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March ETF: bullish trend losing momentum

Zareena Sayeedova, Leading Analyst, Global Markets (Finam)

In line with our expectations, last month a bullish trend on the global equity markets slightly subsided, with the MSCI World Index advancing only 1% in March compared to February’s 4.6% gain. Since the very beginning of the month buying sentiment was cooled by negative a stream of news out of China according to which the official GDP growth forecasts for 2012 were revised downward from 8% to 7.5%, and also the country recorded the highest trade deficit since 1989. However, the cooling effect of the Chinese news flow was capped by ambiguous statements from Fed Chairman Ben Bernanke that the central bank remains committed to pursuing a soft monetary policy, which some construed as a hint concerning QE3. The situation was quite peaceful in Europe, no market-moving events took place and investors began to closely monitor economic data to understand the depth of the European debt crisis. Reference.

An ETF (Exchange Traded Fund), or an index fund, constitutes a financial instrument, the price of which reflects a reading of one or another stock index, a specific commodity, currency or index of the asset portfolio formed by the issuer.

At present, there are over 1,000 various ETFs in the United States and they continue to grow. Currently one can find ETFs pegged to various segments of the financial market: a market of stocks, bonds, commodity items and currencies. The table below shows returns of primary ETFs since early 2012:

# Name Ticker YTD, %
1 Market Vectors Vietnam /VNM 31.55
2 iShares MSCI-Turkey Investable Market /TUR 28.95
3 iShares MSCI-Peru /EPU 21.71
4 iShares MSCI-Germany /EWG 21.12
5 iShares MSCI-Thailand Investable Market /THD 21.09
6 PowerShares QQQ /QQQ.O 20.99
7 SPDR Emerging Europe /GUR 19.28
8 iShares MSCI-Singapore /EWS 19.02
9 Global X/InterBolsa FTSE Colombia 20 ETF /GXG 18.97
10 CLYMR BNY Mellon Frontier Markets /FRN 18.63
11 iShares MSCI-Chile /ECH 18.35
12 Fidelity Nasdaq Composite /ONEQ.O 18.29
13 Global X Ftse Norway 30 ETF /NORW.K 16.75
14 iShares MSCI-Belgium /EWK 16.53
15 iShares Silver Trust /SLV 16.48
16 iShares MSCI-Mexico /EWW 16.29
17 Market Vectors Russia /RSX 15.85
18 iShares MSCI-Austria /EWO 15.47
19 iShares MSCI-Sweden /EWD 15.39
20 Africa Index /AFK 14.56
21 iShares MSCI-Taiwan /EWT 14.56
22 SPDR Emerging Latin America /GML 14.33
23 iShares MSCI-South Korea /EWY 13.93
24 SPDR Emerging Middle East & Africa /GAF 13.34
25 iShares MSCI-Emerging Mkts /EEM 13.19
26 iShares MSCI-EMU /EZU 13.08
27 iShares MSCI-South Africa /EZA 12.84
28 iShares MSCI-Hong Kong /EWH 12.77
29 iShares MSCI-France /EWQ 12.72
30 iShares MSCI-BRIC /BKF 12.71
31 iShares MSCI-Brazil /EWZ 12.67
32 SPDR Emerging Asia Pacific /GMF 12.37
33 SPDR Index 500 /SPY 12.20
34 iShares MSCI-Pacific ex-Japan /EPP 11.79
35 iShares MSCI-Japan /EWJ 11.69
36 Vanguard MSCI Pacific /VPL 11.66
37 Vanguard MSCI Europe /VGK 11.25
38 iShares MSCI-EAFE /EFA 10.82
39 iShares MSCI-Switzerland /EWL 10.65
40 PowerShares USX China /PGJ 10.25
41 iShares MSCI-Netherlands /EWN 10.21
42 SPDR DJ EuroStoxx 50 /FEZ 9.96
43 iShares S&P Global 100 /IOO 9.75
44 SPDR China /GXC 9.74
45 iShares MSCI-Australia /EWA 9.65
46 iShares MSCI-Italy /EWI 9.09
47 iShares MSCI-Malaysia /EWM 8.96
48 iShares MSCI-Israel Capped Investable Market /EIS 8.87
49 DIAMONDS DJIA /DIA 8.17
50 SPDR DJ Stoxx 50 /FEU 7.50
51 PowerShares DB Commodity Index /DBC 7.30
52 iShares MSCI-UK /EWU 7.05
53 Gulf States Index /MES 6.95
54 SPDR Equity Gold /GLD 6.66
55 iShares MSCI-Canada /EWC 6.54
56 iShares FTSE/XINHUA China 25 /FXI 5.15
57 Market Vectors Indonesia /IDX 4.88
58 Rydex CurrencyShares Swiss Franc Currency /FXF 3.98
59 Rydex CurrencyShares Swedish Krona Currency /FXS 3.83
60 Rydex CurrencyShares Euro Currency /FXE 2.95
61 Rydex CurrencyShares Pound Sterling Currency /FXB 2.91
62 iShares JP Morgan USD Emerging Markets Bond /EMB 2.70
63 Rydex CurrencyShares Canadian Dollar Currency /FXC 2.12
64 SPDR Lehman International Treasury Bond /BWX 1.89
65 iShares S&P Global Utilities Sector /JXI 1.84
66 iShares iBoxx Inv Grade Corp Bond /LQD 1.64
67 iShares iBoxx High Yield Corp Bond /HYG 1.44
68 Rydex CurrencyShares Australian Dollar Currency /FXA 1.22
69 iShares Lehman TIPS /TIP 0.82
70 iShares Lehman 1-3 Yr Treas /SHY -0.21
71 PowerShares DB Agriculture /DBA -2.70
72 iShares MSCI-Spain /EWP -3.20
73 iShares S&P Latin America 40 /ILF -3.22
74 Rydex CurrencyShares Japanese Yen Currency /FXY -7.15
75 iShares Lehman 20+ Yr Treas /TLT -7.46

