CHINA AND INDIA ARE EMERGING MARKET WINNERS -- FALLING OIL HURTS BRAZIL AND RUSSIA -- SHANGHAI STOCKS END YEAR AT THREE YEAR HIGH -- NEW ETFS OFFER EXPOSURE TO SHANGHAI A-SHARES, BUT MAY NOT BE LIQUID ENOUGH

BRIC DIVERGENCE... The year 2014 saw very diverging trends among the world's largest emerging market stocks. The lines in Chart 1 show those diverging trends among the four BRIC countries that are Brazil, Russia, India, and China. I'm using exchange traded funds here because they take foreign currency trends into consideration. [Falling currencies hurt the performance of foreign stock ETFs. Brazil and Russia have two of the year's weakest currencies, while the currencies of China and India have held up much better]. The two 2014 winners are India and China with yearly gains of 28% and 12% respectively. Since October, however, China has been the best performer. More on that later. The two BRIC losers have been Brazil and Russia with 2014 losses of -15% and -45% respectively. Those two countries (and their currencies) have been hurt by the plunge in oil and other commodities. It could be argued that part of the stronger performance by China and India is because they're both energy importers and benefit from falling prices.

Chart 1

CHINA A-SHARES HAVE A BIG YEAR ... The red line in Chart 2 shows the Shanghai Stock Exchange Composite Index closing the year at the highest level in more three years. Its gain for the year was 52% (which includes today's 2% gain). The black line shows the Hong Kong Hang Seng Index lagging behind Shanghai. Hong Kong stocks have actually lost ground since September while Shanghai was surging. Buying in Shanghai started in the spring with the announcement of a planned Shanghai-Hong Kong Connect program which would allow foreigners to buy mainland Chinese stocks (A-shares) for the first time in Hong Kong. The actual launch of that link in mid-November gave a big boost to Shanghai stocks. So did a surprise November Chinese rate cut. [Chinese stocks also got a big boost during July when the price of oil started to tumble. China imports oil]. Which raises a question for foreign investors interested in China. Can Shanghai stocks be bought through an exchange traded fund? The answer is yes, but with a big caveat.

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Chart 2

FTSE CHINA 25 INDEX ISHARES HAVE A GOOD YEAR... Chart 3 shows the FTSE China 25 Index iShares (FXI) nearing a test of its September high. The FXI gained 12% during 2014 and, for most investors, is the probably the safest way to play the Chinese rally. It's the most liquid Chinese ETF with assets of six billion dollars. [Hong Kong iShares gained only 4%]. The problem with the FXI is that it trades the biggest 25 stocks traded in Hong Kong. It offers little or no exposure to mainland China. Several new ETFs have been launched recently which offer more exposure to Shanghai. The problem with them is that they're relatively new and with a lot less liquidity.

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Chart 3

CHINESE A-SHARES ETF SOARS... Chart 4 shows the Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (ASHR) surging 51% during 2014 which closely matches the gains in the Shanghai Stock Index. As its name implies, the ASHR offers exposure to the largest 300 A-Shares traded on the Shanghai stock exchange. Another ETF with similar performance is the Market Vectors China A-Shares (PEK). Of those two, the ASHR is the more liquid. However, its assets of less than one billion dollars raise a red flag about its usefulness at this time. If nothing else, it may act as a good barometer of trends in mainland China. But the ASHR, and other new Chinese ETFs, may have to attract more funds before they're suitable for the average investor. With Chinese stocks on a tear, however, I suspect it won't take too long for that to happen. Since the Chinese yuan (a managed currency) has been relatively stable this year, currency swings aren't that significant for Chinese ETFs.

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Chart 4

HOMEBUILDERS STARTING TO LOOK BETTER... Homebuilders may be worth keeping a close eye on entering the new year. The daily bars in Chart 5 show the Dow Jones U.S. Home Construction iShares (ITB) up strongly today and nearing a test of its November high. Its relative strength ratio (solid area) has also started rising since October after declining for most of the year. [The fact that the blue 50-average recently crossed above the red 200-day average is another positive technical sign]. Its longer range chart also looks positive.

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Chart 5

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Chart 6

HOMEBUILDERS READY TO RESUME UPTREND... The weekly bars in Chart 6 also provide a positive look to the longer-range trend in homebuilders. It shows the Dow Jones Home Construction iShares (ITB) considating since spring 2013 in what appears to be an "ascending triangle". [An ascending triangle is identified by a flat upper line and a rising lower line and is usually a bullish pattern]. The chart suggests that the ITB is getting ready to resuming its longer-range uptrend. It would have to close decisively above the upper resistance line to do that. I believe there's a strong chance of that happening in the new year. The solid area shows that its relative strength ratio (ITB/SPX) is starting to turn up after falling from spring 2013 to autumn 2014. [In a future article, I'll write about the fact that housing is still in the early stages of a bullish 18-year real estate cycle].

HAPPY NEW YEAR...