ETFxray

Could Emerging Asian Economic Growth Hold Up Better than Expected?

By Carl Delfeld of Chartwell ETF and ETFfolio

The IMF unleashed a heat-seeking missile on global markets with a statement that "The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,” and “The situation is exceptionally uncertain and subject to considerable downside risks.”

This opinion was tempered somewhat by the IMF chief economist’s optimism that the world would avoid a repeat of the Great Depression of the 1930s was based on an expectation that governments would follow the right policies. European governments were having difficulty in coordinating their response to the crisis and more action was needed to shore up their shaky financial systems, he said.

Emerging market economies have seen sharp falls in asset prices this week and overall are down about 60% so far this year. The IMF noted that they have yet to bear the brunt of the slowdown in the real economy and would fare somewhat better than developed countries.

The projection for Chinese growth next year was cut by half a percentage point to a still-healthy 9.3%, and India was forecast to grow at 6.9%. Charles Collyns, the deputy director of the IMF’s research department, said that India, being less open an economy than China and many of the industrialised economies, had strong internal drivers of growth which should shield it from the worst of the economic downturn.

And Adam Schrek of the AP reports that an ASEAN joint statement stated that the 10-nation bloc's economic fundamentals remain sound even though gross domestic product growth might not match last year's 6.7 percent.

"ASEAN today is lean and fit, in part reflective of the significant reforms undertaken over the decade since the 1997 financial crisis," the group said. Ministers said banks in the region should be able to withstand the financial turmoil shaking the world's banking system.

They said the region's banks have no shortage of capital, do not carry particularly large debt loads, and have limited exposure to the sort of toxic mortgage loans and other bad assets that have brought down banks in the U.S. and Europe.

"Our banks are strong," said Tan Sri Nor Mohamed Yakcop, Malaysia's finance minister. "We don't have a banking crisis, period."

We will see but there is no doubt that investor risk appetite has declined significantly - at least for now.

Fukuda Out, Subbarao In

By Carl Delfeld of Chartwell ETF & ETFfolio

The markets today welcomed a change in India's top central banker while lamented another unexpected change in Japan's premiership.

Mr. Yasuo Fukuda, Japan’s (EWJ) prime minister, on Monday night shocked even his own party by abruptly resigning after less than a year in office, paving the way for possible snap elections in the world’s second-largest economy which is facing a sharp slowdown in its growth.

He is the second prime minister to quit in a year, said he had resigned in the hope that a new leader could break the political deadlock that had plagued his term in office. The opposition Democratic Party of Japan has blocked legislation needed to invigorate Japan’s sinking economy and further its global diplomatic and security ambitions.

Meanwhile, India ETFs (INP) welcomed the Monday appointment of the finance ministry’s top bureaucrat, Duwuri Subbarao, as new governor of the country’s central bank, a surprise choice that comes as the country confronts high inflation and slowing growth.

Mr. Subbarao, the 59-year-old finance secretary, replaces Yaga Venugopal Reddy, a veteran Reserve Bank of India official whose term ended last week. This change is primarily due to political manuevering since the government has been pursuing populist policies ahead of next year’s election. Mr Subbarao is regarded as a safe choice as a career mandarin.

The Financial Times reports that India’s economy is going through one of its toughest periods in the past five years with inflation hitting a 13-year high of more than 12% and growth slowing to 7.9%, the lowest level in more than three years.

Singapore & Malaysian ETFs Fade with Falling Growth

By Carl Delfeld of Chartwell ETF & Country ETF Rotation ETFfolio

The ETFs that track the Singapore market are the NETS FTSE Singapore Straits Times Index (SGT) and the iShares MSCI Singapore (EWS). For Malaysia, it is the iShares MSCI Malaysia (EWM).

In my Forbes Asia column entitled "Malaysiapore" earlier this year, I likened the Malaysia and Singapore stockmarkets and exchange-traded funds that track them (see below) to two purring turbine engines, working smoothly in tandem to deliver superior performance. But for the last few months, the Malaysian and Singapore stock markets have run into major turbulence.

The problem is a drop in economic growth.

John Burton of the FT reports that Singapore economic growth slowed in the second quarter to 2.1% from a year ago, providing new evidence that the US slowdown is beginning to impact Asian economies. The city-state downgraded its forecasts for non-oil exports for the year, indicating that it expects them to contract by 2-4% rather than to grow at that pace as it had earlier predicted. Meanwhile, neighbouring Malaysia reported that industrial production grew at its slowest pace in 10 months in June

Although palm oil and other commodities are an important part of the Malaysian story, investors have begun to recognize that its economy is well diversified with 43% of GDP attributed to the services sector while agriculture represents only 8%. It also has attractive demographics with 32% of its population under the age of 15 - more than double the proportion in Japan. Economic growth last year was a solid 6% and the country has moved solidly into the middle income circle of countries with a per capita income of $12,900.

