1nvest MSCI EM Asia Index Feeder ETF
1nvest Asset Management has provided the solution for investors who would like specialised exposure to emerging markets, specifically emerging Asia.
The newly listed 1nvest MSCI Emerging Markets Asia Index Feeder ETF tracks the performance of the MSCI Emerging Markets Asia Index, representing eight emerging market countries, 1,147 constituents and covering approximately 85% of the free float-adjusted market capitalisation in each country. Using the free-float method of market capitalisation eliminates the effect of shares held by insiders, which improves the liquidity of an index.
The ETF is a feeder fund, which will have US dollar exposure to its index. However, SA holders’ returns will be converted to rand, which means that any dollar strength will boost investor returns. It will cost investors a slightly high 0.405%, which we think is somewhat justified given its specialised nature.
China (40.7%), Taiwan (18.8%) and India (17.7%) are the top three country weights of the ETF. From a sectoral perspective, the information technology (25.4%), financial (16.9%) and consumer discretionary (16.2%) sectors dominate the fund’s assets.
Regulatory pressure from Chinese authorities on big tech businesses, a zero- Covid approach to the Omicron outbreak earlier this year and the subsequent stop- start recovery have been some of the main headwinds facing China’s economy this year.
In addition, investors have also been unnerved by weak conditions in China’s property market. Infrastructure investment and residential property have been a key part of China’s economic growth over the past two decades. Consequently, property and related industries account for 25%-30% of China’s GDP, according to the Peterson Institute for International Economics.
Strong demand and investment before the pandemic led to property developers pre-selling homes before completion and increasingly relying on international funding to augment investment to meet rising demand.
However, this led to increased speculation and soaring property prices prompting eventual intervention by authorities that have introduced regulations to reduce funding. The resultant tightening of credit to the property sector has seen prospective homebuyers choosing not to purchase homes due to risk of non-completion, affecting cash flows at major developers.
Accordingly, major financial analytics firm Bloomberg reports that net profits among 136 Chinese real estate firms tanked 87% to just $2.5bn in 1H22 from $19.2bn over the same period last year, worsened by the pandemic’s effects on economic activity.
Our focus on China may seem outsized, but its importance to emerging markets overall is increased in this ETF, meaning that strong investment performance will depend heavily on the Asian giant staging a strong recovery towards the end of this year and beyond.
Unlike most economies globally, China is actively taking steps to stimulate its economy. In late-August, Chinese media reported that local governments could sell bonds worth more than $229bn to boost infrastructure investment.
While useful, economists doubt the ability of infrastructure to bolster economic growth, given current conditions in the property market.
However, investment bank ING reports that the local government stimulus will provide funding to developers to complete projects with government reforms that will prompt developers to keep making repayments. In addition, monetary stimulus was provided by a five basis points cut in the one-year loan prime rate to a record low of 3.65%, designed to boost property demand.
The positive effects of the stimulus, reforms and an overall recovery in China are yet to be seen and will have been stalled by a drought that has affected its hydro-power capabilities, leading to significant energy shortages.
Overall, the MSCI China index (USD) was down 25.2% year-to-date (8 September), which we believe reflects the risks and uncertain conditions related to China and emerging markets (broadly). However, in its EM outlook, Lazard Asset Management points to the potential reward of buying into Chinese weakness.
Using historical data, Lazard reports that following periods of sharp drawdowns, Chinese equities have bounced back close to 30% over the next 12 months and almost 50% over 18 months. While this is no guarantee of strong future performance, it does suggest potentially handsome rewards for investors willing to take on the risk.
Fund suitability
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The ETF suits investors who require specialised exposure EM equities, have a long-term investment horizon and have a high risk tolerance.
Fees
- The fund has a total expense ratio of 0.405%.
Top 3 Allocation - top 3
- China - 40.7%
- Taiwan - 18.8%
- India - 17.7%
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Background: Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
- Gain instant exposure to various underlying shares or bonds in one transaction
- They diversify risk because a single ETF holds various shares
- They are cost-effective
- They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
- High transparency through daily published index constituents
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