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Biggest Threat to Emerging Markets is Politics, Not Economics

Emerging market ETFs staged a stunning rally today and, while the jury is still out, investor interest in these fast-growing markets seems to be alive and kicking. The major themes driving this growth which has averaged well over 7% in annual terms over the past five years seem clear. Market reforms and hospitality to foreign capital, better balance sheets and fiscal discipline leading to higher credit ratings and bulging FX reserves, urbanization leading to higher productivity, and the ability to catch up more rapidly due to breakthroughs in technology and communications. The world is truly filling in and moving tens of millions from poverty to the middle class. This is truly a wonderful development.

What could derail this locomotive? In my view, it won't be subprime lending or a liquidity crisis but rather politics. India's current ruling coalition is held together by alliances with factions at odds on just about every important issue including the Indo-US civil nuclear agreement, sealed last month in Washington after two years of gruelling negotiations. This exposes the clear anti-Americanism of the government’s communist allies and the stark opportunism of the Hindu nationalist opposition.

In Thailand, the recently approved "new" constitution can be best described as "managed democrocy" with a majority of the Senate to be appointed and a judiciary empowered to initiate legislation. In China, the ruling Communist mandarins are counting on continued strong economic growth to maintain power but if it falters only momentarily, it has only one card left to play and that is nationalism. You can feel traces of this in the government's response to some of the product safety issues that have surfaced as it charges that foreigners are trying to "demonize" China and Chinese products.

Protectionism and its kissing cousin nationalism are the issues that global ETF investors should watch very closely.

Global exchange-traded fund investors should not neglect the nice menu of emerging market ETFs that in some cases offer broader exposure than competitors such as the iShares family of ETFs. In particular, the
China ETF (GXC) offers investors five times more companies in its ETF basket compared with the iShares China ETF (FXI). There is also a growing interest in the Emerging Europe ETF (GUR). The Chartwell ETF Advisor will begin blending some of these options in its seven model ETF portfolios.

Here is a snapshot of these emerging market ETFs sponsored by State Street Global Advisors (SSGA) based upon the S&P/Citigroup Global Equity.

SPDR S&P Emerging Markets ETF (GMM) Index includes more than 1,500 companies across 26 emerging countries.

SPDR S&P Emerging Latin America ETF (GML) Index includes companies domiciled in Argentina, Brazil, Chile, Columbia, Mexico, Peru, and Venezuela.

SPDR S&P Emerging Middle East & Africa ETF (GAF) Index includes companies domiciled in Egypt, Israel, Jordan, Morocco, Nigeria, and South Africa.

SPDR S&P Emerging Europe ETF (GUR) Index features companies in countries that are nearing acceptance into the EU, including Czech Republic, Hungary, Poland, Russia, and Turkey.

SPDR S&P Emerging Asia Pacific ETF (GMF) Index includes companies domiciled in China, India, Indonesia, Malaysia, Pakistan, the Philippines, Taiwan, and Thailand.

SPDR S&P China ETF (GXC) Underlying index includes over 150 companies domiciled in China.

By Carl Delfeld of the Chartwell ETF Advisor

China Market Down But Asian ETFs Only Nicked

After a week where Asian markets and exchange-traded funds generally moved upward. China's Shanghai & Shenzhen 300 index made up of "A" shares today closed -4.3% after China's central bank chief Zhou Ziaochuan said that China's stock market may be overvalued and hinted at higher interest rates. But other Asian stock markets suffered much less severe declines: Nikkei -0.56%, Hang Seng -0.81%, Australia -0.83%, South Korea -0.69%. The European stock market is trading moderately lower on carry-over weakness from last Friday's US session. The European DJ Stoxx 50 is trading -0.64%.

For last week, Asian markets were generally up while the S&P 500 index lost 1.8%. The iShares China (FXI) led last week up 4.8% and 15.4% for the year. The iShares Taiwan (EWT) ETF was up 2.4% and iShares Malaysia (EWM) added 1.4% to increase its gain for the year to 32.3%. South Korea (EWY) which is up 22.4% so far this year lost 2.3% last week and Japan (EWJ) lost 1.3% for the week.

Posted by Carl Delfeld of the Chartwell ETF Advisor

Snapshot from Indonesia

Many ETF investors have only a vague understanding of Indonesia but it is a very important country with a population exceeding the US, represents the largest Muslim country in the world and lies at a geographically strategic position next critical gaeways of trade and commerce. It has also been one of the best performing markets in the world over the past 18 months and I use the closed-ended Indonesian Fund (IF) as a proxy for its stock market in our World Country ETF Rotation Strategy.