Singapore and Malaysian companies have stepped up their investments and activities in each others markets and there is even a Malaysia - Singapore Third Country Business Development Fund co-funded by the two countries. The Fund allows Malaysian and Singaporean enterprises to cooperate and to jointly identify investment and business opportunities in "third countries", outside Malaysia and Singapore.

The Singapore government still predicts full-year growth of 4-5% after the economy expanded by 4.5% in the first half. The economy grew by 7.7% in 2007.

The ETFs that track the Singapore market are the NETS FTSE Singapore Straits Times Index (SGT) and the iShares MSCI Singapore (EWS). For Malaysia, it is the iShares MSCI Malaysia (EWM).

Malaysiapore ETFs

By Carl Delfeld of the Chartwell ETF Advisor and Chartwell Partners Asset Management

Like two turbine engines powering a jet plane, the Malaysian (EWM) and Singapore (EWS) markets and ETFs have been working smoothly in tandem to give investors superior performance over the last year and after a pullback, are attractively priced.

It seems that investors, especially foreign investors, have finally begun to appreciate that Malaysia offers many of the attributes of its southern neighbor. Although palm oil and other commodities are an important part of the Malaysian story, investors have begun to recognize that its economy is well diversified with 43% of GDP attributed to the services sector while agriculture represents only 8%. It also has attractive demographics with 32% of its population under the age of 15 - more than double the proportion in Japan. Economic growth last year was a respectable 6% and the country has moved solidly into the middle income circle of countries with a per capita income of $12,900.

All of these favorable trends are finally being recognized by global investors and have also given the country the strength to improve political and economic relations with Singapore.

This brings us to the increasing economic integration between the two countries which can be viewed as a dividend to investors as it fosters higher economic growth and political stability. To see how much better bilateral relations are today, it is helpful to look back to the foundations of both countries.

While disputes between the two countries continue over deliveries of fresh water to Singapore, relations are as good as they have ever been since Singapore's 1965 secession from the Federation formed in 1963 when the former British colonies of Singapore and the East Malaysian states of Sabah and Sarawak on the northern coast of Borneo joined the Federation.

There are concrete signs of this increased integration and cooperation. The bridge which opened in 1998 connecting Singapore and Johor, Malaysia has reduced the traffic congestion at the Johor-Singapore Causeway.

A great way to learn more about Malaysia, Singapore and Thailand is to join Carl on his luxury investment tour, "Investing Along the Orient Express"

Then there was the recent meeting between the Malaysian and Singapore premiers, Abdullah Badawi and Lee Hsien Loong, and their agreement to set up a Joint Ministerial Committee with oversight over economic cooperation in the Iskandar Development Region (IDR) in the state of Johor in Malaysia, separated from Singapore by a 1km long causeway. The region spans an area of 2,217 sq. km., which is about thrice Singapore’s size. Both sides quickly agreed to the introduction of ‘smart cards’ to facilitate the two-way traffic of Malaysians and Singaporeans to the IDR. On a regular work day it is estimated that more than 150,000 workers commute over the Johor-Singapore causeway to earn a better living.

On the security front, both countries are members of the Five Power Defense Arrangements (FPDA) which is a joint defense arrangement between Malaysia, Singapore, Australia, New Zealand and the United Kingdom.

How should investors invest in these favorable trends which are raising the profile of Malaysia, reducing the global investment community’s perception of country risk and raising expectations that its economic growth curve will continue?

A shotgun approach would be to invest in the MSCI iShares Malaysian exchange-traded fund (EWM) which is a basket of leading Malaysian companies and has an annual expense ratio of only 0.54%. Financial companies account for 33% of the fund’s exposure, industrial firms are at 18% and consumer staples and discretionary companies together make up an additional 29%.

The best and most direct approach would be to take a grubstake in Johor real estate. It is hard to imagine that prices will not escalate as investment in the region and IDR project gain momentum.

Investing in Malaysia is a back door strategy to investing in Singapore and dynamic regional economic growth. For more on putting Singapore and Malaysia into your global portfolio go to Chartwell ETF.

Asian Markets and ETFs Jump Across the Board

By Carl Delfeld of the Chartwell ETF Advisor

Asia-Pacific stocks and ETFs that track them are trading higher according to Barchart almost across the board on some optimism following yesterday's US rally: Japan +1.49%, Hong Kong +3.24%, China +2.75%, Taiwan +1.86%, Australia +1.78%, Singapore +0.54%, South Korea +0.76%, Bombay +0.11%.

