines) have an exceptionally large allocation to the financial sector. I find this level of exposure to be somewhat risky, given the possibility of foreign fund withdrawal, something that happened in the 1997 Asian crisis.

Sector

VNM

EIDO

THD

EWM

EPHE

Financials

23.4%

36.8%

27.1%

28.3%

46.2%

Staples

20.3%

12.5%

10.6%

8.8%

4.9%

Discretionary

11.8%

16.1%

6.6%

9.4%

5.5%

Materials

11.4%

4.5%

9.9%

4.3%

2.2%

Real Estate

9.3%

0.0%

0.0%

0.0%

0.0%

Energy

8.4%

4.9%

17.1%

2.6%

0.7%

Health Care

4.8%

2.3%

4.6%

5.2%

0.0%

Industrials

4.6%

4.0%

10.8%

15.5%

22.0%

Info Tech

3.0%

0.0%

2.8%

0.0%

3.5%

Utilities

2.6%

1.9%

3.3%

15.1%

7.5%

Telecom

0.0%

13.9%

6.1%

10.9%

6.9%

Final Thoughts

VNM scored best in the 10 factor rankings, has reasonably good technical and the lowest P/E Ratio. I don't have any problems proposing VNM as a long term buy, except that the government is communist and ultimately may lead to stock performance problems.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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