WisdomTree India Earnings Fund (NYSEARCA:EPI) As has been noted, 2012 was a wild year for Indian equities and the ETFs that track them. EPI finished the year with a 18.5 percent gain, which is arguably somewhat deceiving given a nasty decline that saw the fund slide from around $21.60 in late February to $15.60 in early June.
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 percent 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 percent in October 2012 compared with October 2011, but that is down 1.2 percent from September 2012. Still, there is no debating the fact this South America’s fastest-growing economy with expected 2013 GDP growth of seven percent.
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 percent to that sector, but there is more to the story. Financials account for almost 27 percent 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 percent this year.
Impressively, Peruvian banks increased lending in 2012 with nary a bump regarding non-peforming loans. As one example, Credicorp Ltd. (NYSE:BAP), EPU’s largest holding with a weight of almost 21 percent, had a non-performing loan ratio of just 2.34 percent at the end of the second quarter of 2012. Generally, an acceptable NPL ratio is in the area of five percent. At the end of November, the NPL ratio among private Peruvian banks was a stellar 1.79 percent.
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 percent 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 U.S. and any type of positive economic momentum out of the eurozone.
iShares MSCI Thailand Index Fund (NYSEARCA:THD) Like so many of the other ETFs on this list, the iShares MSCI Thailand Investable Market Index Fund is coming off a 2012 run that leaves investors to wonder if similar feats can be repeated in 2013. A 2012 gain of 33.5 percent and closing the year at an all-time high will do that.
The simple answer regarding THD’s 2013 fortunes is that a negative performance would represent a break from what is becoming a long-term uptrend. Since the March 2009 market bottom, THD has been one of the best-performing ETFs of any stripe and the fund has nearly quadrupled. Of course, past performance is no guarantee of future returns, but the Thai economy is well-positioned to start the new year.
The country is expected to see GDP growth of 5.2 percent this year and is sitting on a streak of 56 consecutive quarters of growth, according to Investor’s Business Daily. Like the Philippines, Thailand has a debt-to-GDP ratio that would make a developed market blush, in this case under 42 percent.
Inflation is a concern, particularly after the December report showed an increase to 3.63 from 2.74 percent in November. That leaves the Bank of Thailand without much wiggle room to lower interest rates.
That leads into the primary issue regarding THD’s continued bullishness this year. The Thai economy is export-driven and any slowdown in the global economy can weigh on Thailand. If inflation jumps while exports fall, the Bank of Thailand may not be able to cut rates. On the other hand, Thai stocks are resting at 16-year highs and international investors more than tripled their purchases of Thai equities in December from November.
Regarding THD, from 2009 through today, it can be said that every significant pullback endured by the ETF has represented a buying opportunity. With most signs pointing to another strong year for the Thai economy, THD’s pullbacks may be few and far between this year.