Source: Reuters

A slight cooling in buying sentiment also affected our ETF returns rating. For example, as of late March the weight of ETFs offering returns of over 20% YTD, which we track, dropped from 10.7% to 8%, while that of the instruments posting losses increased from 5.3% to 8%.

The top line in our returns rating, as was the case in February, is held by the index fund pegged to the Vietnamese stock market. In March the index slightly corrected, but its Q1 returns ultimately topped 30%. Thus, the robust gains posted by the Vietnamese equities market were driven by stronger demand on the part of foreign institutional investors and expectations of monetary easing going forward. For instance, in February foreigners’ net investments in Vietnamese securities were nearly equal to the 2011 number. Stock markets of such developing countries as Vietnam are of course considered high-risk, but we suspect that the Vietnamese market still holds upside potential in the mid-term outlook.

The runner-up in the ETF returns rating is Turkey, as investors believe that the economic and social-political environment in the country is positive. At the same time, silver (No. 2 in the February rating) was ousted far beyond the Top 10, with YTD returns equal to 16.5%. The silver-pegged ETF has been highly volatile, a common feature of the instrument for a long time now, and surges in silver contracts come as no surprise to us, as one way or another there is a strong likelihood that the metal will continue to head north in the long-term outlook, regardless of whether this is along a straight or a winding upward trajectory.

At the bottom of our rating are still defensive assets, i.e. funds pegged to treasuries and the Japanese yen. For a while, the yen lost its defensive properties due to disappointing economic conditions in Japan and recently conservative investors have disregarded the yen.

At this stage, we believe that the most reasonable scenario is a sideways trend on the global markets, with a moderately negative forecast for high-risk assets and a moderately positive forecast for defensive assets. No disastrous events have so far occurred in Europe, but, by the same token, there is no reason to be overly optimistic either, as numbers out of China have recently not been very inspiring.