China And India Small Cap ETFs Still Reeling From Global Slowdown Fears

This past Saturday, Former Minnesota governor and presidential candidate Tim Pawlenty addressed a group of conservatives in Minneapolis. According to a variety of news sources, he stated, ”If China can have 5% growth and India can have 5% growth and Brazil can have 5% growth, the United States can have 5% growth.”

On the numbers, Tim Pawlenty is wrong… really wrong. Developed economies like the U.S. are exceptionally unlikely to grow at a 5% annualized clip. It’s like asking a developed corporation like Kimberly Clark to match a dot-com start-up in revenue growth from domestic operations.

Yet, as the media used economists and other naysayers to eviscerate the unrealistic projections of 5% U.S. GDP, they missed a much larger “miss” by Pawlenty. Both China and India are growing at a 9% annualized rate here in 2011, not 5%.  

That’s right… more than 3x the growth of the U.S. for China and India. And while both countries are having a difficult time reining inflation in, China’s annualized inflation is only 2x that of the U.S. (Note: Indian inflation is still rather painful at 8% to the U.S. forecast of 2.8%.)

Of course, it stands to reason that the higher inflation rates in the rapid-growth economies of China and India are partially attributable to more opportunity and higher wages. Yet the panicky fear that these countries are failing in their respective bids to beat back rising costs has been overshadowing both standard of living increases and ongoing corporate sales growth.

Consider the woefully tragic trajectory for China and India Small Cap ETFs:

China and India Small Cap ETFs Continue To Falter
					Approx % From
					52-Week High (Through 6/20/11)
Emerging Global India Small Cap (SCIF)					-35.8%
Market Vectors India Small Cap (SCIN)					-29.9%
iShares MSCI China Small Cap (ECNS)					-20.9%
Guggeheim China Small Cap (HAO)					-20.2%

 

Clearly, investors are abandoning the collective soul of local-based manufacturing and consumption in Asia. What’s more, current shareholders aren’t putting up much resistance to keep these funds from breaking to new 52-week lows. In the chart below, one can see that Guggenheim China Small Cap (HAO) hit a bottom in July of 2010, while Market Vectors India Small Cap (SCIN) reached a low point in February of 2011.

Will India and China small-caps stage a recovery? Of course they will. Forward valuations in the “tweens” look attractive and fears of a worldwide economic meltdown are very nearly “priced in.”

That said, I wouldn’t be a buyer of any of these specific funds at this time. I’d use the most liquid exchange-traded vehicle of the group, HAO, and wait for the current price to climb above a 50-day moving average. For that matter, I’d want to see the 50-day trendline cross above the 200-day trendline. “Golden crosses” are frequently good signs of renewed faith.

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