Sunday, December 10, 2006

Investing in 2007 - part II

In this series, we will look at possible sectors and companies that one can invest in 2007. In order to do this, one has to look at the returns in the current year and understand the fundamentals better. In the first part of this series, we looked at the returns of US stocks and found that many of them have done extremely well with mixed results in the commodities sector. In this segment, we will look at REITs and then returns in foreign markets. Once this is done, we will look at different segments and choose the ones that are of interest.

The vanguard REIT index - VNQ has returned 32% for the year. The iShares Dow Jones US Real Estate fund IYR has returned about 30% for the year. streetTracks Wilshire REIT RWR has returned 32% for the year. Although REITs have done very well for the year, the REIT dividend yield is low compared to their long term average.

Now let us take a look at international ETFs and then the returns in some key country indices thus far this year. There are many popular international ETFs and we will take a look at the main ones.

Of the global etfs, iShares EAFE Global Large Cap Growth Fund EFG has returned 15.35% for the year. The EAFE Global Blend EFA has returned about 18% and the value fund EFV has returned about 22% thus far in the year. The interesting thing to note here is that the return from international stocks is comparable to that from the US even taking into account the depreciation in the value of the dollar.

In addition, the popular vanguard funds VGK for European Index has returned 27% YTD and the Asia Pacific Index Fund VPL has returned 6% YTD.

The iShares emerging market fund EEM has returned 17.35% YTD and the corresponding fund from Vanguard VWO has returned 15.88% YTD. EEM charges a higher management fee compared to VWO. Again the interesting part to note here is that despite a falling US dollar, the US assets have performed well and have comparable returns to that of the emerging markets. Let us now look at the country by country performance of some key economies around the world.

Wikipedia has the world's largest countries by nominal GDP. The European Union is at the top of the list at 13.5 trillion dollars followed by the US at 12.5 trillion dollars. China is at 2.2 trillion dollars and Canada is at 1.2 trillion dollars. The emerging markets of Brazil, South Korea, Russia, Mexico and India are in the 750 billion dollar range with India poised to make a significant leap over the others in the next five years.

The main index in the U.S, the SP500 index has gained close to 15% thus far this year. This came after last year's anemic growth. The other large north american economy Canada also saw its index grow by about 14% this year. The Mexican index has increased by 43% YTD as well. The Brazilian index has also grown by about 33% thus far this year.

In Europe, the British FTSE100 index has gone up by about 12%. The German DAX has gone up by almost 21% thus far in the year. The Swiss index has gone up by about 12.5% thus far this year.

In Asia, where the giant dragon (China) and Tiger(India) economies are growing at quick rates, the indices increased as follows. In India, the BSE Sensex index has grown by about 55% thus far this year. This is on top of the 45% growth observed last year. In China, the Shanghai SSE Composite Index has grown by about 75%+ thus far in the year. The Hangseng index has grown by about 26% thus far this year. The Nikkei 225 index has been relatively flat thus far in the year. The Korean index has been relatively flat where as the Taiwan stock market has surged by about 17.5% YTD.

To summarize, the global stock markets have seen more advances than declines and majority of the stock markets have advanced significantly thus far this year.

In the next article, we will look at the economies of the world and the economic growth prospects in some of these countries.

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