Since the stock market’s gate opened at the beginning of 2012,
emerging countries were off to a fast start. Stocks in Brazil, Colombia
and India galloped to the lead, increasing more than 10 percent within
the first few weeks of the year.
By the time the end of April came around, Colombia had sprinted to
the lead, followed closely by Thailand and the Philippines. All
increased more than 20 percent in the first four months of 2012.
However, rather than focusing on the leaders of the pack, spectators
seemed to have directed their attention toward the S&P 500 Index,
as it galloped to its best first-quarter gain since 1998.
The recovery in U.S. stocks is significant and helps restore
confidence in equities. We’re pleased to see markets improving,
especially following a rough finish in 2011. Yet there lingers a
persistent negativity toward emerging markets growth and commodities
that prevents many investors from jockeying their portfolios into a
position for growth. Rather, they remain spectators on the sidelines,
with equity fund outflows continuing.
In contrast, Eastern Europe exploded on the upside and far outpaced
not only the U.S. market, but also Europe. The chart below shows
investment results across three different markets. Since the beginning
of the year through April 30, the iShares S&P Europe 350 ETF has
trailed, while the SPDR S&P 500 ETF has placed second. Among these
three investments, the Eastern European Fund (EUROX) has kept the lead
for most of the quarter and took first place as of April 30.
You can see above that EUROX and the European market were climbing
steadily since the beginning of the year, but by April, began to fall
because of the eurozone’s debt grief and concerns over China.
Over the past four months, Russian stocks, which are heavily
weighted in energy companies, have underperformed many emerging markets,
increasing only about 6 percent. HSBC Global Research believes that the
low valuations seem to be “pricing in a lot of political risk”
surrounding the protests against Russia’s newly elected presidential
candidate. Investors need to see the opposition movements against
Vladimir Putin as very different from the Middle East discontent, says
HSBC. The firm says Russia’s protests are “largely liberal” without
“religious dimension” which suggest future reforms to reduce the
political discontent are more likely.
HSBC also thinks that the government will try to improve the
investment climate. Putin suggested in a recent speech that he would
like to increase Russia’s rating in the World Bank’s Ease of Doing
Business report. Currently, Russia ranks 120th; Putin would like to set a
goal of 20th place.
What may be hurting investor sentiment toward Russia in the short
term is the political strain that has recently surfaced between Russia
and the U.S. and NATO involving missile defense installations in Europe.
This is precisely the reason we believe investors need to hold actively
managed investments with experts who understand the political situation
to skillfully maneuver around emerging Europe.
China, the Workhorse of the Global Economy
While China did not win, place or show among major markets during the
first few months of the year, its H shares gained nearly as much as the
S&P 500. Yet,
the negativity that I’ve frequently discussed continues, even though the country is the Clydesdale of our global economy.
In the first quarter, China’s GDP growth was 8.1 percent, a likely
trough for the year, according to a Merrill Lynch-Bank of America
conference call recently. The firm listed several reasons that China
will see an improved GDP over the next three quarters:
- Although spring made an early appearance in many parts of North
America, this past winter in China was the coldest in 27 years. This
extremely chilly weather slowed down economic activity.
- Credit growth has bottomed out and bank lending has been
reaccelerating. BCA Research echoed this thought in its China Investment
Strategy this week, saying there’s been a “sharp turnaround in bankers’
confidence in recent months, which is also being reflected in rising
bank lending of late.”
- Home developer price cuts and lower mortgage rates offered to
first-time buyers have driven a significant recovery in home sales. In
our recent webcast on China,
Andy Rothman from CLSA made some excellent comments related to
mortgages, agreeing with ML-BofA, saying that each month it was getting
easier for new home buyers to get mortgages, and along with lower
interest rates for mortgages, this was a clear sign of “the government’s
process of easing up on the housing sector.”
- With leadership transition close to conclusion, local infrastructure construction activity is poised to increase.
- As shown below, crude steel, steel products and cement output has shown initial signs of recovery in the recent month.
While China’s Government Purchasing Managers’ Index (PMI) for April
came in slightly below market consensus, the number remains above the
three-month number for the fifth consecutive month since December 2011.
We believe the government’s PMI is a far better indicator of overall
manufacturing activity than the HSBC data because it takes into account
domestic demand.
From the PMI’s inception in January 2005, the majority of the time
the PMI is above the three-month average, Chinese and U.S. stocks, as
well as copper and WTI crude oil, all see gains over the following three
months. So far this year, each has proved true.
BCA Research says that the latest PMI substantiates that the
“Chinese economy may be reaccelerating,” pointing to three trends:
Monetary easing is working, external demand seems strong and may be
accelerating, and the government has increased fiscal expenditures on
social housing and infrastructure projects, which is supportive of
ML-BofA’s view above.
The race in the stock market isn’t over until it’s over. While
a top contender may ultimately win in the Run for the Roses, the
assumed “long shot” might come from behind and race to first place.
Rather than place all your money on the market you believe will win,
place or show, we believe diversification among markets is the way to
go.
Which countries are you betting on to top markets in 2012? Email us at
editor@usfunds.com.
See Our Popular Periodic Table of Emerging Markets.
Total Annualized Returns as of 03/31/2012
| Fund |
One-Year |
Three-Year |
Five-Year |
Ten-Year |
Gross Expense Ratio |
| Eastern European Fund
|
-20.47%
|
24.40%
|
-6.79%
|
14.47%
|
1.98%
|
| SPDR S&P 500 ETF
|
8.36%
|
23.22%
|
1.96%
|
4.03%
|
0.10%
|
| iShares S&P Europe 350 ETF
|
-7.80%
|
16.79%
|
-4.21%
|
5.02%
|
0.60%
|
Expense ratios as stated in the most recent prospectus. Performance
data quoted above is historical. Past performance is no guarantee of
future results. Results reflect the reinvestment of dividends and other
earnings. Current performance may be higher or lower than the
performance data quoted. The principal value and investment return of an
investment will fluctuate so that your shares, when redeemed, may be
worth more or less than their original cost. Performance does not
include the effect of any direct fees described in the fund’s prospectus
(e.g., short-term trading fees of 2.00%) which, if applicable, would
lower your total returns. Performance quoted for periods of one year or
less is cumulative and not annualized. Obtain performance data current
to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.
For investment objective and risks regarding the SPDR S&P
and the S&P Europe 350 ETFs, see the “Additional Disclosures”
section at the bottom.
Source: http://www.usfunds.com/investor-resources/investor-alert/
