While the pace of GDP growth and strength of underlying economic fundamentals vary wildly between emerging and developed markets–and even from country to country–most global equity markets have moved in the same direction in 2010: up. Impressive earnings reports and data releases show that individuals and corporations are once again beginning to spend again, and the ripple effect is being felt in all sectors of the economy.
Of course significant risks remain throughout the global economy. From still-rising unemployment in the U.S. to deflation in Japan to concerns of overheating economies in Brazil and China, the road ahead is littered with obstacles. While most investors focus on the potential economic potholes, political risks in many corners of the globe have increased significantly in recent months, adding yet another complication to some still-fragile recoveries.
Most of the world’s most volatile regions aren’t readily accessible to international investors, and as such the impact of any conflicts is generally indirect. But escalating tensions in several major markets have forced investors to take a closer look at the political risks on investments in several emerging and developed economies. Below, we highlight three ETFs that have have encountered some turbulence in recent weeks as concerns about political stability have increased:
- iShares MSCI Thailand Index Fund (THD): Although not widely covered by U.S. media, the situation in Thailand has been rapidly deteriorating over the last month. Clashes between supporters of the ousted prime minister and the current government have become increasingly violent and have shut down many of Bangkok’s high end shopping centers and hotels. While the economic damage to this point has been limited primarily to tourist-intensive industries, a prolonged conflict could hinder growth throughout an economy that was poised to post impressive growth figures this year. THD tracks the performance of the MSCI Thailand Investable Market Index, and has seen a sharp drop over the last month as the violence in the Thai capital has intensified (see Thailand ETF Continues Slide).
- iShares MSCI South Korea Index Fund (EWY): This ETF sunk after a South Korean navy vessel sunk near the North Korean border, as investors worried that a North Korean missile was to blame. While South Korean officials have avoided directing any blame to the North, suspicions have only increased after more in-depth research revealed that the explosion was most likely caused by a missile. Relations between the two Koreas have been far from amicable for the last several decades, and the potential for the recent events to escalate into an armed conflict is very real. Since the initial blast, EWY has largely shrugged off any fears of such an event over the last month, although the steep one day decline immediately afterwards highlights the potential downside risk (see ETF Tracking Error: Fact And Fiction).
- iShares MSCI Israel Capped Investable Market Index Fund (EIS): Conflict is nothing new to the Middle East, as the potential for violence between Israelis and Palestinians is an inevitability that investors in the region have come to accept. Over the last month, several interesting developments in Israel have mostly flown under the radar internationally, but could signal heightened risks within the country. Israeli security officials have reportedly become frustrated with the prolonged push for sanctions against Iran, and has begun weighing the merits of a solo attack. “Some senior Israeli officials say in interviews that they see signs Washington may be willing to live with a nuclear-armed Iran, an eventuality that Israel says it won’t accept,” writes Charles Levinson. A war is by no means imminent, but the possibility shouldn’t be completely discounted when considering an investment in EIS.
Disclosure: No positions at time of writing.