Tap into Asian growth with Far East ETFs

WHETHER you subscribe to the belief that the 21st century belongs to China or not, there is no doubt that it certainly belongs to emerging markets and particularly to those in the Far East. The story is a familiar one: these countries have transformed themselves from rural backwaters to the new hub of the global economy and will be increasingly instrumental in driving world growth.

While they were not immune to the financial crisis, emerging Asian markets have sustained their rapid development and the equity markets have boomed, illustrated just yesterday by the better-than-expected performance of China’s manufacturing sector. There have been some warnings about overheating but so far these have proved unfounded and strategists remain positive about the outlook for emerging Asian markets.

“We have raised our forecast of emerging market growth in both 2010 and 2011 while our forecast of world growth is roughly unchanged. If anything, the fundamental grounds for emerging market outperformance look a bit stronger to us now than they did three months ago,” say Barclays Capital’s strategists led by Michael Gavin. “We expect that investor flows into emerging markets that have been attracted to this economic outperformance will continue in the months to come,” they add.

Due to capital controls it has been difficult for British investors to gain access directly to these markets but mutual funds and exchange-traded funds (ETF) have never been more popular. According to EPFR Global, Asia ex-Japan funds enjoyed their best week in 15 months in the week ending 22 September. Meanwhile, global ETFs tracking emerging markets equity indices have seen growth of 13.5 per cent year-to-date and 191 new listings.

Against this positive backdrop, earlier this week HSBC unveiled an ETF tracking the MSCI EM Far East index, which is listed on the London Stock Exchange. The fund gives investors exposure to the largest listed companies in China (via Hong Kong), Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand. It is also the first emerging market ETF that is physically replicated and has a total expense ratio of 0.6 per cent, which is competitive for its peer group.

The new ETF adds to HSBC’s MSCI Pacific ex Japan ETF that was launched at the start of the month and the MSCI Brazil ETF in July. While HSBC has yet to launch a single country emerging Asia ETF, HSBC Global Asset Management’s global head of market position David Chellew says that the number of ETFs would be steadily increased over the next 12 to 18 months, including a wide range of emerging market equity indices. “We believe that emerging markets are extremely attractive and we are going to offer a decent range of emerging market regional and single country ETFs; it is what clients would expect from us,” he says.

The ETF, which pays dividends semi-annually, is available to retail and institutional investors. HSBC plans to use its distribution networks to make sure its funds are available to all clients and investors can find them on platforms.

All ETF providers offer emerging market ETFs although they vary in terms of benchmark and structure. Recently, Credit Suisse listed 13 swap-based emerging market ETFs in London including those tracking MSCI Korea, MSCI Taiwan, and even the China A-shares CSI 300 as well as regional indices.

In a world where developing equities will continue to outperform, emerging market ETFs will attract further inflows from investors seeking exposure to the new growth engine of the world.

● By 2015, emerging market consumers are forecast to account for 37 per cent of global consumption.

● A third of India’s population is now middle class compared to 22 per cent in 2002.

● The MSCI World only has a 12 per cent weighting towards emerging markets.

● According to the World Bank, developing economies are expected to grow between 5.7 and 6.2 per cent each year between 2010 and 2012, almost twice as fast as developed countries.

● The financing gap of developing countries is projected to be $210bn in 2010, declining to $180bn in 2011, the World Bank says.