Mark Headly, CEO of Matthews Funds wrote the following update after a recent visit.

"A few days visiting Indonesian companies in the sprawling capital city of Jakarta was enough to remind one of the complexities of this vast archipelago nation. With over 13,000 islands and more than 100 language groups, Indonesia is one of the most diverse nations on the planet. Both government and company management alike face many challenges in such an environment. Indonesia has gone through intense trials since the Asian Crisis ripped its economy and political system apart. On a visit in 2002, a tank was parked in front of my hotel. General Suharto's thirty year dictatorship left a vacuum that was very hard for a young democracy to fill. The hostility towards the small domestic Chinese population that dominated much of Indonesia's business community was particularly intense.

Today, one finds a relatively serene environment, but security at hotels and office buildings is tight, with all vehicles carefully inspected before they are allowed through security posts. The damage to Indonesia's reputation by the bombing in Bali and a prominent Jakarta hotel lingers on. Otherwise, this society seems to be moving forward with significant activity on the streets and in shops. Jakarta has progressed immensely from my first visit in 1991, but much remains to be done. Major infrastructure projects have been stalled for years. Urban unemployment remains high as foreign direct investors continue to shun a country known for aggressive labor unions, high levels of corruption and unreliable infrastructure.

A whole new social contract is being hammered out between the dominant island of Java and the many outlying population centers. In recent years, Indonesia has made money by selling it resources, agricultural goods and exported labor with much of this activity occurring on the outer islands of Sumatra and Kalimantan. For Indonesia to fully regain the confidence of international and domestic investors, the development of the major cities must proceed with government efforts that meet the needs of their populations and the business community. While this will not be easy, the odds seem in favor of Indonesia's millions of young and enthusiastic citizens."

Posted by Carl Delfeld of the Chartwell ETF Advisor

Russia Grabs Pole Position, China Gains, in Emerging Markets ETF

Russian companies, fueled by the rapid growth and profitiability of its energy sector, have risen the ranks of the top ten companies in the emerging market index and the exchange-traded funds that track it such as (EEM).

The top ten holdings in this ETF basket in order of weighting are:

Gazprom (Russia)
Samsung Electronics (South Korea)
Posco (South Korea)
Taiwan Semiconductor (Taiwan)
Kookmin Bank (South Korea)
Silicon Precision (Taiwan)
Lukoil Holdings (Russia)
Chungwa Telecom (Taiwan)
China Mobile (Hong Kong)
United Microelectronics (Taiwan)

It may be surprising to many investors to see Taiwan with four out of the ten top holdings. China is also making progress and in the MSCI World index has pulled even with Taiwan and has also matched Hong Kong in terms of country weighting.

PetroChina announced today it would launch one of the biggest ever initial public offerings on the mainland market, becoming the latest large state-owned company to seek a Shanghai listing. The oil and gas group said it would issue up to 4bn shares in Shanghai which at Tuesday share price in Hong Kong, where it is already listed, would raise around $5.7bn

By Carl Delfeld of the Chartwell ETF Advisor

iShares FTSE/Xinhua China 25 Index (FXI)

Today FXI closed at $125.56 after a 2.31% increase. That puts FXI just off its 52 week high of $125.89.
Other noteworthy facts:
* FXI broker through a double top back at $120 when it also passed its bearish resistance level.
* There have been significant corrections to the downside like back in January and February. It would be wise to establish an exit strategy to capture any significant gains.
* Last year around this time FXI remained in demand for seven months and went from $70 to $118. (The past is no guarantee of the future)

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By DE Smith of MyPortfolioView

Emerging Markets Exchange Traded Funds Recover

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By DE Smith of MyPortfolioView

Samsung Dominates Top Heavy Korea ETF (EWY)

Samsung Electronics which represents 24% of the Korean exchange-traded fund (EWY) which has come alive this year after trailing other Asian markets over the past few years and was up 1.92% yesterday alone. It has become Asia’s largest technology company by market cap (larger than Sony), and its largest maker of memory chips and flat panel screens and mobile phones. Samsung enjoys a credit rating higher than South Korea’s sovereign rating. With 62 affiliates, the Samsung group dominates life in Korea like no other company in history. It represents 15% of the nation’s total economic activity, 25% of the capitalization of the KOSPI stock market and the taxes it pays represent almost 10% of total government income!

