Uncertain Future for the Growth Economies: Asian ETFs

The global downtown has really knocked the wind out of Asian markets and ETFs tracking them. Asian countries are regarded as highly exposed to U.S. markets for their exports. This is great when the US economy is expanding, but when a downturn arrives an expression comes to mind: "the U.S. catches a cold and the rest of the world catches pneumonia".

Asian ETFs deserve a look from investors. Most Asian economies are expected to grow over the next decade, and even mildly in 2009. A November, 2008, IMF Survey shows the following percentage GDP growth projections, although these numbers are expected by many to shift downward as 2009 unfolds:

Fiscally, Asia appears to have entered the downturn on better footing than the U.S. Over the last decade, Asia has in a sense been on the other side of the trade: when the U.S. was consuming, Asia was producing for that consumption. When the U.S. was borrowing money, Asia was lending. The consequence of this system is that Asian economies have become advanced production and exporting machines and Asian governments hold trillions of U.S. treasury and agency debt. This seems like an enviable position.

Financial sector problems that are strangling the U.S. economy and hampering any rebound appear to be far more contained in Asia. In general Asian banks not only have survived the financial crisis intact, but some appear to be increasing lending (notably in China). And even after cutting 5 times in the last year, China's central bank (unlike the U.S. and notoriously of course the BOJ) still has room to cut.

The problem is that the system built over the last decade, while arguably unsustainable, is entrenched. It appears that Asia has not yet developed enough domestic demand to pick up the slack left by the U.S. consumer. With over half of the world's population this seems likely some day, but these economies are a long way from American style consumption.

Short-term, radical revisions have already been made to estimates: In the final quarter of 2008, while the above statistics were being compiled, Singapore's economy shocked all by contracting 12.5%. The Singapore Ministry of Trade and Industry (SMTI) scrambled to put together a forecast for economic growth in 2009 and came up with a number between -2 and 1%, much different from the 2% projected by the IMF. It will likely be revised lower yet. The Korean situation is similar: the Korea Development institute (KDI), Korea's influential research group, forecasts 0.7% growth in 2009, lower than the IMF and the government's official projection of 3%, but experts say this is likely to be revised lower again. Hong Kong and Taiwan are possibly the most export-dependent economies in Asia. Their economies may even shrink in 2009. China and India, on the other hand, less export driven, are still expected to grow. But even here growth has been whittled down to about 5% for 2009.

Although even these lowered numbers may sound good in relation to the West, in the case of China, growing at a rate of 10% a year for the last 20 years, this is a shock. The ranks of the Chinese unemployed, already estimated to be above 150 million, may swell further.

Evaporating expectations and uncertainty about how Asia will perform in coming months explain the sinking of Asian ETFs. They are clearly more favorably priced than they have been in many years, and investors interested in growth long-term have no better place to look.

There are several pan-Asia ETFs. The chart below compares the returns of two of the most important Asian-wide ETFs: the Vanguard Pacific Stock ETF (PCX:VPL) and iShares S&P Asia 50 Index (PCX:AIA).

Of the two we prefer VPL. It has an expense ratio of just 0.12% and an annual turnover rate of 3%, compared to 0.5% and 18% respectively for AIA. It is hard to see how investors could have exposure to Asia at a lower cost. The pan-Asia diversification strategy has also helped the performance of VPL. Though certainly well off its highs, it t is outperforming most of the single country ETFs. The chart below compares the returns of VPL with several of these single country funds: iShares FTSE/Xinhua China 25 Index (PCX:FXI), iShares MSCI Japan (PCX:EWJ), iPath MSCI India Index ETN (PCX:INP), iShares MSCI Hong Kong Index (PCX:EWH), iShares MSCI Singapore Index (PCX:EWS).

As the chart above shows, VPL is outperforming all but Japan. As with the U.S. and Europe, most analysts believe that Asian equities are a great deal at these depressed levels though they are likely to trade on greater volatility than most domestic funds. There are quite a number of ETFs with a focus on Asian economies.

Multiple country ETFs:

SPDR S&P Emerging Asia Pacific ETF (PCX:GMF)

iShares MSCI All Country Asia ex Japan Index Fund (NGM:AAXJ)

iShares MSCI Pacific ex-Japan Index Fund (PCX:EPP)

First Trust ISE Chindia Index Fund (PCX:FNI)

FTSE RAFI Asia Pacific ex-Japan Portfolio ETF (PCX:PAF)

WisdomTree Dreyfus New Zealand Dollar Fund (PCX:BNZ)

Single Country ETFs:

iShares FTSE/Xinhua China 25 Index Fund (PCX:FXI)

Powershares Golden Dragon Halter USX China Portfolio ETF (PCX:PGJ)

SPDR S&P China ETF (PCX:GXC)

iShares MSCI Hong Kong Index Fund (PCX:EWH)

iShares MSCI Japan Index Fund (PCX:EWJ)

iShares MSCI Malaysia Index Fund (PCX:EWM)

iShares MSCI Singapore Index Fund (PCX:EWS)

iShares MSCI South Korea Index Fund (PCX:EWY)

iShares MSCI Taiwan Index Fund (PCX:EWT)

iShares MSCI Turkey Investable Market Index Fund (PCX:TUR)

iShares FTSE Hong Kong Listed China Index Fund (NGM:FCHI)

iShares S&P/TOPIX 150 Index Fund (PCX:ITF)

MSCI India Index ETN (PCX:INP)

India Earnings Fund (PCX:EPI)

India Portfolio ETF (PCX:PIN)

iShares MSCI Thailand Investable Market Index Fund (PCX:THD)

Fundamental ETFs / Leverage ETFs:

Dynamic Asia Pacific Portfolio ETF (PCX:PUA)

FTSE RAFI Japan Portfolio ETF (PCX:PJO)

ProShares UltraShort FTSE/Xinhua China 25 ETF (PCX:FXP)

ProShares UltraShort MSCI Japan ETF (PCX:EWV)

Sector Specialized / Currency / Dividend ETFs:

iShares FTSE EPRA/NAREIT Asia Index Fund (NGM:IFAS)

Claymore/AlphaShares China Real Estate ETF (PCX:TAO)

iShares MSCI Japan Small Cap Index Fund (PCX:SCJ)

Claymore/AlphaShares China Small Cap Index ETF (PCX:HAO)

SPDR Russell/Nomura PRIME Japan ETF (PCX:JPP)

SPDR Russell/Nomura Small Cap Japan ETF (PCX:JSC)

WisdomTree Dreyfus New Zealand Dollar Fund (PCX:BNZ)

WisdomTree Pacific ex-Japan High-Yielding Equity Fund (PCX:DNH)

WisdomTree Dreyfus Chinese Yuan Fund (PCX:CYB)

WisdomTree Dreyfus Indian Rupee Fund (PCX:ICN)

WisdomTree Dreyfus Japanese Yen Fund (PCX:JYF)

WisdomTree Japan High-Yielding Equity Fund (PCX:DNL)

WisdomTree Japan SmallCap Dividend Fund (PCX:DFJ)

WisdomTree Japan Total Dividend Fund (PCX:DXJ)

WisdomTree Pacific ex-Japan Total Dividend Fund (PCX:DND)