iShares Global ETFs

If recent economic data is any proof, the global economy is still stuck in a two-speed regime. Developed markets like Europe, Japan and the United States are stalling and struggling to shake off their post-crisis economic slump, while China is re-accelerating from its 2012 slowdown.

Given this growing discrepancy in the global growth environment, I’m amending my views of two countries:

  • The Netherlands. Since August 2011, Dutch stocks have gained roughly 19% in dollar terms and have outperformed a broad European benchmark. However, Dutch valuations no longer look particularly attractive compared to those of other European markets amid signs that local fiscal austerity is contributing to economic contraction. Because I believe that Europe will continue to struggle with its ongoing recession, as evidenced in its recent weak fourth-quarter gross domestic product numbers, the Netherlands is vulnerable to more growth disappointments. Given this, I’m downgrading my view of the Netherlands to a benchmark weight.
  • Korea. If Chinese growth continues to recover, as I expect it will, emerging markets in China’s orbit such as Brazil and Korea are likely to benefit. And at barely 9x forward earnings, Korean valuations, while normally cheap, look particularly inexpensive today compared to other emerging markets. In addition, the Korean corporate sector appears in good shape with strong balance sheets and positive earnings outlooks. As a result, I’m upgrading my view of Korean stocks, which are accessible through the iShares MSCI South Korea Capped Fund (EWY), to a benchmark weight from underweight.

As for my expectations for the global economy overall, I believe that global growth is likely to be marginally greater in 2013 than in 2012 – largely thanks to a resurgent China. In addition, while the United States looks to be in better shape than Europe or Japan, I expect US growth to also remain muted, particularly during the first part of the year thanks to fiscal drag. At the same time, though China and other large emerging market countries are highly unlikely to achieve double-digit growth anytime soon — or ever — their growth should be higher in 2013.

Given this divergent growth, I continue to advocate investing in emerging markets, where growth should be stronger, over developed markets. In addition, for investors looking for domestic plays on this same theme, I also like certain segments of the US market that offer more emerging market exposure like technology, energy and mega caps. Technology, energy, and materials companies, for instance, currently generate a third or more of their sales from emerging markets, while healthcare only generates 16% and utilities only 10%. These sectors are accessible through funds like the iShares Dow Jones U.S. Technology Sector Fund (IYW) and the iShares Dow Jones U.S. Energy Sector Fund (IYE).

Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.