Where should ETF investors travel in 2013 for the biggest returns? Several investment strategists share their top country ETF investing ideas.
• Mark DiOrio, portfolio manager at Parasol Investment Management in Westmont, Ill., with $125 million in assets under management: iShares Poland ETF (EPOL).
Poland is poised to be a standout equity market for 2013. A combination of an accommodative business environment, easing monetary policy and attractive valuation levels sets the stage for an emerging opportunity.
For 2013 (from the left), Parasol's Mark DiOrio prefers Poland, Zacks' Neena Mishra favors Mexico, Camarda's Don Vandenbord likes Japan and Beckerman... View Enlarged Image
Supported by the Ministry of the Treasury, a plan for 2012-13 has been implemented to privatize 300 Polish companies.
One of the objectives is to execute the plan through stock exchange transactions in order to strengthen the domestic capital market. The other objective is to strengthen economic competitiveness.
To further strengthen the private sector, Poland has embarked on a three-step deregulation agenda. The first two steps significantly reduced administrative burdens. The third step, to be implemented in 2013, focuses on VAT (value-added tax) relief for companies.
The National Bank of Poland (NBP) maintains Poland's own currency, the zloty. That means Poland sets its own monetary policy, giving it flexibility to manage many challenges.
Currency fluctuations can be a risk to U.S. investors. The z loty is about 21% cheaper vs. the dollar than it was on Jan. 1, 2008.
The slowdown and recession in most of Europe is an ongoing risk. Those factors reduced Polish third-quarter gross domestic product growth to 1.4% from 2.3% in Q2. However, the NBP is responding to this slowdown in GDP growth. It has begun to lower interest rates to 4.25% from 4.5%. The NBP said it would lower rates more if the slowdown persists. Low rates are historically bullish for equities.
The Polish stocks in EPOL trade near 1.7 times book value compared to 3.0 P-B ratio for the broad MSCI Emerging Markets Index. Poland is not only trading at a discount to the rest of its peers, it is trading at a discount to itself.
The Polish equity market's cyclically adjusted price-to-years, using 10-year earnings, is 11.2. Its current one-year P-E is near 7.8. The P adjusts much quicker than the E, and in this case the P has plenty of room and reason to expand.
• Neena Mishra, ETF research director at Zacks Investment Research in Chicago, Ill.:iShares MSCI Mexico Investable Market Index Fund (EWW).
Many U.S. manufacturers are shifting production to Mexico from China as China's average manufacturing wages, adjusted for productivity, now top Mexico's.
Further, Mexico's proximity to the U.S. means that companies can ship goods to U.S. customers much faster, at a much lower cost and duty-free because of the North American Free Trade Agreement.
The new administration (of Enrique Pena Nieto) has pledged more reforms in the energy sector, allowing more private investments and encouraging development of shale gas reserves, and tax reforms that could accelerate the GDP growth to 6%.
Apart from being positive on the Mexican economy, I also like the ETF due to its heavy exposure to consumer staples and telecom sectors. Growing consumer demand in the country will be beneficial for these sectors.
In recent years, Mexico adopted open market policies, fiscal discipline, labor reforms and prudent macroeconomic measures. As a result, the economy is currently growing at about 3.2%.
Its budget deficit is just 2.5% of GDP compared with 8.6% of GDP for the U.S. for 2011. Gross debt stands at about 43% of GDP, compared with more than 107% for the U.S., according to the International Monetary Fund.
Bank of Mexico has kept the key rate unchanged at 4.5% since 2009 as inflation has generally remained within its target range of 2% to 4%. The country's foreign reserves have risen to $165.4 billion, as of the end of August 2012.
Though the currency has been hit by U.S. fiscal-cliff concerns, it is still up about 9% year-to-date vs. the dollar. Additionally the longer-term outlook for the peso looks promising, given the country's macroeconomic position, rising exports and comfortable foreign exchange reserves position.
Risks: The economy is still very much dependent on the U.S. as a consumer of about 80% of its exports. Any contraction in the U.S. economy in case it goes over the fiscal cliff, will affect Mexico.
• Don Vandenbord, portfolio manager at Camarda Wealth Advisory in Fleming Island, Fla., with $250 million in assets:IShares MSCI Japan Index Fund ETF (EWJ).
EWJ will benefit from the easy-money commitment of incoming Japanese Prime Minister Shinzo Abe. The recent landslide victory of Abe's Liberal Democratic party is seen as a mandate for Abe to champion pump-priming stimulus efforts, as Abe vowed to take all necessary action to rescue the Japanese economy from the woes of deflation.
The yen immediately weakened after the election results were announced, and EWJ broke above six-month resistance on strong volume, and the benchmark Nikkei index rose above 10,000 for the first time in nearly nine months. Continued weakness in the yen will serve as the catalyst to strengthen the competitiveness of Japanese exports and kick-start their languishing equity markets.
In December, the Japanese central bank enacted another round of monetary stimulus — its fifth move of 2012. Pressured by Abe, the Bank of Japan has also announced a review of their inflation target, which is expected to increase to 2% of GDP from the current 1%.
These policy moves and announcements, added to Abe's pledge for more stimulus, further support the weak-yen/strong-equity thesis. While Japan faces competing monetary-easing action from Europe and the U.S., the rewards for an upside move in EWJ appear to far outweigh the downside risks.
• Daniel Beckerman, president of Beckerman Institutional in Oakhurst, N.J., with $35 million in assets:WisdomTree Emerging Markets Small-Cap Dividend (DGS).
India has been growing at over 5% per year. China's growth rate has been over 6% per year. The excessive rate of growth relative to the U.S. is expected to continue in the near future. Furthermore, the debt levels are relatively more favorable for the emerging market countries. Russia and South Korea, for example, hold less than a third of the level of U.S. debt relative to GDP.
Because of low input and labor costs in the emerging markets, there has been accelerating growth in manufacturing there over the years. This has led to a large accumulation of wealth there. They want access to consumer goods, housing, autos, communications, and technology. DGS trades at 12 times 2012 earnings, which puts it at a valuation discount relative to the U.S. market. Small-cap companies tend to be more insulated from large global concerns.