With the health of the global economy still riding in the balance, leaders from twenty of the most powerful and important economies in the world will meet in Seoul, South Korea this week to discuss a number of critical issues. The G-20 organization, which consists of 19 countries around the world as well as the European Union, accounts for 80% of world trade and two-thirds of the world’s population, giving the group incredible influence and power over the world economy. One item at the top of list of discussion topics is the recent QE2 program launched by the U.S. Federal Reserve, in which the central bank announced plans to buy up $600 billion worth of bonds in the U.S. Treasury market in order to help jump-start the struggling American economy [see ETF Ideas If Sarah Palin Is Right].
While the program has been met with mixed responses at home, a variety of nations–both rivals and allies–have railed against the American program, arguing that the injections will only funnel hot money to emerging markets, spike inflation in a host of important commodities, and do nothing to boost the American economy. “For the U.S. to undertake a second round of quantitative easing at this time we feel is not recognizing the responsibility it should take as a reserve currency issuer, and not taking into account the effect of this excessive liquidity on emerging-market economies,” Vice Finance Minister Zhu Guangyao told reporters at a press conference in Beijing [also read Emerging Market ETFs: Seven Factors Every Investor Should Consider].
In addition to issues regarding this bond buying program, a number of other conflicts look to be at the forefront of discussion. Below we highlight three of the most pertinent issues and themes, as well as related ETFs that should be in focus as the summit kicks off in Seoul [for more ETF ideas, sign up for our free ETF newsletter]:
WisdomTree Dreyfus Chinese Yuan Fund (CYB)
Many foreign economic officials, and especially politicians in the U.S., are looking to talk China into strengthening its currency in hopes that a stronger yuan will spur domestic consumption in China and create much needed jobs in the U.S. “You’re seeing some countries run up very big surpluses and intervening significantly in the currency markets to maintain their advantage when it comes to their currency,” Obama recently said at the news conference with Indonesian President Susilo Bambang Yudhoyono, pinning his hopes for the G20 on more flexible currency systems in many emerging markets such as China.
However, progress on the Chinese currency front seems less than in the wake of QE2, as the Fed’s bond buying campaign has angered the Chinese. Through the state run Xinhua news agency, Beijing declared that the Fed was “risking the global recovery by following its own track for economic revival,” going on to note that “it is necessary for the issuer of the international reserve currency to report to and communicate with the G20 group before it makes major policy shifts.” With comments like this popping up, it seems likely that China will be hesitant to shift its currency value too drastically, especially given the clear preference not to bend to political pressure from Western nations.
Nevertheless, if any progress is made on this front look for CYB to be in focus. The fund seeks to achieve total returns reflective of both money market rates in China available to foreign investors and changes in value of the Chinese Yuan relative to the U.S. dollar. Although the fund has not really moved very much so far in 2010–it has gained a little more than 1% year-to-date–investors continue to clamor for exposure to the Chinese currency; CYB has amassed close to $650 million in assets under management and trades almost 300,000 shares daily [see Three ETFs To Watch During The Great Currency War of 2010].
iShares MSCI South Korea Index Fund (EWY)
The South Korean government is no doubt looking to capitalize on this opportunity to showcase the nation to the world’s largest and most powerful economies in an effort highlight a dynamic economy that is wildly different than its neighbor to the North. The G20 summit also looks to show the importance of Korea at the crossroads of larger Asian markets, and demonstrate how the country can play a pivotal role in diplomacy in the increasingly important region. “Hosting the G-20 certainly has something to do with nationalism and identity,” said Gi-wook Shin. “Koreans also say their country is ‘small,’ and it certainly looks so in Northeast Asia since its neighbors are so huge: China, Russia, Japan. But it’s a top-15 country in terms of economic size. And through the G-20, Koreans want to show the world that they have become an advanced country.”
South Korea can also demonstrate its incredible rise to some of the lesser developed G20 nations, such as Indonesia or South Africa, providing them with a model for solid levels of growth that has helped the country to grow at an impressive clip for decades. “Now it will no longer be possible to discuss a global issue without including Korea,” said Lee Myung-bak, proclaiming that the country had moved “away from the periphery of Asia to the center of the world.”
If the G20 turns out to be successful and opens investors eyes to the promise of the South Korean market, EWY could receive a small boost. The nearly $4 billion dollar fund from iShares tracks the MSCI Korea Index, which holds about 100 securities in total and gives heavy weightings to the information technology (26%) and industrials (16%) sectors. In terms of individual holdings, Samsung takes the top spot with about 15% and is trailed by steel giant Posco (5.6%) and Hyundai Motor (4.8%). The fund has had a solid 2010, posting gains of about 20% so far this year [see Three International ETFs Facing Shrinking Populations].
Market Vectors Rare Earth/Strategic Metals ETF (REMX)
Another hot topic at the Summit is rare earth metals, a valuable natural resource of which China controls nearly 97% of the world’s supply. These metals are crucial to a variety of high tech goods including weapons systems, green technology and computer products. In recent months, China has appeared to be nearly on the verge of banning exports of many of these metals, and any discussion on this topic looks to put the brand new REMX into focus. According to the WSJ, 35 businesses and trade organizations representing some of the largest users of rare earth metals signed a letter urging leaders to find a solution to loosen up the extremely tight rare-earth market. This comes after Japan and Germany complained that automobile and clean-tech industries are being hit by the crunch in supplies and follows on the heels of U.S. Secretary of State Hillary Clinton’s mention of the issue to Chinese officials late last week.
One ETF that looks to be in focus given any news on this front is REMX, which seeks to replicate the Market Vectors Rare Earth/Strategic Metals Index. Companies in this index are primarily engaged in a variety of activities that are related to the mining, refining and manufacturing of rare earth/strategic metals. REMX holds 24 securities in total, with large allocations going towards Australian (23.9%), Canadian (19.8%), and American firms (18.8%). In terms of individual holdings, mid and small caps dominate the list so many of the companies are likely to remain unknown to many investors. Top components include Lynas Corp (8.8%), Iluka Resources (8.3%) and Titanium Metals (6.7%). Although the fund debuted on the 27th of October, it already has close to $100 million in assets under management [see Van Eck Launches Rare Earth/Strategic Metals ETF].
Disclosure: No positions at time of writing.