In 2013, equity markets in Europe, Japan and the United States delivered strongly.1 Emerging markets EM, on the other hand, were disappointing.2 However, it is at precisely these times—after being disappointed—when emerging market equities probably warrant a closer look.
Mapping Emerging Markets with WisdomTree’s Indexes
During 2013, WisdomTree launched two broadly focused emerging market equity Indexes:
1. WisdomTree Emerging Markets Dividend Growth Index (Dividend Growth): This Index was designed to focus on dividend payers within emerging markets that exhibit relatively strong earnings growth potential as well as relatively higher quality metrics.
2. WisdomTree Emerging Markets Consumer Growth Index (Consumer Growth): This Index was designed to focus on profitable companies within emerging markets that have the potential to benefit from consumer growth in emerging markets, rather than focus on emerging market multinationals that tend to export to developed countries.
Gauging the performance of these Indexes, in addition to the WisdomTree Emerging Markets Equity Income (EM Equity Income) and WisdomTree Emerging Markets SmallCap Dividend (EM Small Dividends) Indexes, can allow us to better understand what components of emerging market equities are tending to perform best (or worst) over different periods. For reference we included the MSCI Emerging Markets Index (MSCI EM), the most widely followed benchmark for the performance of EM equities.
WisdomTree Broad EM Equity Scorecard for 2014
• Dividend Growth & Consumer Growth Outperform MSCI EM YTD and Since the February 5 Low3
o Dividend Growth: A greater than 9.5% average over-weight to Indonesia and a greater than 8% average over-weight to Thailand were primary drivers of outperformance. Both of these markets had a tumultuous 2013 but have been on the comeback trail in 2014. Surprisingly, even a 7.8% average over-weight to Russia contributed to outperformance by focusing on the combination of growth and quality. Exposures in South Africa and India saw positive total returns, but being under-weight in India and poor stock selection in South Africa hurt relative performance.
o Consumer Growth: This Index is actually the only one shown that is not weighted by dividends, but rather by earnings. As a result, instead of being under-weight to India compared to the MSCI EM, it maintained an approximate over-weight of 2.6% when India’s market was roaring. Additionally, the fact that the Materials and Energy sectors are ineligible leads to very small weight within Russia. The largest average country weight was to China, and exposure here was positive, but not as positive as that of the MSCI EM, causing it to contribute negatively to relative performance.