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Reversal of Fortune: Asia ETFs Lead the Way After 2-Year Hiatus

09 November 2012 at 2:32 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Nearly two months ago, Ben Bernanke announced an open-ended promise for the Federal Reserve to purchase $40 billion in mortgage-backed bonds every month. Prior to the 9/13 announcement, investors expected another round of electronic money printing, yet the size and scope of the plan exceeded everyone’s expectations. U.S. stocks surged to multi-year highs through the Friday 9/14 close.

Shortly thereafter, however, U.S. stock assets began to weaken. Not only were corporate revenue reports decidedly weak in October, but many chose to exit riskier assets prior to the presidential election and the subsequent “fiscal cliff” debate.

Realistic fears that the same cast of characters may stumble in their efforts to reach an agreement has seen many investors selling first and asking questions later. The S&P 500 has already forfeited -6.3% over the last 8 weeks.

That said, not every stock ETF has lost ground since 9/14. Asian ETFs have actually held steady.

SPY 2 months

AAXJ 2 monthso

Keep in mind, China’s inflation has slowed, its manufacturing has picked up, and its leaders have plenty of conventional fiscal and monetary policy tools at their disposal. In other words, the circumstances are enormously beneficial to regional players that support the world’s 2nd largest economy.

Not sure that the worst is over in Asia? Take a look at the recent returns throughout the Asia-Pacific region:

Warming Up To Asia Neighbor ETFs
9/17-11/9  (8 Weeks)
iShares MSCI Philippines (EPHE) 3.6%
iShares MSCI Indonesia (EIDO) 1.7%
iShares MSCI Australia (EWA) 0.0%
iShares MSCI New Zealand (ENZL) -0.1%
iShares MSCI All Asia excl Japan (AAXJ) -0.6%
iShares MSCI Hong Kong (EWH) -1.7%
iShares MSCI Malaysia (EWM) -1.8%
iShares MSCI South Korea (EWY) -5.3%
S&P 500 SPDR Trust (SPY) -5.7%
S&P 500 -6.3%
PowerShares QQQ NASDAQ 100 (QQQ) -9.4%

In commentary from previous months, I talked about changes in the economic landscape as well as the relative strength that Asian Neighbor ETFs were demonstrating. For example, in an article from the 1st of October, “Asia Pacific ETFs Become Relative Strength Standouts,” I chronicled the progress of the region’s ETFs over a 10-week period from mid-July. Funds like iShares New Zealand (ENZL) had already moved from a relative strength factor score in the 50th percentile to the 90th percentile.

Obviously, if U.S. political leaders fail miserably on minimizing the extent of simultaneous tax hikes and spending cuts, one shouldn’t expect Asian ETFs to escape unharmed. On the other hand, if you’ve ignored emerging markets for years due to uncertainty about a hard economic landing in China, it’s time to take another look.

Based on a wide variety of ETF selection criteria, I maintain a healthy allocation to iShares All Asia excl Japan (AAXJ) as well as an individual country “fave,” iShares MSCI Malaysia (EWM). The 3.6% annualized dividend yield is 2x the 10-year U.S. treasury. Meanwhile, the country maintains full employment, manageable inflation and steady GDP expansion.

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Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

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