Asia ETFs: Fast Growth May Have Consequences | ETF Trends

Asian countries are projected to expand at its usual astonishing rate, but higher global liquidity may be fueling an asset bubble that could threaten the performance of Asian economies and related exchange traded funds (ETFs).

The case for continued growth in Asia is strong:

  • The International Monetary Fund (IMF) believes that GDP for developing East Asian countries, excluding Hong Kong, South Korea, Singapore and Taiwan, will increase 8.9%, up 0.2% from  previous estimates, and 7.8% in 2011 after stimulus measures diminish and growth in developed countries level out, writes Kathy Chu for USA Today.
  • China’s economy is expected to expand by 9.5% this year.
  • For the first time, Thailand, Malaysia, Laos, Mongolia and Papua New Guinea could experience 7% growth in 2010, says the World Bank.

But that growth has the potential to come at a cost. The IMF warns about high capital inflows, rising asset prices and inflationary trends that could create “an emerging policy challenge and a growing risk to macroeconomic stability.”

Sri Mulyani Indrawati, a World Bank managing director, stated that curbs may be “targeted” at specific problems to help limit hot-money that is fueling a potential asset bubble in the region, remarking that the U.S. “quantitative easing will create a lot of liquidity flooding to the East Asia Pacific region, because it is the most dynamic and attractive with a higher return on investment,” according to Barry porter for Bloomberg. [Asia ETF Industry Grows as Economies Heat Up.]

One tactic seen so far is in emerging Asian countries, which have been trying to artificially weaken their currencies as foreign investors throw more money into high-performing emerging markets.

The World Bank’s warning, though, bears heeding. Although broad Asia ETFs are above their 200-day moving average now, watch this trend line for signs of cooling and have an exit strategy ready to go.

The two top-performing Asia ETFs recently are:

  • PowerShares FTSE RAFI Asia Pacific ex-Japan (NYSEArca: PAF): As the name states, PAF excludes Japan, but gives exposure to Australia (41.2%), South Korea (34.5%), Hong Kong (14.9%) and others. It’s up 15.3% in the last six months.
  • SPDR S&P Emerging Asia Pacific (NYSEArca: GMF): This fund shifts the focus to Asia’s powerhouse emerging economies, like China (36%), Taiwan (28.1%), India (20.5%) and others. It’s up 18.2% in the last six months.

For more information on Asia, visit our Asia category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.