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11/27/14 05:00:16 PM
TECH KNOWLEDGE

NOT ALL EMERGING MARKETS ARE THE SAME

Emerging market equities returned to favor in 2014, but investors have been increasingly focused on single country ETFs. Not all emerging markets are the same and fortunately for investors they can choice to focus on certain country ETFs where they see the best risk/reward opportunities.

However, choosing country ETFs, while sitting in an office in the United States with lots of things to focus on, can and should be a daunting task. This is why we think the Emerging Market Equity strategy offered by Glovista, an ETF asset manager, is worth learning about. The team behind the strategy focuses initially on a global macroeconomic view that starts with a house view on business cycles, interest rates and currencies of developed markets (Japan, Europe and the U.S.) along with commodities before comparing these views with general consensus. As a result of these views, some major investment themes materialize. Then the ETF asset manager provides a macroeconomic assessment of each of the countries within the MSCI Emerging Market Index, to help determine where management wants to gain exposure to that theme since various country ETFs can fill the need. For example, Brazil, Russia and Thailand each offer exposure to commodities, but the macroeconomics of the three is distinct.

Further analysis is then done on ETF candidates at the sector level since, for example, telecom services stocks in China and Mexico will be impacted by more by government policies than interest rates, noted Darshan Bhatt, managing partner with Glovista, in a recent interview with S&P Capital IQ. He added that risk analysis is also done on the largest holdings since many country ETFs are highly concentrated in a handful of mega-cap companies.

The strategy reviews its country and sector allocations relative to the MSCI Emerging Markets index and as such tends to use iShares country ETFs that seek to track MSCI indices. Bhatt also noted that the iShares products are quite liquid, which the Glovista team views as another advantage. Relative to its broader MSCI benchmark, the strategy has little to no exposure in South Korea, Brazil and South Africa, which recently combined to comprise approximately one-third of the index's value. Glovista will also take off-benchmark exposure.

One of the largest positions is iShares MSCI Taiwan Index Fund (EWT 16 Marketweight), which Bhatt said was appealing for a number of reasons. He believes with its current account surplus and foreign exchange reserves, Taiwan has a relatively stable macroeconomy. Further, Glovista favors EWT's heavy exposure to information technology stocks (recently 57% of its assets) on the belief the sector would benefit from an improving global economy. S&P Capital IQ views EWT's holdings -- including its largest, Taiwan Semiconductor (TSM 22 *****) -- to be attractively valued and the ETF trades with a tight $0.01 bid/ask spread. Taiwan is a good example that not all emerging markets will perform the same. While the MSCI Emerging Markets index rose 1.3% in the first ten months of the year, the MSCI Taiwan index climbed 7.4%.

Glovista will also hold exposure to even further developing markets, known as frontier markets that are not part of the MSCI Emerging Markets index, when it believes the potential is quite strong. One such example is Vietnam, which Bhatt thinks can benefit from a young, highly educated population to support outsourcing needs of global technology companies such as Samsung. Further he believes that despite limited liquidity, the country's equity market trades at an appealing valuation as tensions with China have created an opportunity. The only direct exposure to Vietnam is Market Vectors Vietnam (VNM 21 NR), which does not receive an overall ranking from S&P Capital IQ, but is viewed favorably for its technical trends and its tight bid/ask spread. The ETF has relatively high exposure to financials and energy companies, and is more diversified than EWT.

The strategy also has relatively large weightings in iShares MSCI China (MCHI 49 Marketweight) and iShares MSCI Chile (ECH 42 NR). While both are more diversified from a sector perspective than EWT, MCHI offers high exposure to financials, whereas ECH has greater utility exposure. In addition, Glovista holds small stakes in ADRs, one of which was Baidu (BIDU 237 ***).

Bhatt noted that the strategy is tactical and while Glovista takes long-term macroeconomic views, turnover can be quite high as a result of market volatility and risk management efforts.

S&P Capital IQ provides research and rankings on more than 800 equity ETFs, based on a combination of proprietary holdings-based research and relevant performance and cost factor metrics. Investors interested in learning more about these ETFs should review the S&P Capital IQ ETF reports on this platform. To learn more about Glovista and its strategy, please visit www.glovista.net.

 

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