The Global Guru: Did You Miss the Three Top-Performing Stock Markets of 2013?
With all of the focus on the U.S. markets’ refreshingly strong performance in Q1 2013, it’s hard to focus on opportunities in far away, exotic stock markets.
And it’s not like most global stock markets have been terrific performers of late.
I monitor 36 stock markets on a daily basis for my clients at Global Guru Capital. You can invest in all of those markets through an exchange-traded fund (ETF) that you can purchase through a U.S. brokerage account.
Alas, after outperforming the U.S. market in Q4 2012, both developed and emerging markets had a lousy Q1 of 2013. The average gain in these 36 markets so far in 2013 is a mere 0.24%.
Yet, there were a handful of markets that recorded double-digit percentage gains in Q1. All three are in Asia. All three continue to offer big upside. And all three are probably far off of your investment map.
1. The Philippines
The Philippines is a new kid on the block for global investors, with the iShares MSCI Philippines Investable Market Index (EPHE) launching only in September of 2010.
And over the past year, it’s been a one-way bet, gaining 17.80% in Q1 alone.
S&P 500 versus the iShares MSCI Philippines Investable Market Index (EPHE)
The Philippines boasts several drivers in place that have made it an investor favorite over the past two years.
First, it has a rapidly growing population of 95 million expected to jump 51% by 2040 to 142 million. With a median age of just 22, over 61% of the population will be of working age by that time. That compares with just over half the population in Japan.
Second, most Filipinos speak understandable English. That’s why just last year, India lost 70,000 jobs to Philippine call centers. These call centers in the Philippines generated about $11 billion in revenue in 2011 and this number is expected to more than double to $25 billion in three years.
Third, the 10% of the Filipinos living abroad send money back home — 20 billion of payments in 2011, up from $7.5 billion in 2003.
Finally, the economy grew 6.6% in 2012 and is expected to gain another 6% in 2013. Corruption and tax evasion are down. And domestic consumption makes up about 70% of the gross domestic product (GDP), helping insulate the country from global economic downturns. No wonder it just received an “investment-grade” rating from Fitch. If the country repeats this with either of the two other major rating agencies (S&P and Moody’s), the taps would open up further, including for much-needed foreign direct investment.
Vietnam had a lousy 2012. A slow growth rate, high inflation and an indebted banking system all combined to explain why the economy expanded at its slowest pace in years in 2012.
So, why are investors so hot on Vietnam in 2013?
In the big picture, the Vietnamese economy has massive growth potential, thanks to favorable demographics, a cheap manufacturing base and increasing disposable income.
After several unsuccessful attempts, the government has gotten inflation under control. State-owned enterprises are being privatized. The economy has received a further boost due to the country’s plans to increase foreign ownership of Vietnamese companies from the current limit of 49%.
Technology production is gradually shifting from China to Vietnam. In fact, “Apple killer” and South Korean giant Samsung has moved 40% of its mobile phone production to Vietnam. Manufacturing costs are a lot lower than in China, and Vietnam’s population is much younger, with an average age of 28.
The Market Vectors Vietnam ETF (VNM) has been one of the best performing ETFs of 2013 — gaining 14.22% in Q1.
S&P 500 versus Market Vectors Vietnam ETF (VNM)
VNM tracks the Market Vectors Vietnam Index, and also includes offshore companies that generate at least 50% of their revenues in Vietnam. The fund holds companies listed on U.K., Thai, Malaysian and Indian stock exchanges.
One caveat: Banks in Vietnam are heavily burdened with bad debt, and financials account for 40% of the VNM. On the plus side, with VNM still only trading at a price-to-earnings (P/E) ratio of around 11, Vietnam is cheap compared to the other top-performing markets highlighted here.
As the world’s fourth-largest country, Indonesia boasts a young-and-growing population of 242 million. Once the sick man of South Asia, Indonesia’s tax, customs, and capital market reforms introduced in 2004 by President Yudhoyono have resulted in the government adopting a policy of wanting to see another “I” added to the “BRIC” (Brazil, Russia, India, and China) acronym.
Recently, President Yudhoyono increased infrastructure spending to more than $21 billion in the hopes of meeting his GDP-growth goal: an average of 6.6% by 2014, thereby outperforming several of its higher-profile BRIC rivals.
Indeed, Indonesia has a lot going for it. Its growing middle class of 130 million is expected to double by 2020. Its currency, the rupiah, has remained stable against the U.S. dollar and a new central bank governor is committed to keeping it that way. Foreign direct investment in Indonesia reached $5.9 billion in Q4 of 2012. For the entire year, foreign direct investment was $22.8 billion, a 26.7% increase from 2011.
Indonesia still has lots of challenges. A shaky legal system, rampant corruption and inadequate infrastructure, combined with the ever-present threat of terrorism, still pose a threat to long-term growth.
Although Indonesia was one of the top-performing stock markets of 2010 and 2011, and has gotten off to a strong start in 2013, Indonesia remains off the radar for most investors.
The Van Eck’s Market Vectors Indonesia ETF (IDX) has more than tripled since its launch in March of 2009 — far outpacing the U.S. S&P 500, and rising 11.03% year to date in 2013.
S&P 500 versus Market Vectors Indonesia ETF (IDX)
To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.
Nicholas Vardy, CFA
Editor, The Global Guru