2013 was a horrendous year for emerging market investments. Broad products like EEM and VWO finished the year lower, while developed market indexes surged higher in the same time frame.
This heavy selling pressure was largely due to Fed tapering talks, and the impact that this could have on emerging market investments. After all, a lot of hot money flowed into developing nations as a result of easy money policies back in the U.S., but with the potential for higher rates and a stronger dollar, there were worries that the appeal of these emerging markets might be reduced.
While this was the broad reason for the decline in emerging markets throughout the year, several individual countries also slid thanks to political strife and concerns about governance. These political woes helped to push some emerging markets far lower—on top of the broader issues—and could weigh on a few markets heading into 2014 as well.
In particular though, three countries stand out thanks to political uncertainty which is causing some volatility in their home markets. Two have been huge losers as a result of this, but one has managed to surge as of late. Either way though, 2014 could be a very important year for any of the following three markets and their ETFs:
It has been an extremely rough year for Turkey, as protests in Istanbul spread across the nation in the summer, and rocked the Prime Minister’s hold on the government. Concerns over the outcome of this uncertain situation also helped to push Turkish stocks lower, and sent the Turkish lira plunging as well.
However, this may have only been the tip of the iceberg, as a new crisis is now brewing in Turkey. The government is now in the thick of a corruption scandal, with many of the Prime Minister’s supporters being arrested, and also some cabinet Ministers resigning as well (see Is The Turkey ETF in Trouble Again?).
Speculation now suggests that elections will be called in 2014, further adding to the uncertainty in the nation. This could be especially true if the ruling party loses its grip on the government, or if a hung parliament that can’t reach a decision is the result of the elections.
The iShares MSCI Turkey ETF (TUR - ETF report) has mirrored Turkey’s struggles in 2013, and it has been one of the worst performing large cap-focused ETFs in the time frame. The first round of losses came during the original protests in May and June, while the latest (December) round has only added to this fund’s woes.
In fact, the product is down close to 40% since the beginning of May, while it has lost a whopping 16% in the past one month alone. Clearly, the political issues in Turkey—as well as this impact on the Turkish lira—are sending investors far away from TUR, and given the uncertainty over the situation, we could definitely see a further drop in this market in the coming year as well.
Thailand is no stranger to political issues, with coups becoming pretty regular occurrences in the Southeast Asian nation. Right now though, concerns stem from a series of protests that have come from a very unpopular bill from the government.
This bill looks to pardon several figures from the recent past, and possibly pave the way for the return of the former Prime Minister, and brother of the current Prime Minister, from exile. The bill was shot down, but the protests haven’t really curtailed, with worries building over the upcoming elections and a desire by some to remove the current Prime Minister from office as well (see Where Does the Thailand ETF Go from Here?).
There are also reports that Thailand’s Democrat Party will boycott the upcoming elections, throwing another wrench into Thailand’s plans for a solution to the current issues. Meanwhile, the Thai army chief has called for calm, but hasn’t ruled out a coup, potentially adding fuel to the fire down the road.
The best barometer of Thai market performance is the iShares MSCI Thailand Capped ETF (THD - ETF report). This fund does about a quarter million shares of volume in a normal day, and has AUM of roughly half a billion.
As concerns have begun to mount over the Thai political situation, the fund has been crushed. Its one month loss now stands at 8.5%, while it has tumbled roughly 15% since mid-September.
The fund’s YTD performance stands at -20%, so clearly it hasn’t been a great year for Thai equities by any stretch. However, should political worries escalate, or if coup concerns intensify, we could see further losses ahead for this product.
India has faced a plethora of political issues, largely thanks to the fractured nature of the political landscape in the country, as well as rampant corruption. However, many of the issues related to India’s underperformance this year came from the relatively high inflation rates in the country, and concerns over the taper’s impact on BRIC markets.
Now though, with a recent run by the opposition party, there is some speculation that the current ruling party could be in trouble, and that India’s political scene might in for a seismic shift. After all, the current party has been in power for a decade, though the BJP is gaining momentum after a string of victories in state elections (see India ETFs in Focus on Goldman Upgrade).
Generally, this electoral uncertainty isn’t good news for emerging market stocks. However, since the BJP Prime Minister candidate is likely to be Narendra Modi, an investor favorite, this looks to be an exception to the rule, especially if current trends continue and his party gains more steam heading into elections.
For this reason, we have seen a bit of a boost in the India ETF market lately, with several funds accelerating off of their lows. Plus, large cap India ETFs have actually beaten out the S&P 500 over the past month, suggesting that there is a bit of a turnaround at hand in this space.
Two such funds to watch in this market are the WisdomTree India Earnings ETF (EPI - ETF report) and the PowerShares India Portfolio (PIN - ETF report). Both of these are relatively popular—average daily volume in excess of one million shares a day—and have added more than 4.8% in the past month.
The real segment to watch though, is the India small cap space. Funds in this corner of the market have been crushed in the YTD time frame, but are really turning around in recent trading sessions (See Emerging Market ETFs: How to Pick Winners).
Both the Market Vectors India Small Cap ETF (SCIF - ETF report) and the iShares MSCI India Small-Cap ETF (SMIN - ETF report) are actually still down more than 20% YTD, but thanks to the improving political situation, are doing quite well lately. The duo have each added more than 20% in the past three months, crushing both developed markets and broad emerging market indexes in the process, suggesting these could be ones to watch in the New Year.
Clearly, the political situation in countries can have a huge impact on markets. For both Turkey and Thailand, it is quite negative, though at least for India funds, political trends have had a decidedly positive impact on stocks as of late. Either way, politics will play a big role in all three of these markets in 2014, so keep an eye on these issues if you are thinking about any of these markets for the New Year.
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