In 2013, emerging markets1 were the laggards of the global equity markets2. 2014 has seen some bright spots, but various uncertainties, most notably with respect to Russia, have tended to constrain equity rallies. However, there is one market that seems to have completely shrugged off 2013 concerns and emerge as an extremely strong performer thus far this year.3
That market is India.
Cumulative Performance of the WisdomTree India Earnings Index (WTIND) vs. the MSCI Emerging Markets Index (MSCI EM)
For current performance of the WisdomTree India Earnings Index, click here.
The critical question: How has India been different from the broader emerging markets over the past 12 months to explain this nearly 50% outperformance?
Election of an Investor- and Reform-Friendly Government
Prime minister Narendra Modi, seen by many as much more investor and reform friendly than the previous administration, has been instrumental. Modi’s Bharatiya Janata Party (BJP) swept into power with the biggest Indian election win in 30 years as voters sought change in a country saddled by slow economic growth and perceived to be thick with corruption.4 Modi’s party has since made notable strides on the reform agenda, which includes the budget announcement (which encompassed the fast-tracking of projects), reining in India’s fiscal deficit and promoting foreign direct investments (FDI) in sectors of the markets that have previously been closed to foreign participation. 5 Markets rallied both in anticipation of the BJP coming into power as well as after the election results were in.6
Bringing Credibility to Monetary Policy
Since Raghuram Rajan’s appointment as governor of the Reserve Bank of India (RBI), he has worked tirelessly to establish the RBI’s reputation as an inflation-fighting central bank. Despite slower growth, the RBI has raised its key repo rates three times since May of 20137. Inflation has been a persistent problem in India, but whereas consumer price inflation had remained above 8% for the 28 consecutive months ending May 2014, the last two months have seen inflation prints below 8%.8 The RBI has since eased its inflation tone and maintained that monetary policy will be accommodative.
The Bottom Line: The Indian rupee has become a much more stable currency after touching record lows in August of 2013.9
Learning from 2013’s “Taper Tantrum”
In 2013, one of the biggest discussions was about the U.S. Federal Reserve tapering its quantitative easing program. On the back of the “taper” discussions, many emerging markets—especially India—performed poorly as investors worried about the potential for poor liquidity and potentially even higher rates in the near future. India was particularly vulnerable with its twin deficit both in its fiscal and current account. Since that time, improvements have been made:
• Current account balance went from -6.5% of gross domestic product in December 2012 to -1.7% of GDP in March 2014, contributing to a more optimistic view on the country.10
• The government’s commitment to reduce its fiscal deficit from -5% of GDP to -3% of GDP over the next two to three years is highly encouraging.
Broad Exposure to India’s Profitable Companies
The WisdomTree India Earnings Index was well positioned to take advantage of these recent events in India. First, it is the broadest measure of the performance of India’s equities; since its inception it has had a minimum of 140 and a maximum of 270 constituents. Its average exposure to small caps (companies below $2 billion in market cap) has been about 15% of its weight.11 In a year like this, small-cap stocks have been very important performance generators.