Bullish factors in Asia included a 2.8% rally in BHP Billiton (BHP) on higher commodity prices and strength in gas and oil companies with the rally in crude oil prices to a new record high. London-based Standard Chartered Bank, which derives two-thirds of its revenue from Asia, rallied to a 3-week high on a favorable earnings report. And Industrial & C ommercial Bank of China rallied 3.4% after JPMorgan recommended China's largest bank as the "safest exposure to the sector."

In other Asian news, Thailand’s Election Commission on Tuesday found a ­ruling party politician guilty of vote-buying in last year’s general election, dealing a blow to political allies of Thaksin Shinawatra.

High inflation in Vietnam has led to the State Bank of Vietnam, the central bank, trying to drain liquidity from the financial system to hold down the value of the dong against the dollar. The central bank has pulled back its purchases of dollars leading to overnight inter-bank rates for the currency have reached as high as 40 per cent recently.

Stay on top of global news that can impact your ETF portfolio by going to Chartwell ETF.

Aussie Dollar and Chinese Inflation Surge

By Carl Delfeld of the Chartwell ETF Advisor and ETFfolio.com

ETF investors need to be aware that inflation in the Asia-Pacific region is creating upward pressure on two key currencies. What will be the impact on exchange-traded funds that track markets in the region?

The Australian dollar surged to a three-month high todays as speculation grew after a Reserve Bank of Australia’s policy meeting that further interest rate rises are on the horizon. The central bank raised interest rates by 25 basis points to 7% at its meeting earlier this month in an attempt to stem domestic inflationary pressures. The Australian ETF (EWA) responded positively in trading today, up nearly 2%.

Meanwhile, China recorded an inflation rate above 7 per cent in January – the highest in more than 11 years causing concern and raising the lilelihood that its currency would continue to strengthen to combat inflation. The National Bureau of Statistics on Tuesday said that inflation surged to 7.1 percent from 6.5 percent in December. Producer prices hit a monthly high of 6.1% - the highest in three years - due to winter storms, resulting transportation problems plus higher commodity prices.

The yuan has risen by about 13 per cent against the US dollar since mid-2005 but increased at an annualised rate of about 20% in January.

How are Chinese exports doing in light of the stronger currency and how should your global ETF portfolio be adjusted to take advantage of these developments? You need Chartwell ETF.

The Politics of Asian ETF Investing

By Carl Delfeld of the Chartwell ETF Advisor

Unlike most global investment advisors 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.

If you want to stay on top of important political trends and events in the world, go to Chartwell ETF today.

Hong Kong & Singapore Lead Asian Outperformance

By Carl Delfeld of the Chartwell ETF Advisor

Investors with the Hong Kong (EWH) and Singapore (EWS) exchange-traded funds in their saddlebags are in good shape as both have outperformed benchmarks and surprised skeptics.

In morning update Barchart reports that Japan closed +0.79%, Hong Kong closed +0.45%, and Australia closed +1.10%. However, China closed -1.46%, and India's Sensex closed -0.57%. India today reported that its exports in September were very strong at a 5-month high of +19.2% yr/yr, thus providing support to keep industrial growth near the government's 10% growth target.

Hong Kong is just a bit behind the mainland in terms of a booming market. The stock market, which hit new highs on Thursday, has risen 11 per cent in the past month for a year-to-date gain of 58 per cent. The currency, pegged to the US dollar, is bumping against it ceiling which is forcing the de facto central bank to intervene five times on Wednesday alone.

Hong Kong has always been a bit volatile and tied to real estate in particular, but the latest rally does not seem excesswive at this point. The benchmark Hang Seng Index is trading at about 22 times next year’s earnings, comfortably below the excesses of the tech frenzy of 2000. The stock market itself is a far different beast from those days. Now, Chinese companies make up over half the market capitalisation

The iShares MSCI Singapore ETF (EWS) has also been at the sweetspot of Asian growth. It is up 40% year-to-date and is rapidly becoming a gateway for many investors interested in capturing China-led growth through Swiss. quality companies. The ETF basket has some of Singapore's largest blue-chip companies. Seventy percent is weighted within the 10 largest holdings, which are banking and financial.

Both of these ETFs have been core holdings of Chartwell ETF's Asian Opportunity portfolio, find out what other countries made the grade by joining the Chartwell ETF Advisor.

Asian Markets and ETFs Maintain Momentum

By Carl Delfeld of the Chartwell ETF Advisor

Asian markets and the exchange-traded funds that track them opened the week on a positive note. Asian stocks today closed higher with the Nikkei index +1.17%, Hong Kong +3.89%, Australia +1.37%, and China's CSI 300 index closed +2.10%.

Here are the year-to-date numbers for key markets form Bloomberg and some of the ETFs that follow them. In some cases there are more than one option and the Chartwell ETF Advisor sometimes prefers the closed-ended fund alternatives.