But the company is not a terrific play on the South Korean economy. Rather it is a global play on its three key markets and the expected payoff from its extraordinary commitment to R&D. The South Koreans are discontented because the five largest companies are growing outside the country more than in it and at a stage of development where it should be more competitive manufacturing onshore. The challenge is the low cost manufacturing platform with huge economies of scale just next door – the issue is China. Samsung already has already has 29 plants and 50,000 workers in China.

Since China is already starting to manufacture stuff like machine tools that the South Koreans were busily exporting in 2003 and 2004, South Korean planners believe it must quickly transform itself into a finance, communications and transportation hub – akin to the role of Singapore or Switzerland. The question then becomes does it have the right companies, the right skills and what is its competitive advantage?

Together, Samsung, POSCO, KEPCO (Korea Electric Power) and SK Telecom account for almost 50% of South Korean stock market’s market capitalization. To use a basketball analogy, the South Korean starting five are strong but its bench is a bit thin and its team has lost the home court advantage. The problem is not Samsung but rather that they need about ten more Samsungs.

The top four companies also make up 40% of the South Korea iShare (EWY) ETF which is up 29% so far this year. Samsung alone accounts for 23% of this ETF and buying the iShare gives you more exposure to the top ten South Korean companies. A stronger won and higher interest rates might lead to slower growth and the likely re-emergence of the North Korean problem may very well undermine investor confidence but the momentum of the market may offset some of these risks.

Earlier this year we increased exposure to South Korea in some of Chartwell's ETF Portfolios. after seeing that it was attractive on a relative valuation basis.

By Carl Delfeld of the Chartwell ETF Advisor

Six Popular Regional ETFs Move to the Downside by 5% Plus

Each of the following ETFs has recently reversed in value between 5% – 7%. For more information on each of the following ETFs you can login to your MyPortfolioView account by clicking here.

By DE Smith of MyPortfolioView

Is India Economy and ETF Too Hot?

Fears that India's economy, stock market and the exchange-traded fund (INP) that tracks it are overheated led its central bank to ramp up interest rates. Since January 2006 the Reserve Bank of India (RBI) has raised its overnight lending rate by one and a half percentage points, to 7.75% and the rupee, in turn, has jumped 10% in value versus the US dollar duringn the past four months alone.

But rather than slowing down, India's economy is speeding up. An article in the Economist states that JPMorgan estimates that growth in the three months to March accelerated to a seasonally adjusted annual rate of 11.4%. Yet, despite rapid growth, wholesale-price inflation fell to 5.1% in mid-May, down from 6.7% in January. Still the signs of an overheated economy are everywhere. A sharp increase in house prices, credit growth of 28% over the past 12 months, 15%-plus average rises in wages for skilled workers, record industrial capacity utilisation rates, and 41% more imports in April than a year ago.

Plus, consumer prices still appear to be rising at an annual 8% clip which likely means that more aggressive rate hikes are on the way. The trick is to slow growth down a bit without triggering a sharp decrease in economic activity - easier said than done and what in the US is often referred to as a soft landing.

The higher rupee has helped boost returns for investors in the India ETF but valuations may be getting a bit toppy. Still you must admire the underlying growth and momentum of the Indian economy. Will higher interest rates and a stronger currency blunt this mojo?

Join the Chartwell ETF Advisor and stay on top of the India story.

Latin American ETFs Gain, China Suffers Negative Flows

Investors continued to reduce their direct exposure to Chinese equities and exchange-traded funds during the first week of June, pulling over $1 billion out of China and Greater China Equity Funds tracked by
EPFR Global for the second week in a row. But they pumped another $810 million into Latin America Equity Funds, adding to their indirect bet on the Chinese economy’s robust growth and its demand for raw materials. ETFs and funds geared to developed markets had a mixed week. Japan ETFs and equity funds extended their losing streak. But US equity funds posted inflows on the strength of an exceptionally good week for Large Cap Growth Funds as interest rate fears took a brief holiday before resuming at mid week, European equity funds were back in the black and global equity funds and ETFs extended their winning streak to 13 straight weeks.

There was a strong suggestion in this week’s data that investors are looking for dips to buy into. Flows and fund performance were, for the most part, inversely correlated. The four equity fund groups that posted the best portfolio performance – Japan, Pacific, EMEA and Asia ex-Japan equity funds – all posted net outflows, while relative laggards such as European, Global and Latin America equity funds attracted fresh money.

At the country level Brazil has been the star in recent weeks. But Mexico Equity Funds took in $149 million during the week ending June 6, handily distancing Brazil Equity Funds in terms of flows as a percentage of assets under management.

Find out more by joining the Chartwell ETF Advisor