When investing, timing is ever important. On August 9, 2013, WisdomTree launched an Index designed to reflect a growing middle class spurring broad-based consumption in the emerging markets. Most recognize that emerging market consumers will be important drivers of long-term global economic growth. However, emerging markets experienced short-term pain last year, and the performance out of the gate for this Index was challenged in the second half of 2013.
India and Indonesia Run into Summer 2013 Troubles
India and Indonesia comprise large weights, nearly 19%, within the WisdomTree Emerging Markets Consumer Growth Index (WT Consumer Growth), which is more than double the weight of a broad index such as the MSCI Emerging Markets Index (EM Equities).1
Last August, investors were weighing the prospect of the U.S. Federal Reserve tapering its monthly bond purchases and the implications this had for countries such as India and Indonesia, which rely on foreign financing to fund their high current account deficits. Both the Indian rupee and the Indonesian rupiah responded, dropping 7.4% and 8.2%, respectively, against the U.S. dollar from WT Consumer Growth’s inception through the end of August 2013.2 Overall, the Index was down nearly 7% in less than one month.
Refocusing on the Fundamentals: 2014 Could Be Turnaround Year
Broadly speaking, EM Equities have been out of favor over the past few years, but we are seeing signs of a potential turnaround in 2014, showing just how quickly the picture can change in these markets:
• Indonesia: Through April 30, 2014, Indonesia was the top-performing country in EM Equities—over 20%!3The rupiah was up more than 5%, and it was also a top performer among other emerging market currencies.4
o Indonesia’s current account deficit eased to less than 2% of gross domestic product in the fourth quarter of 2013. Part of the reason for this was a ban on unprocessed minerals going into effect in January 2014, inducing miners to export what they could during December 2013. Expectations of Indonesia’s inflation have also trended downward, with the Indonesian Central Bank expecting 2014 inflation in the range of 3.5% to 5.5%, a contrast to the 8.22% inflation seen in January 2014 year-over-year.5
• India: During this same period, the rupee was up approximately 2%, and India was the top-performing country of the BRIC nations.6
o India’s current account deficit reduction was largely driven by decreasing gold imports (taxes on gold imports were increased three times in 2013) and decreasing commodity prices.7 India’s central bank has also garnered increased credibility as an “inflation fighter” with governor Raghuram Rajan at the helm.
WT Consumer Growth in 2014
If in fact 2014 truly marks a year with the potential for a recovery in EM Equities, we find it important to examine how WT Consumer Growth is responding in this environment, against both EM Equities and the WisdomTree Emerging Markets Equality Income Index (WT EM Equity Income), an Index designed to focus on the lowest-priced stocks (valuation opportunities) within emerging markets.
WT Consumer Growth Leading Thus Far
• Consumer Focus Helping: By design, WT Consumer Growth will have 60% of its weight split between the Consumer Discretionary and Consumer Staples sectors, thereby positioning with significant over-weights in these sectors compared to both EM Equities and WT EM Equity Income. Critically though, this WT Consumer Growth Index is not a “sector index”; it is broadly inclusive of companies from eight of ten sectors. It is just designed to remove companies that are most globally sensitive and not reflective of growth trends within emerging market economies.
o Special Note on Valuation: Despite focusing on a theme of growth and quality and reflecting growth trends within emerging market consumers, the WT Consumer Growth had a price-to-earnings (P/E) ratio of approximately 11.5x, compared with 10.8x for EM Equities. By contrast, the Consumer Staples in EM Equities has a P/E ratio over 20.0x.8 This is a testament to WisdomTree’s proprietary methodology while mitigating the risk of an expensive valuation.