2013 was a horrendous year for emerging market investments. Broad
products like
EEM and
VWO
finished the year lower, while developed market indexes surged
higher in the same time frame.
This heavy selling pressure was largely due to Fed tapering talks,
and the impact that this could have on emerging market investments.
After all, a lot of hot money flowed into developing nations as a
result of easy money policies back in the U.S., but with the
potential for higher rates and a stronger dollar, there were
worries that the appeal of these emerging markets might be
reduced.
While this was the broad reason for the decline in emerging markets
throughout the year, several individual countries also slid thanks
to political strife and concerns about governance. These political
woes helped to push some emerging markets far lower—on top of the
broader issues—and could weigh on a few markets heading into 2014
as well.
In particular though, three countries stand out thanks to political
uncertainty which is causing some volatility in their home markets.
Two have been huge losers as a result of this, but one has managed
to surge as of late. Either way though, 2014 could be a very
important year for any of the following three markets and their
ETFs:
Turkey
It has been an extremely rough year for Turkey, as protests in
Istanbul spread across the nation in the summer, and rocked the
Prime Minister’s hold on the government. Concerns over the outcome
of this uncertain situation also helped to push Turkish stocks
lower, and sent the Turkish lira plunging as well.
However, this may have only been the tip of the iceberg, as a new
crisis is now brewing in Turkey. The government is now in the thick
of a corruption scandal, with many of the Prime Minister’s
supporters being arrested, and also some cabinet Ministers
resigning as well (see Is The Turkey ETF in Trouble Again?).
Speculation now suggests that elections will be called in 2014,
further adding to the uncertainty in the nation. This could be
especially true if the ruling party loses its grip on the
government, or if a hung parliament that can’t reach a decision is
the result of the elections.
Turkey ETF
The
iShares MSCI Turkey ETF (TUR) has mirrored
Turkey’s struggles in 2013, and it has been one of the worst
performing large cap-focused ETFs in the time frame. The first
round of losses came during the original protests in May and June,
while the latest (December) round has only added to this fund’s
woes.
In fact, the product is down close to 40% since the beginning of
May, while it has lost a whopping 16% in the past one month alone.
Clearly, the political issues in Turkey—as well as this impact on
the Turkish lira—are sending investors far away from TUR, and given
the uncertainty over the situation, we could definitely see a
further drop in this market in the coming year as well.
Thailand
Thailand is no stranger to political issues, with coups becoming
pretty regular occurrences in the Southeast Asian nation.
Right now though, concerns stem from a series of protests
that have come from a very unpopular bill from the government.
This bill looks to pardon several figures from the recent past, and
possibly pave the way for the return of the former Prime Minister,
and brother of the current Prime Minister, from exile. The bill was
shot down, but the protests haven’t really curtailed, with worries
building over the upcoming elections and a desire by some to remove
the current Prime Minister from office as well (see Where Does the
Thailand ETF Go from Here?).
There are also reports that Thailand’s Democrat Party will boycott
the upcoming elections, throwing another wrench into Thailand’s
plans for a solution to the current issues. Meanwhile, the Thai
army chief has called for calm, but hasn’t ruled out a coup,
potentially adding fuel to the fire down the road.
Thailand ETF
The best barometer of Thai market performance is the
iShares MSCI Thailand Capped ETF (THD). This fund
does about a quarter million shares of volume in a normal day, and
has AUM of roughly half a billion.
As concerns have begun to mount over the Thai political situation,
the fund has been crushed. Its one month loss now stands at 8.5%,
while it has tumbled roughly 15% since mid-September.
The fund’s YTD performance stands at -20%, so clearly it hasn’t
been a great year for Thai equities by any stretch. However, should
political worries escalate, or if coup concerns intensify, we could
see further losses ahead for this product.
India
India has faced a plethora of political issues, largely thanks to
the fractured nature of the political landscape in the country, as
well as rampant corruption. However, many of the issues related to
India’s underperformance this year came from the relatively high
inflation rates in the country, and concerns over the taper’s
impact on BRIC markets.
Now though, with a recent run by the opposition party, there is
some speculation that the current ruling party could be in trouble,
and that India’s political scene might in for a seismic shift.
After all, the current party has been in power for a decade,
though the BJP is gaining momentum after a string of victories in
state elections (see India ETFs in Focus on Goldman Upgrade).
Generally, this electoral uncertainty isn’t good news for emerging
market stocks. However, since the BJP Prime Minister candidate is
likely to be Narendra Modi, an investor favorite, this looks to be
an exception to the rule, especially if current trends continue and
his party gains more steam heading into elections.
India ETFs
For this reason, we have seen a bit of a boost in the India ETF
market lately, with several funds accelerating off of their lows.
Plus, large cap India ETFs have actually beaten out the S&P 500
over the past month, suggesting that there is a bit of a turnaround
at hand in this space.
Two such funds to watch in this market are the
WisdomTree
India Earnings ETF (EPI) and the
PowerShares India
Portfolio (PIN). Both of these are relatively
popular—average daily volume in excess of one million shares a
day—and have added more than 4.8% in the past month.
The real segment to watch though, is the India small cap space.
Funds in this corner of the market have been crushed in the YTD
time frame, but are really turning around in recent trading
sessions (See Emerging Market ETFs: How to Pick Winners).
Both the
Market Vectors India Small Cap ETF (SCIF)
and the
iShares MSCI India Small-Cap ETF (SMIN)
are actually still down more than 20% YTD, but thanks to the
improving political situation, are doing quite well lately. The duo
have each added more than 20% in the past three months, crushing
both developed markets and broad emerging market indexes in the
process, suggesting these could be ones to watch in the New
Year.
Bottom Line
Clearly, the political situation in countries can have a huge
impact on markets. For both Turkey and Thailand, it is quite
negative, though at least for India funds, political trends have
had a decidedly positive impact on stocks as of late. Either way,
politics will play a big role in all three of these markets in
2014, so keep an eye on these issues if you are thinking about any
of these markets for the New Year.
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WISDMTR-IN EARN (EPI): ETF Research Reports
PWRSH-INDIA POR (PIN): ETF Research Reports
MKT VEC-INDI SC (SCIF): ETF Research Reports
ISHARS-M IND SC (SMIN): ETF Research Reports
ISHRS-MSCI THAI (THD): ETF Research Reports
ISHRS-MSCI TURK (TUR): ETF Research Reports
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