EM ETFs to Buy on The Dip (EPHE, ECH, GXG)

April 11, 2012 12:19 pm
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EM ETFs to Buy on The Dip (EPHE, ECH, GXG)

For fear of stating the obvious, the past month has not been kind to emerging markets equities and ETFs. The Vanguard MSCI Emerging Markets ETF (NYSE: VWO) is off 4.3% since March 12 and that looks compared to the performances turned in by the major ETFs tracking the BRIC nations.

The iShares MSCI Brazil Index Fund (NYSE: EWZ), the iShares FTSE China 25 Index Fund (NYSE: FXI) and the WisdomTree India Earnings ETF (NYSE: EPI) are all off at least 7% in the past month while the Market Vectors Russia ETF (NYSE: RSX) has plunged 9%.

Those dour runs might cement the notion that it’s time to depart emerging markets ETFs, but there’s compelling evidence to the contrary. Russ Koesterich of iShares notes emerging markets are cheap relative to their own historical valuations and developed markets.

“The current valuation of roughly12x earnings is also a 22% discount to where the MSCI World Index is trading. And historically, when emerging market stocks have been at a 20% or more discount to developed market equities, they have significantly outperformed over the next year,” Koesterich noted.

With those words of encouragement, let’s look at some EM ETFs that might prove to be worthy buy-on-the-dip candidates.

Global X FTSE Colombia 20 ETF (NYSE: GXG)
In the past month, the Global X FTSE Colombia 20 ETF has been giving away some free information. What the fund is saying is “Hey, forget Brazil and look at Colombia. I’ve only lost 1.4% in the pas month compared to that nasty spill for EWZ.” OK, so ETF’s can’t talk, but if they could, that’s probably what GXG would be saying.

The fund’s ability to endure an unfavorable market environment and its large weight to Ecopetrol (NYSE: EC), perhaps the best-performing oil stock in 2012, bode well for GXG’s medium-term returns. Ecopetrol is up almost 50% since we recommended it in December 2011.

iShares MSCI Chile Investable Market Index Fund (NYSE: ECH)
Recent weeks have brought multiple concerns about China’s economy, which has weighed on Brazil and EWZ and plagued copper prices along the way. Of course, emerging markets ETFs have been hammered, too. That confluence of factors should have doomed ECH, right? Well, not exactly.

The fund has held up well comparatively speaking and if the weakness that has just started to creep into ECH in the past few days persists, that could drag the ETF back to $65. That’s not a bad thing because $65 represents a solid buy point for an ETF that could offer double-digit upside from there.

iShares MSCI Philippines Investable Market Index Fund (NYSE: EPHE)
One of the two “P’s” in the CAPPT acronym the Philippines growth story has not been damaged in recent weeks. The Asian Development Bank said today that higher public spending, investment and private consumption will bolster the Philippine economy over the next two years.

EPHE is down almost 4% in the past week, indicating it’s in the midst of a pullback, but if support at the 50-day moving average holds, then this fund is safe from the long side.

iShares MSCI Thailand Investable Market Index Fund (NYSE: THD)
There’s a lot to love about Thailand from a longer term perspective, but given that THD is up about 40% since its October 2011 low, a deeper pullback may be required to create an attractive buying opportunity. As it is, this momentum ETF has slid almost 6% in the past week. Optimally, THD stabilizes in the $70 area before mounting another challenge of $75.

Market Vectors Vietnam ETF (NYSE: VNM)
The Market Vectors Vietnam ETF started 2012 on fire though that wasn’t all that surprising. Looking at the chart, VNM is consolidating in a higher range and repeating the pattern that was seen in February after the ETF had shot up to $18 from around $14 at the beginning of the year.

Concerns about inflation and VNM’s almost 44% weight to bank stocks have started to creep into the VNM thesis lately, but foreign investment in the Southeast Asian country is rising. Should policymakers be able to keep a lid on inflation, VNM’s next leg higher could materialize sooner rather than later.

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