Emerging markets have been turned inside out this year after a spectacular run in 2017, but before an investor looks to dive into the deeply-discounted EM space after Wednesday’s 800-point drop in the Dow Jones Industrial Average, he or she must be still selective and exercise due diligence. Simply selecting a country-specific ETF in emerging markets without the proper research could be akin to catching a falling knife and as such, investors must use caution.
Countries like Turkey and Argentina have seen their local currencies face severe downward pressure in addition to skyrocketing bond yields. While it may be enticing to see the red and buy into the dip, instabilities in certain countries’ financial systems could still leave these markets depressed, and as such, investors should shy away from these parts of the world.
Purchasing broad-based ETFs in emerging markets such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) and iShares MSCI Emerging Markets ETF (NYSEArca: EEM) can help with diversification, but can still expose investors to continued aggregate selling pressure from a rising dollar and ongoing trade wars. Instead, investors can look to emerging markets opportunities that are country-specific to dampen external effects by starting with those that boast the largest gross domestic products, such as India and Brazil as well as ETFs that focus on EM debt.
India: High on Growth, Low on Debt
The International Monetary Fund’s director of fiscal affairs Vitor Gasper said that global debt reached a new high in 2017, topping the $182 trillion mark, but also said that India’s debt, in particular, is much less than global debt as a percentage of the world’s gross domestic product (GDP).
“So, it is substantially less than the global debt as percentage of world GDP,” Gasper said regarding India’s debt, which is below the average of developed and emerging market economies. “There is a positive relation between the debt to GDP ratio and the level of GDP per capita. If you compare around the world with the best economies or emerging market economies, the level of debt in India is lower.”
Furthermore, its economy is experiencing strong year-over-year growth as it grew “8.2 percent year-on-year in the second quarter of 2018, above 7.7 percent in the previous three months and beating market expectations of 7.6 percent. It is the strongest growth rate since the first quarter of 2016, boosted by household spending, financial, real estate and manufacturing activities,” according to Trading Economics.
Gasper also cited that although private debt in India has increased the last decade, it has tapered off in recent years.
“If you look at emerging market economies, that includes India, you see that private debt in the last 10 years has increased quite substantially, although in the last two years, since the end of 2015, 2016 and 2017, there is a slowdown in the process of leveraging, but debt is very high and public debt is a very high as well,” Gasper said.
Nonetheless, the IMF director still views India as stable relative to other emerging market economies.
“So, it’s very stable. So, what you do see is that emerging market economies, which is where India is, there’s a very fast buildup in private debt with a slowdown in the last two years, But India is basically steady. So, India is not an emerging market economy where leveraging is progressing fast,” said Gasper.
With the rupee experiencing its doldrums this year, India could present investors with discounted opportunities that could benefit INDL if the country’s central bank is able to shore up its local currency. Just today, the Reserve Bank of India announced it would inject 120 billion rupees or US $2.1 billion into its financial system through the purchase of government bonds.