Where Are the World’s Best Market Returns?

by Dan Burrows | April 22, 2013 2:27 pm

International investors are having a rough time of it so far this year — unless they’ve bet heavily on the U.S., Japan, a couple corners of Asia and sub-Saharan Africa.

Because just about everywhere else in the world has been a dud.

Indeed, with Europe in recession and a slower-growth China weighing on formerly hot emerging markets, it’s tough to find much in the big developed and developing markets that isn’t either lagging or losing money.

It may not feel like it, what with recent volatility and some disappointing first-quarter earnings reports, but U.S. stocks have performed just fine so far this year. The benchmark S&P 500 and Dow Jones Industrial Average have each gained 11%.

That’s nothing compared to Japan, however. Aggressive monetary policy intended to slay once and for all two decades of deflation has the yen tumbling and Japanese stocks soaring. The Nikkei 225 is up a whopping 30% year-to-date.

Too bad that almost everywhere else you look in the big developed markets, you find underperformance or year-to-date declines. The U.K.’s FTSE 100 is up about 6%, but that’s about it for any good news in major European markets. Germany’s DAX index is off 2% so far in 2013. France’s CAC 40 is essentially flat. Benchmark indices in Italy and Spain are down 3% each.

Major emerging markets are faring even worse, no thanks to China, where the Shanghai Composite is down 1% on the year. Sluggish demand for energy and other commodities has clobbered Russia, where the benchmark index is off nearly 13% in 2013. The same goes for Brazil, where the Bovespa has lost around 13%. And India’s benchmark index is off more than 2%.

As we wrote recently, declines in emerging markets stocks and the right kind of demographic growth have international investors increasingly looking to frontier markets, especially in sub-Saharan Africa[1].

Believe it or not, the best performing stock market in the world so far this year is Ghana, according to data from MSCI. It’s up 56% since the first of the year. Other top performers include Kenya, which has gained 31%, and Zimbabwe, up almost 30%.

Here are the top 10 performing markets — be they developed, emerging or frontier — according to MSCI, so far in 2013:

Pretty much the only way for U.S. investor to gain exposure to these hot frontier markets is through exchange-traded funds such as Market Vectors Africa Fund (NYSE:AFK[2]), iShares MSCI Frontier 100 (NYSE:FM[3]) and Guggenheim Frontier Markets (NYSE:FRN[4]).

Unfortunately, because these ETFs are mostly weighted toward holdings in energy, commodities and financial stocks in slumping stock markets like Colombia, Chile and South Africa, they’re getting crushed or at least underperforming so far this year.

Which brings us to the 10 worst performing stock markets so far this year, according to MSCI:

The dubious distinction for worst market of 2013 so far belongs to the Czech Republic, a country highly dependent on exports to the rest of Europe, which is in recession. Meanwhile, austerity programs and tax hikes have hurt Czech domestic demand. The result? A market that’s lost nearly 19% year-to-date.

Poland is likewise suffering from the broader downturn in Europe, while Egypt and Jamaica struggle with domestic instability. What the rest of the laggards have in common are the effects of slower growth in China. The Shanghai Composite has actually held up pretty well considering that the broader MSCI index has slumped 8.7%.

Even worse has been what slower growth in China has done to energy and commodities prices — and to those countries dependent on such exports. That’s why Russia, Peru, South Africa, and Colombia are selling off this year. Everything from oil to coal to gold is in the tank.

Still, while the top-performing markets of sub-Saharan Africa could very well have more room to run this year, there’s really no way for retail investors to chase those returns the way the relevant ETFs are constructed. The Middle East Dividend ETF (NASDAQ:GULF[5]) is heavily weighted toward the UAE, and it’s up 12% this year, for anyone looking to chase that countries’ returns.

But a better bet would be further outperformance on the part of Japan. If you can’t fight the Federal Reserve here in the U.S., you probably can’t fight the Bank of Japan either. The iShares MSCI Japan ETF (NYSE:EWJ[6]) is up 16% for the year-to-date and should have more upside as long as the yen keeps falling.

As for bargain-hunting among the laggards, well, that’s a lot trickier. Europe is poised for years of substandard growth, and the jury’s still out on whether China will suffer a soft landing or a hard one.

Happily for U.S. investors, comparatively decent U.S. economic performance and an expected second-half acceleration in corporate profits make domestic stocks look all the better in relief.

As of this writing, Dan Burrows held no positions in any of the aforementioned securities.

  1. especially in sub-Saharan Africa: https://investorplace.com/2013/04/the-next-great-emerging-market-sub-saharan-africa/
  2. AFK: http://studio-5.financialcontent.com/investplace/quote?Symbol=AFK
  3. FM: http://studio-5.financialcontent.com/investplace/quote?Symbol=FM
  4. FRN: http://studio-5.financialcontent.com/investplace/quote?Symbol=FRN
  5. GULF: http://studio-5.financialcontent.com/investplace/quote?Symbol=GULF
  6. EWJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWJ

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