10 Emerging Markets ETFs for 2013
This is not a bold prediction, but it is reasonable to expect one of 2012's hottest asset classes to stand tall again in 2013.
There are reasons to be cautiously optimistic regarding what 2013 has in store for EPI and other India ETFs. The government has taken steps to bolster the economy, including reducing diesel subsidies and opening India's retail sector to more foreign investment. Inflation, perhaps the biggest stumbling block for the Indian economy over the past several years, is moderating a bit and that could give the Reserve Bank of India room to cut interest rates later this month.
An interest rate cut should be supportive of India large-cap ETFs because these funds are typically heavy on bank stocks and cyclical sectors. EPI, for example, allocates a combined 39% of its weight to financial services and materials names.
Still, Indian policymakers are carrying heavy burdens going into 2013. Inflation must be reduced, the country must keep hold of its investment-grade credit rating and domestic infrastructure must finally be improved.
iShares MSCI All Peru Capped Index Fund (NYSEARCA:EPU) There are multiple ways of interpreting some of Peru's latest economic data points. The Andean nation showed economic growth of 6.71% in October 2012 compared with October 2011, but that is down 1.2% from September 2012. Still, there is no debating the fact that this is South America's fastest-growing economy with expected 2013 GDP growth of 7%.
Given that Peru is one of the world's largest producers of copper, gold, and silver, EPU is often viewed as a materials play. It is that with a weight of 51.5% to that sector, but there is more to the story. Financials account for almost 27% of EPU's and that is a good thing because Peruvian banks are flourishing. Bank lending in Peru could rise by as much as 18% this year.
Impressively, Peruvian banks increased lending in 2012 with nary a bump regarding non-peforming loans. As one example, Credicorp (NYSE:BAP), EPU's largest holding with a weight of almost 21%, had a non-performing loan ratio of just 2.34% at the end of the second quarter of 2012. Generally, an acceptable NPL ratio is in the area of 5%. At the end of November, the NPL ratio among private Peruvian banks was a stellar 1.79%.
On a related note, Peru's central bank lifted reserve requirements four times last year in an effort to keep inflation tame. The outlook for 2013 is generally positive, but EPU returned almost 24% last year, leaving investors to wonder if a sequel is possible. More upside is possible though Peru will need at least two of the following three factors to work in its favor: continued improvement in the Chinese economy, the same thing in the US, and any type of positive economic momentum out of the eurozone.
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