Asian Central Banks Could Impact These ETFs in 2013
Through three rounds of quantitative easing, Operation Twist and assorted other easing programs aimed at stimulating the U.S. economy, it is easy for investors to get the impression that the Federal Reserve is the only game in town when it comes to central banks.
Of course, that is not the case as numerous central banks will continue to wield significant influence over equity prices in developed and developing nations across the globe. Making matters all the more intriguing for investors is that the issues Central Bank A must deal with often differ greatly from those faced by Central Bank B.
For example, the Reserve Bank of India must contend with high food prices (inflation) and slowing economic growth, while the Bank of Japan must find ways to engineer inflation while weakening the yen.
Those are just two examples, but they underscore the notion that plenty of ETFs could be affected by the whims of central banks in 2013. Here is a more comprehensive list:
WisdomTree Japan Hedged Equity Fund (NYSE: DXJ) It has been duly noted in recent weeks that DXJ has simply been on fire in terms of gathering assets. DXJ had less than $520 million in AUM in mid-November, but that number surged to almost $1.1 billion as of December 26.
The attraction to DXJ is more than just a soaring Nikkei 225 following the election of Shinzo Abe as Japan's next prime minister. In addition to that obvious fact, DXJ uses a geographic screen to exclude companies that derive the bulk of their revenue in Japan because a weaker yen is good Japan's exporters, not so much for the importers.
Granted, Abe is less than two weeks removed from victory, but his pre- and post-election rhetoric about weakening the yen and getting Japan's inflation rate to two percent has been sharp. That has buoyed hopes that the Bank of Japan will get in line with Abe's wishes and finally jolt the Japanese economy higher.
Market Vectors Vietnam ETF (NYSE: VNM) Due to inflation problems that, until this year, could best be described as rampant, the State Bank of Vietnam has not been able to cut interest rates in more than two years.
Vietnam's benchmark interest rate, currently nine percent, has banks, business owners and market participants desperate for lower rates. Despite the controversy that has surrounded Vietnamese financial services firms in 2012, the country's banks are well-funded and inflation there is expected to be seven percent this year. If that is the final number, it would be an encouraging sign because the government's original goal for 2012 was 7.5 percent inflation.
Earlier this month, Prime Minister Nguyen Tan Dung told a Vietnamese press outlet that the country has room to cut rates. If that does happen, expect a bounce in VNM.
Market Vectors Indonesia Index ETF (NYSE: IDX) Indonesia, Southeast Asia's largest economy and the fourth most populous nation in the world, has monetary issues of its own. The Indonesian Rupiah has faltered against the U.S. dollar this year, but the country has a widening current-account deficit and a $1.5 billion trade gap as of October, according to Bloomberg.
Those issues have contributed to laggard status for IDX and Indonesia ETFs this year. Year-to-date, IDX is off slightly, but even the small loss puts the ETF well behind the stellar gains posted by the comparable ETFs tracking other Southeast Asian nations such as the Philippines and Thailand.
Bank Indonesia is widely expected to raise rates at its next policy meeting. However, the more important issue is the central bank's ability to keep Indonesian inflation in the 3.5 percent to 5.5 percent area next year. An unexpected rise in inflation there could prompt aggressive tightening and that could spook investors from Indonesian equities.
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