Anyone who follows emerging markets has been disappointed with the returns they have seen in these equity markets1 over the past few years. There have been lackluster returns and downward-trending rates of economic growth, which is the opposite of what we’ve seen in developed markets, especially the U.S. While some will surely consider increasing allocations to developed market equities, we believe that contrarians out there may also be wondering about the potential for attractive entry points into certain emerging markets. Based on my research below, I believe India presents such an interesting opportunity.

Unlocking India’s Potential

The story of India as both an economy and an equity market is one that tends to focus on the longer term. The country’s massive population, coupled with a favorable demographic picture, definitely points to the potential for a growing consumer class in the future. However, in the recent past, what have investors in India gotten? In a word: volatility. India’s markets tend to be more volatile than the broader spectrum of emerging market equities2, so they have the potential to capture swings in sentiment that impact emerging markets, which of course can be both positive and negative over time.

A Simple Look at Mean Reversion

In evaluating India’s equities, we looked for a framework to utilize the available return history to better understand if there were any simple trends that occurred in years after:

• The MSCI India Index (India’s equities) underperformed the MSCI Emerging Markets Index (broader emerging markets) for one year

• India’s equities outperformed the broader emerging markets for one year

2013 was a tough year for India’s equities, which underperformed the broader emerging markets. The key question: Does history suggest India is likely to bounce back for 2014? Early indicators for the first few months have been pointing in that direction. Of course, no matter what our result, there is never any guarantee that past performance can indicate a future result, but the following analysis shows how India’s equities did after one-year periods of both out- and underperformance compared to the broader emerging markets.

India’s Equities Performed More Strongly After Underperforming Broader Emerging Markets

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