With the current issues in the American market and European woes
seemingly never-ending, we are once again reminded of how
susceptible many emerging markets are to developed nations’
conditions.
Several emerging markets—like China—are very dependent on
exporting goods to industrialized nations in order to power their
growth, and when these product destinations are struggling, many
developing nations can be in for a rough ride.
This situation doesn’t just afflict China either, as a number of
other emerging markets, both large and small, are particularly
impacted by this trend. Among just some of the markets that have to
play off of developed market trends include several natural
resource exporters in South America like Brazil, as well as high
tech manufactures in Asia such as South Korea or Taiwan.
This is rather unfortunate as many investors look to emerging
markets to provide their portfolios with growth during these
troubling times. After all, even with these export woes, many top
emerging markets are growing at a 5%+ rate, a level that virtually
any developed nation would kill for (read Forget China Buy These
Emerging Market ETFs Instead).
Fortunately, not all emerging markets fall into this export
trap, as there are several that rely on domestic consumption in
order to power growth. These markets, since they are so focused on
domestic events, could thus be better insulated from global shocks
and developed market issues, making them potentially better plays
in this economic environment.
In order to play these domestically-focused emerging market
economies we are utilizing data from the World Bank on household
final consumption expenditures as a percentage of GDP. This metric
represents the market value of all goods and services, including
durables and imputed rent, and broadly represents what percentage
of the economy is devoted to spending.
Admittedly, this isn’t a perfect measure of domestic insulation
from global shocks, but it is arguably a solid predictor of which
nations are able to hold up their economies when others a world
away are facing issues (see the Guide to Small Cap Emerging Market
ETFs).
With this caveat, we highlight three ETFs below of countries
that devote more than 75% of their GDP to household final
consumption, potentially offering up some interesting choices for
investors looking to emerging markets that are driven by developing
nations instead of their First World counterparts:
Market Vectors Egypt Index ETF (EGPT)
Barely making the 75% cut, Egypt is a nation in transition
thanks to a move towards ‘Democracy’ following the ‘Arab Spring’.
Although the country struggles with this shift, the nation does
have a great deal of positives such as a young population, enviable
geographic position, and a solid growth rate.
The country can easily be played with the Market Vectors Egypt
ETF EGPT, a fund that tracks the Mark Vectors Egypt Index. This
benchmark costs investors 94 basis points a year in fees and gives
exposure to just over 25 firms in total (read Top Three Emerging
Market Dividend ETFs for Income and Growth).
From a sector perspective, financials do take up a big chunk of
assets, followed by telecoms and basic materials. However, large
caps account for just over half the assets, so the product should
have a pretty hefty tilt towards pint sized securities.
iShares MSCI Philippines Investable Market Index Fund
(EPHE)
Another economy that relies on consumption is the island nation
of the Philippines. While the country may not rank highly on ease
of doing business surveys, the nation does have a huge population,
many of whom who speak English, and a low labor cost. This combo
has made it increasingly popular among a number of businesses,
helping to boost the country’s economy in the near term.
These trends can be targeted with EPHE, a relatively inexpensive
ETF that charges just 59 basis points a year in fees. The ETF holds
over 40 stocks in its basket, but allocates roughly 25% to the
three biggest firms in the benchmark, so there is some
concentration risk (read Three Emerging Market ETFs to Limit BRIC
Exposure).
From an industry look, diversified industrials take the top spot
at about a quarter of total assets, while real estate and banks
make up another 30% as well. Beyond that, telecoms also make up a
sizable chunk, although there is definitely a large cap tilt in
this fund.
iShares MSCI Turkey Investable Market Index Fund
(TUR)
Thanks to its important location at the crossroads of Middle
East and West, Turkey is now on many investors’ radars. While
inflation might be relatively high in the country, it too has a
young and growing population as well as a relatively low debt load
and a GDP per capita that ensures most of the nation is well within
the consuming class.
While the country is increasingly popular among both tourists
and investors, only one ETF currently targets the country, TUR.
This fund tracks the MSCI Turkey Investable Market Index, charging
59 basis points a year in fees but holding a robust 94 stocks in
its basket.
Financials do dominate the fund at just under 50% of the total
assets, but the next few sectors are very consumer oriented
including staples at 13%, and also telecoms at 9% of the fund (read
Five Emerging Market Infrastructure ETFs for the Coming Boom).
The ETF is also pretty large cap oriented, but it is actually
the most popular on the list with over 200,000 shares in volume a
day, suggesting tight bid ask spreads for investors seeking a
different way to play emerging markets.
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MKT VEC-EGYPT (EGPT): ETF Research Reports
ISHARS-MS PH IM (EPHE): ETF Research Reports
ISHRS-MSCI TURK (TUR): ETF Research Reports
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VanEck Egypt Index ETF (AMEX:EGPT)
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