China MSCI China, up 72.53%
Hong Kong Hang Seng Index,(EWH) up 39.57%
India Bombay Stock Exchange 100, up 44.38%
Indonesia Jakarta, up 32.12%
Japan TOPIX, (ITF), up 0.77%
Japan MSCI Japan, up 2.05%
Korea KOSPI, (EWY), up 38.28%
Malaysia Kuala Lumpur, (EWM), up 30.38%
Philippines PSE, up 32.65%
Singapore Straits Times, (EWS) up 32.10%
Taiwan TWSE, (EWT), up 24.12%
Thailand SET, up 35.97%

Will Asian markets continue to move ahead or will they run out of steam? Join Chartwell ETF and gather some financial intelligence to help you manage your global portfolio.

Time to Cut Taiwan Knot

By Carl Delfeld of the Chartwell ETF Advisor and Council on Asian Relations

It is time for Taiwan, China and America to stop kicking the can down the road a few feet each day. Let’s kick the can way down the road by agreeing to a twenty year period of guaranteed autonomy for Taiwan thereby deferring and defusing the combustible independence issue.

There is little doubt that for the leadership of the Chinese Communist Party, Taiwan is a bone in their throat - a constant irritant – and most likely an obsession for some hard-line factions determined to bring Taiwan back into the fold of the motherland. At a September 6th meeting, Chinese President Hu Jintao told President George W. Bush that the next two years will be a time of "high danger" for Taiwan because of the independence referendum issue, and that Taipei should receive "stronger warnings" from America.

Mr. Hu was referring to Taiwanese President Chen Shui-bian's plans to conduct a referendum in March on seeking U.N. membership for Taiwan. This could trigger an emotional response but despite its fury at this latest development, Beijing is very reluctant to take military action against Taiwan for five reasons.

First, any military conflict with Taiwan would surely cancel the Beijing’s showcase 2008 Olympics. This would be a devastating setback for China’s leadership and people

Second, Beijing’s approach of working quietly to support more friendly political factions within Taiwan seems to be working. In addition, Taiwanese President Chen Shui-bian’s term will end in 2008 and Beijing is betting on a less strident and independent successor.

Third, although China is rapidly modernizing its military forces, U.S. treaty obligations to Taiwan in the event of an invasion cannot be discounted. In addition, President Chen, citing China’s expanded missile program in his annual New Year’s Day address, called for the legislature to approve plans to purchase more weapons from the U.S. to offset the buildup. The Pentagon on September 12th announced plans to sell $2.23 billion worth of "surplus" submarine hunting aircraft and air defense missiles to Taiwan. The deterrent remains strong if the U.S. stands firm and sends a clear message.

Fourth, a 2005 joint statement by the Japanese and U.S. governments that both countries had a “common strategic objective” to “encourage the peaceful resolution of issues concerning the Taiwan Strait through dialogue,” raises the possibility of Japanese intervention making the military option even more risky and improbable.

Lastly, any military action would derail China’s double digit economic growth not to mention the economic integration of Taiwan into China which is moving ahead at a breathtaking rate. Cross-Straits trade has doubled since 2000 to reach $80 billion in 2006, about 1 million Taiwanese have re-located to work in China, and Taiwanese companies now account for about 65% of hardware output from the mainland.

My view is that while calls for independence are not practical near term, the desire for a high degree of autonomy from China by Taiwanese citizens is still very strong. There may be one greater China but there are three systems – China, Hong Kong and Taiwan. A period of Taiwanese autonomy will allow its citizens to observe if China’s system evolves into a more open, transparent system with rule of law and democratic institutions. This cooling off period would help China, Taiwan and America defuse rising tensions that could lead to open conflict if conventional thinking continues to dominate the debate.

In addition, right now politics rather than economics is unfortunately the prime concern for most investors considering investing in Taiwan. For the next couple of years, both could lead to a window of opportunity for investors with nerve and foresight. The same goes for American diplomats if they shift the focus from Taiwanese independence to autonomy.

Taiwan with a population of 23 million and an area of 14,000 square miles (half the size of Ireland) is a remarkable success story. However, but Taiwanese companies will need to constantly innovate, make Taiwan a major R&D center and build strong consumer brands to avoid the it’s economy from being swallowed by the mainland.

If you can get over the political risk, Taiwan’s stock market, which is up 17% so far this year, represents good value though you should expect some volatility. Take a look at the iShares Taiwan (EWT) exchange- traded fund. It has a 23% exposure to the semiconductor industry and Taiwan Semiconductor accounts for 14% of its holdings but it includes significant exposure to technology hardware, materials and banks.

For global investors, an autonomous Taiwan could be the purest China play of all. Learn more about the best way to play Chinese economic growth by joining the Chartwell ETF Advisor.