Market Overview

Two Country ETFs Vulnerable to a China Slowdown

In the fourth quarter, China's gross domestic product grew 7.9 percent, according to official data, and economists are forecasting growth of 8.1 percent this year. Obviously, that growth rate is far superior to what investors will find in the developed world and it easily surpasses forecasts for Brazil and India, among other emerging markets.

Still, there are some signs that the Chinese economy, the world's second-largest behind the U.S., could be slowing. While the country's purchasing managers index rose to 51.7 in March from 50.4 in February, the March reading is still below the two-year high 52.3 seen earlier this year.

However, select commodities ETFs and ETNs paint a different picture. For example, the iPath DJ-UBS Copper TR Sub-Index ETN (NYSE: JJC) is off more than six percent year-to-date. The Market Vectors Coal ETF (NYSE: KOL) has plunged more than nine percent. And if equities are truly forward-looking indicators, then there is good reason to be concerned about China because the iShares FTSE China 25 Index Fund (NYSE: FXI), the largest, most heavily traded China ETF, has tumbled nine percent this year as well.

Of course, China's government has shown it will step in to support the economy when needed, so fears of a slowdown there may be unnecessary. However, a Chinese slowdown does materialize, the following country ETFs could prove vulnerable. Note the intent with this list is to go beyond the obvious choices such as the iShares MSCI Brazil Capped Index Fund (NYSE: EWZ), the iShares MSCI Chile Capped Investable Market Index Fund (NYSE: ECH) and Australia ETFs.

iShares MSCI New Zealand Capped Investable Market Index Fund (NYSE: ENZL)
Overall, it is hard to quibble with the returns delivered by the iShares MSCI New Zealand Capped Investable Market Index Fund. Over the past year, the lone New Zealand ETF is up nearly 21 percent and that is without the benefit of quantitative easing. At least without the benefit of QE in New Zealand, a policy the central bank there has eschewed.

Additionally, ENZL has delivered solid returns in the face of a strong New Zealand dollar, a situation that is not good for New Zealand's exporters. Even with that, ENZL has performed well and done so without the help of a currency hedge.

All that aside, New Zealand would be vulnerable to a slowdown in China. China is New Zealand's largest trading partner and the relationship is growing. New Zealand sent NZD787 million in exports to China last month, up from NZD527 million in February 2012, according to Investing.com.

iShares MSCI All Peru Capped Index Fund (NYSE: EPU)
Peru is expected to be the fastest-growing economy in Latin America this year. Additionally, the government balance sheet there is sound, giving the country a decent chance of seeing its sovereign credit rating increased later this year by at least one of the major ratings agencies.

Those superlatives have not prevented EPU from sliding nearly five percent, a decline that in large part can be attributed to the ETF's heavy mining sector exposure. Materials stocks represent almost 46 percent of EPU's, which is not surprising given that Peru is the world's largest silver producer and major producer of gold and copper.

While Peru is looking to expand its exports to China to include agriculture and food products, that could take a few a years. At the moment, the bulk of Peruvian exports to China are minerals, leaving mining-heavy EPU vulnerable to any Chinese economic shocks.

For more on ETFs, click here.

Posted-In: Long Ideas News Short Ideas Specialty ETFs Emerging Market ETFs Commodities Global Econ #s Best of Benzinga

 

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