2023 hasn’t been a bad year for emerging markets equities. But amid numerous challenges in China, the MSCI Emerging Markets Index is higher by just 4% year to date. This is a far cry from the impressive returns delivered by the S&P 500.
It’s safe to assume that 2023 will be yet another year of emerging markets stocks lagging domestic counterparts. But not all hope is lost, particularly for investors willing to be tactical and consider single-country exposures over broader benchmarks. As highlighted by the WisdomTree India Earnings Fund (EPI), India continues to stand out among major developing economies regarding equity market performance.
The fund reminds investors that how Indian stocks are accessed is as important as why. The MSCI India Index is beating the MSCI Emerging Markets Index by a better than 2-to-1 margin this year. EPI is topping that India benchmark by 670 basis points. It’s doing so with annualized volatility that’s well below that of the MSCI Emerging Markets Index.
For India Exposure, EPI Matters
Indian equities are experiencing a multiyear run of outperforming broader emerging markets gauges. But there is concern equities in Asia’s third-largest economy are richly valued. Data bears that out, but those lofty multiples actually support the EPI thesis.
EPI’s underlying index – the WisdomTree India Earnings Index (WTIND) – focuses on profitable companies. That’s a meaningful attribute because it ensures not only a quality profile, but also steers investors clear of richly valued money-losing firms.
Other factors support the EPI thesis as well. While India’s long-term growth potential is often viewed through the same lens that pertained to China a few decades ago, there are important differences between these two mammoth economies — differences that arguably favor India.
“India’s democratic form of government as opposed to China’s one-party communist regime, India’s ‘soft power diplomacy’ vs. China’s growing territorial disputes and India’s relatively free market approach in contrast to China’s state control are a few examples,” according to WisdomTree research. “We expect these factors to help India sustain growth and continue to attract outside investments.”
Additionally, EPI is a case study in “methodology matters” when it comes to ETFs. The fund’s methodology has supported impressive long-term performance while mitigating valuation risk.
“This approach has translated well into performance, with the WisdomTree India Earnings Fund gaining 67% while delivering an annualized outperformance of 4.08% over the MSCI India Net Total Returns Index in the last three years ending August 2023,” concluded WisdomTree.
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