Asia ETFs Jump on China Rate Hike

NEW YORK (ETF Expert) -- The biggest news over the weekend was China's surprise Christmas-day decision to hike its interest rates. China is looking to slow down price inflation. And, not surprisingly, some of the worst-performing country ETFs on Dec. 27 were those with heavy exposure to the materials and energy segments.

For example, Columbia, Chile, Brazil and Mexico were among the biggest losers. (Review my recent commentary, "China Decides How High Reflation Trade ETFs Will Climb.")

In general, this tells us that when China reins in rates, the market may believe that the second largest economy may require less coal, steel and copper from resource-rich nations. It may be a knee-jerk reaction, but it's a predictable reaction nonetheless.

On the other hand, China's proactive response to curb price inflation isn't necessarily a burden on its middle class.

Consider five of the best-performing country ETFs on the last Monday in 2010: iShares MSCI Singapore (EWS), iShares MSCI Malaysia (EWM), iShares MSCI Taiwan (EWT), iShares S&P TOPIX Japan 150 (ITF) and Market Vectors Indonesia (IDX). China raised its rates, and the neighboring region's ETFs rocketed higher?

In truth, Asian country ETFs have weakened relative to the broader equity markets over the last 10 weeks. They have dropped from the 90th percentile in relative strength rank to a respectable, though less robust, top one-third in the ETF universe.

Nevertheless, China is, at best, halfway into its rate hiking, inflation-fighting campaign. It follows that it's important to see how that may or may not affect a variety of assets. And at least for one trading session, Asian neighbors seemed to be noteworthy beneficiaries.

One possible reason? Countries like Singapore, Taiwan and Malaysia export a wider variety of nonresource-related goods and services to China. As China raises rates and/or chooses a responsible monetary policy, China's yuan should appreciate. A more competitive yuan in the region lets the other Asian currencies devalue a bit, giving an edge to their exports.

Another reason? Both iShares MSCI Singapore and iShares MSCI Malaysia are heavy on the financials and industrials segments, while iShares MSCI Taiwan is locked in on the tech sector. All of these funds have precious little exposure to energy and basic materials -- areas of the market that take the largest hits when the reflation trade is questioned.

--Written by Gary Gordon of ETF Expert.

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