These Tigers Leap Over the BRIC Wall

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It is no secret that 75% of the money to be made resides outside the US borders.  Emerging markets have been considered the ultimate investing playground for those with the stomach for a gut-wrenching roller coaster ride.  For much of the last decade, the focus has been on a group of nations that Goldman Sachs Economist Jim O'Neil first called the "BRIC's." This quartet, comprised of Brazil, Russia, India, and China, was deemed as the future economic powers on the global scene because of their size, resources, and growing influence in world affairs.

While this well-known foursome has dominated the headlines in the emerging markets, there was a different band that preceded the BRIC's ascension on the economic stage.  Hong Kong, Singapore, South Korea, and Taiwan became known as the "Asian Tigers" because of their exceptional growth rates and industrial expansion over the second half of the 20th century.  Collectively, these Pacific Rim states overcame obstacles and regional security threats to position themselves as the second generation of developed higher-income markets in Asia.

In the aftermath of Japanese occupation during World War II and holding steadfast in the face of the Chinese Cultural Revolution in the late 1960's, the Asian Tigers sought to stake their claim to self-sufficient futures and exploit their strengths to gain both foreign acceptance as well as investment.  Hong Kong and Singapore stand as the premier financial centers in East Asia, while South Korea and Taiwan have become leaders in the information technology sector. 

As with every emerging market, there must be a period of turmoil along the path to prosperity and the Tigers have not mastered the fiscal terrain completely unscathed.  The 1997 Asian Financial Crisis consumed the region and saw an explosion of commercial loan defaults that led to currencies being crushed all along the Pacific Rim and Southeast Asia.  This sudden fiscal collapse, however, ended nearly as quickly as it came about, and in 1998 the aftermath was being assessed.  The lasting affects have been a shift of foreign interest away from the smaller Asian states and into the perceived stability of China and India.  Despite the lack of confidence, the Tigers have all emerged stronger from those dark days and reclaimed their stature as leading markets for the future.

For investors looking to gain direct exposure to the largest companies in these four nations, the iShares MSCI country specific ETF series provides the best opportunity available today.  The chart below shows how the respective ETF's for the Asian Tigers have performed since 2008.

<table> <tbody> <tr> <td> <p>ETF / Annual Return</p> </td> <td> <p>2008</p> </td> <td> <p>2009</p> </td> <td> <p>2010</p> </td> <td> <p>2011</p> </td> <td> <p>YTD 2012 *</p> </td> <td> <p>Overall Avg. Through YTD</p> <p> </p> </td> </tr> <tr> <td> <p>iShares MSCI Hong Kong Index Fund <span class="ticker" data-id="208497">(NYSEMKT: <a href="http://caps.fool.com/Ticker/EWH.aspx">EWH</a>)</span></p> </td> <td> <p>-51.50%</p> </td> <td> <p>59.28%</p> </td> <td> <p>22.44%</p> </td> <td> <p>-16.34%</p> </td> <td> <p>12.37%</p> </td> <td> <p>5.25%</p> </td> </tr> <tr> <td> <p>iShares MSCI Singapore Index Fund <span class="ticker" data-id="208605">(NYSEMKT: <a href="http://caps.fool.com/Ticker/EWS.aspx">EWS</a>)</span></p> </td> <td> <p>-47.01%</p> </td> <td> <p>72.54%</p> </td> <td> <p>22.31%</p> </td> <td> <p>-17.90%</p> </td> <td> <p>23.17%</p> </td> <td> <p>10.62%</p> </td> </tr> <tr> <td> <p>iShares MSCI South Korea Index Fund <span class="ticker" data-id="208620">(NYSEMKT: <a href="http://caps.fool.com/Ticker/EWY.aspx">EWY</a>)</span></p> </td> <td> <p>-55.34%</p> </td> <td> <p>70.36%</p> </td> <td> <p>26.18%</p> </td> <td> <p>-12.00%</p> </td> <td> <p>7.71%</p> </td> <td> <p>7.38%</p> </td> </tr> <tr> <td> <p>iShares MSCI Taiwan Index Fund <span class="ticker" data-id="208609">(NYSEMKT: <a href="http://caps.fool.com/Ticker/EWT.aspx">EWT</a>)</span></p> </td> <td> <p>-46.58%</p> </td> <td> <p>77.30%</p> </td> <td> <p>21.15%</p> </td> <td> <p>-21.05%</p> </td> <td> <p>8.11%</p> </td> <td> <p>7.79%</p> </td> </tr> <tr> <td> <p><em> </em></p> <p><em>COMBINED AVERAGE RETURNS</em></p> </td> <td> <p><em>-50.11%</em><em></em></p> </td> <td> <p><em>69.87%</em><em></em></p> </td> <td> <p><em>23.02%</em><em></em></p> </td> <td> <p><em>-16.82%</em><em></em></p> </td> <td> <p><em>12.84%</em><em></em></p> </td> <td> <p><em>7.76%</em><em></em></p> </td> </tr> </tbody> </table>

 * - YTD is as of 8/31/2012

<table> <tbody> <tr> <td> </td> </tr> </tbody> </table>

Clearly, there were some extremes coming out of the financial crisis of 2008, but these four nations weathered the storm and are poised to deliver significant positive returns in back-to-back years.

The real test is to compare the Tigers to their more famous brethren:

<table> <tbody> <tr> <td> <p>ETF / Annual Return</p> </td> <td> <p>2008</p> </td> <td> <p>2009</p> </td> <td> <p>2010</p> </td> <td> <p>2011</p> </td> <td> <p>YTD 2012 *</p> </td> <td> <p>Overall Avg. Through YTD</p> <p> </p> </td> </tr> <tr> <td> <p> </p> <p>COMBINED AVERAGE RETURNS FOR ASIAN TIGERS</p> </td> <td> <p>-50.11%</p> </td> <td> <p>69.87%</p> </td> <td> <p>23.02%</p> </td> <td> <p>-16.82%</p> </td> <td> <p>12.84%</p> </td> <td> <p>7.76%</p> </td> </tr> <tr> <td> <p>iShares MSCI BRIC Index Fund <span class="ticker" data-id="210408">(NYSEMKT: <a href="http://caps.fool.com/Ticker/BKF.aspx">BKF</a>)</span></p> </td> <td> <p>-58.11%</p> </td> <td> <p>89.95%</p> </td> <td> <p>9.03%</p> </td> <td> <p>-24.19</p> </td> <td> <p>0.00%</p> </td> <td> <p>3.34%</p> </td> </tr> </tbody> </table>

* - YTD is as of 8/31/2012

A classic case of style versus substance . . . the crouching Tigers have quietly climbed to the top of the hill and are now letting out a roar for the world to hear.  While the BRIC’s have the larger populations and surpluses of untapped resources, they have not sustained their growth prospects as the four economic giants along the Pacific Rim.  Perhaps the contrast in performance for the these two groups is best seen through the unwavering commitment to policies aimed at fostering strong export arrangements with wealthy markets and the investment made in higher levels of math and science education to propel innovation for generations to come.

While they may not capture the headlines and lack the spheres of influence of their BRIC counterparts, Hong Kong, Singapore, South Korea, and Taiwan have carved out their place in the tough economic jungle.  The success of the Asian Tigers serves as an example for other emerging markets to emulate, and their ETF’s afford investors a prime opportunity to stop following the herd into a BRIC-wall.


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