While emerging market equities have not been a favorite asset class over the past few years, some emerging market strategies have performed better than others. The WisdomTree Emerging Markets Dividend Growth Index (Dividend Growth) has been quite strong during the first part of 20141 ; to date, it has returned nearly 8%. So what’s driving it?
Put simply: country breakdown. By design, Dividend Growth’s ability to access pockets of surprisingly strong performance within different emerging market countries has set it apart. The chart below illustrates how it differs from the MSCI Emerging Markets Index (MSCI EM).
What’s Behind Dividend Growth’s Strong Start to 2014?
• Indonesia Has Been Strong: Indonesian equities are a prime example of an emerging market that went from being among the worst performers of 2013 to one of the strongest in 2014 over this period. Dividend Growth represents a nearly 10% over-weight position compared to the MSCI EM—and this was a major component of the relative outperformance. Within Indonesia, Dividend Growth had its biggest exposure within the Financials sector, which has delivered greater than 40% returns to start off 2014. Based on Dividend Growth’s stock selection criteria—namely its focus on three-year average return on equity (ROE) and return on assets (ROA)—Indonesian firms looked strong, which is a big reason for their prominent over-weight.
• Currencies Are Coming Back: Of the eight markets shown above, Taiwan is the only one that indicated a depreciating currency against the U.S. dollar over this period. Emerging market currencies, generally speaking, faced difficulties throughout 2013 as the U.S. Federal Reserve discussed tapering. Specifically, if we gauge the performance of the Indonesian rupiah, Brazilian real and Indian rupee over 2013—the three strongest shown in this table—we see -19.54%, -13.15% and -11.01% respectively.2 Clearly these currencies have been coming back in 2014, and this is a major factor helping the performance of the Dividend Growth Index.